JLDGVINT No. eS4 p33... CATCHWORDS Sales Tax - wale value of goods specified by the manufacturer as stock for sale by retail - meaning of "the amount for which the manufacturer could reasonably be expected to purchase identical goods from another manufacturer ... by wholesale" - manufacturer of cosmetics changing from business of wholesaling to department stores to business of retailing through department stores acting as its agents - whether calculation of hypothetical wholesale price at which taxpayer notionally purchases should include: (a) royalties paid by taxpayer to overseas affiliates in respect of industrial property; (b) advertising, promotion and selling expenses of taxpayer's (retail) business - whether taxpayer's previous wholesale selling prices are a guide - when goods are "treated ... as stock for sale by retail" - whether hypothetical wholesale price must include cost of delivery and cost of "picking and packing" goods for sale and goods for use as "testers" - principles of construction of revenue legislation - reliance on the "scheme and purpose" of the Sales Tax legislation and the consistency and fairness of its operation. Sales Tax Assessment Act (No.1) 1930, s.18. Estee Lauder Pty Limited v. Commissioner of Taxation for the Commonwealth of Austrailia Coram: Burchett J Date: 26 May 1988 Place: Sydney IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) No. G.425 of 1984 GENERAL DIVISION ) On remittal from the High Court of Australia BETWEEN: ESTEE LAUDER PTY LIMITED. Applicant AND: COMMISSIONER OF TAXATION FOR THE MMI OF AUSTRALIA Responden t COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Cross—Claimant ESTEE LAUDER PTY LIMITED. Cross—Respondent REASONS FOR JUDGMENT BURCHETT J. This case concerns the meaning and application of 6.18(2) of the Sales Tax Assessment Act (No.1) 1930, which (omitting two provisos irrelevant to the present case) provides as follows: "For the purposes of this Act the sale value of goods treated by the manufacturer of the goods as stock for sale by retail shall be - (a) iff the goods so treated by the manufacturer are of a class which the manufacturer himself sells by wholesale - the amount for which those goods could reasonably be expected to be sold by the manufacturer by wholesale; or (b) in any other case - the amount for which the manufacturer could reasonably be expected to purchase identical goods from another manufacturer if the other manufacturer had in the ordinary course of his business manufactured the identical goods for sale and had sold them to the first-mentioned manufacturer by wholesale." By sub-sec.7(b), it is provided that in the section "a reference to identical goods shall be read as a reference to goods identical in all material respects with the goods in relation to which the expression is used." If one pauses to reflect that businesses conducted by manufacturers who sell by wholesale are not monolithically set in a single form, but are organised in various ways with various and widely differing cost structures, it will be apparent that paragraph (b) of s8.18(2) will not always yield an easy and obvious answer in particular circumstances. The circumstances in which the problem arises in the present case are the following. Estee Lauder Pty. Limited ("Estee Lauder") is an Australian company, being part of an international network of companies controlled by a North American corporation, which may conveniently be referred to as the Estee Lauder group. Estee Lauder manufactures, or imports, and sells a range of cosmetics bearing the brand names "Estee Lauder", "Clinique", and "Aramis". The manufacture of Estee Lauder products involves the use of exclusive formulations and industrial designs, and the affixing of trademarks "and brand names in which there is significant good-will. Estee Lauder pays technical service fees and royalties to designated overseas members of the group in respect of the industrial property the benefit of which it has received from the overseas companies. Until lst February 1982, Estee Lauder carried on its business by selling its products by wholesale to department stores such as David Jones and Myers, and to selected pharmacies and perfumeries. From ist February 1982, Estee Lauder ceased wholesaling altogether, and has sold by retail through the same department stores, pharmacies and perfumeries, which it appointed its agents. At the same time, an attempt was made to remove the manufacturing operations into a different corporate structure. As a result of disputes between Estee Lauder and the Commissioner of Taxation concerning the effect upon the company's sales tax liabilities of these changes in its operations, the company commenced proceedings in the High Court of Australia seeking declaratory relief. On 23rd November 1984, Gibbs C.J. made a consent order remitting the matter to this Court. Thereafter, a cross claim was filed on behalf of the Commissioner alleging that an amount of $17,881,208.15 was due in respect of sales tax and additional tax in respect of the period lst March 1982 to 31st March 1984 inclusive. The Commissioner alleged that Estee Lauder had in reality remained a wholesaler, and sought to recover pursuant to assessments issued upon that basis. Estee Lauder defended the cross-claim, relying on the decision in Deputy Commissioner of Taxation _v. Hankin (1959) 100 CLR 566 at 578, where it was held that a taxpayer could raise defences going to the substance of such a claim. Ultimately, the issues as to whether since 1st February 1982 Estee Lauder's operations were retail operations and not wholesale operations, and as to whether Estee Lauder remained a manufacturer of the products sold by it, were resolved by consent orders made in this Court on 1st October 1986. It was declared (inter alia) that the goods were sold by retail and not by wholesale, and that the goods manufactured in Australia and sold by Estee Lauder were manufactured by Estee Lauder itself. It is the consequence of these declarations, under s.18(2)(b) of the Sales Tax Assessment Act (No.1) 1930, which remains in dispute. In order to facilitate the resolution of that issue, the parties agreed that certain questions should be decided separately from any other questions before the trial in the proceedings. The ultimate form of the questions was settled by a consent order which I made on 16 October 1987. That order was formulated to select, as representative, three months during the period referred to in the cross-claim, namely, March 1982, March 1983, and March 1984, and twelve products from the total range of products marketed by Estee Lauder. The products selected were Country Fresh Face Powder, Self Action Tanning Creme (125 al), Clinique Facial Soap Extra Strength (150 mg), Clinique Clarifying Lotion I (120 ml), Clinique Dramatically Different Moisturising Lotion (120 ml), Clinique Extra Help Make-up Base (Golden Almond), Clinique Eye Pencil (Charcoal Brown), Clinique Extra Gentle Eye Make-up Remover, Night Repair (25 ml), Long - Line Lip Polish, Aramis After Shave (60 ml), and Youth Dew Cologne (60 ml). The same two questions were posed in respect of each of these products and in respect of each of the months mentioned. I set out the questions relating to Country Fresh Face Powder for the month of March 1982 as examples: (a) In respect of the month of March 1982, what quantity of Country Fresh Face Powder manufactured by the Cross-Respondent was treated by the Cross-Respondent as stock for sale by retail? (b) What was the sale value of such goods, such sale value being determined in accordance with 8.18(2)(b) of the Sales Tax Assessment Act (No. 1) 1930 as amended? The parties took up widely opposed positions. The Commissioner's stand was that the legal change, from the relationship of wholesaler and customer to the relationship of principal and agent selling on behalf of the principal as retailer, did not reflect any change of commercial substance. The best guide to the answer to the question posed by s.18(2)(b) ~ what is the amount for which Estee Lauder could reasonably be expected to purchase identical goods from another manufacturer if the other manufacturer had in the ordinary course of his business manufactured the identical goods for sale and had sold them to Estee Lauder by wholesale - is, according to the Commissioner, the price at which Estee Lauder itself did sell by wholesale prior to the change in the legal framework within which it did business. Por Estee Lauder, on the other hand, it was contended that the sub-section deliberately eschews any reference to the price at which Estee Lauder could be expected to sell, if it sold by wholesale, and adopts as a measure the price at which Estee Lauder could be expected to purchase from a hypothetical manufacturer on the hypothesis that that manufacturer had manufactured identical goods and sold them to Estee Lauder by wholesale. Estee Lauder called evidence from a Mr Burger, an executive director of Kolmar (Aust) Pty Limited ("Kolmar") well qualified to speak of cosmetics manufacturing, as to the prices at which his company would have been prepared to sell _ the selected products to Estee Lauder at the relevant times, if it had been asked to manufacture those products on behalf of Estee Lauder. It was Estee Lauder's case that this evidence quite literally answered the question posed by the sub-section, and that Mr Burger's figures should therefore be adopted by the Court. Kolmar is a member of an international group of companies manufacturing cosmetics under contracts entered into with independent cosmetic companies, such as Estee Lauder, and also retail chain stores which promote their own brands. Kolmar has on occasion manufactured some cosmetics for Estee Lauder, although, as I have said, Estee Lauder itself manufactures and also imports cosmetics. Some other well-known brands of cosmetics are not manufactured in Australia by the companies which market them, but are manufactured by Kolmar or by other companies similarly engaged in the manufacture and sale by wholesale of cosmetics made under contract. It is a common feature of such arrangements that Kolmar, and similar manufacturers,- obtain materials and components from suppliers who are themselves bound to supply exclusively to the cosmetic company for which the cosmetics are manufactured. This is normally the case with fragrances. The suppliers are covered, in respect of their supply to Kolmar, by special directions. Similarly, where some part of the product is imported from an overseas affiliate of Kolmar's customer, Kolmar would be supplied by special arrangement. No evidence was led, one way or the other, as to whether contracts of the kind entered into by Kolmar were common in 1932, when the substance of s. 186(2)(b) was adopted by the Parliament. At the present day, Kolmar is only one of four large companies, and a number of smaller companies, described by Mr Burger as "contract manufacturers, fillers and packagers in the cosmetics industry in Australia". Kolmar manufactures cosmetics for customers such as Chesebrough-Pond's, Max Factor, Coles, Woolworths, David Jones, Nutri-Metics and Mary Kay. There is a brand of cosmetics sold by Coles Stores under the name "Starlet", which is manufactured on behalf of Coles and sold to it wholesale by Kolmar. The manufacture and sale of Starlet is claimed by Estee Lauder to be indistinguishable from the hypothetical transactions between it and Kolmar upon which it relies. It was not disputed that all the industrial property in relation to Starlet belongs to Coles, and that the price at which Starlet is sold by Kolmar to Coles is calculated in a fashion similar to that postulated by Estee Lauder in evidence for the purposes of the present case. The evidence showed that significant contributions are made to the retail price of Estee Lauder's cosmetics by the high reputation of the brand names and trademarks, by "up-market" retailing locations, techniques and circumstances, and by promotion and advertising of the products. Both before and after the change from wholesaling to retailing on lst February 1982, Estee Lauder has contributed to the training and salaries of skilled sales personnel. However, I accept the evidence which was proffered on behalf of Estee Lauder that its expenditure in this regard has been significantly greater, both in absolute terms and as a proportion of its total expenditure, during the period it has been carrying on its operations as a retailer. None of the expenditure that relates to the locations, techniques, salaries, promotion and advertising involved in the retail sale of the cosmetics, finds its way into the calculations yielding the wholesale prices for which Estee Lauder contends. According to the company's case, it is irrelevant that similar expenditure, even if not in some instances as great, was involved in its previous wholesaling mode of business, just as it is irrelevant that many other wholesale businesses incur similar expenditures. Its present business is a retail business, and the expenditures are incurred in connection with its retailing operations. On the one hand, it cannot be said that the expenditures in fact made form part of any wholesale business, while, on the other hand, it cannot be said that expenditures of that kind are in their nature essentially referable to, or involved in, the conduct of a wholesale business. The evidence shows that many wholesale businesses, including that of Kolmar, do not incur -comparable expenditures. Estee Lauder's case emphasizes that the Commissioner has accepted, and the Court has made a declaration accordingly, that Estee Lauder is genuinely carrying on business as a retailer. There is therefore no justification for treating its selling expenses as not expenses of retailing, but expenses attributable to the notional wholesaler required to be hypothesized by the terms of 8.18(2)(b). But Estee Lauder takes the argument a step further. It points out that some wholesalers, who carry on business in the manner of Kolmar, manufacture products according to formulations and manufacturing specifications supplied to them, utilizing industrial property of their customers including brand names and trademarks, on the basis that the customer purchases from them by wholesale for an agreed price which, of course, does not include any amount based on the use of the customer's own industrial property. The conclusion, on Estee Lauder's argument,is that the hypothetical price to be worked out under 8.18(2)(b) should include no amount in respect of these items of Estee Lauder's industrial property. Kolmar's prices are calculated on the basis that it can affix trademarks and brand names without incurring any charge for doing so. Likewise, it assumes that it can utilize exclusive designs and packaging, simply paying the cost of the materials used. This is the basis on which it calculates its prices when it manufactures Starlet for Coles, and in other cases where it makes cosmetics on behalf of the owners of similar items of industrial property. Senior Counsel for Estee Lauder put it that Mr Burger, in calculating the prices which were put before the Court, was asked "to assume that he did whatever the applicant (Estee Lauder) did in relation to the product". Thus, where Estee Lauder imported particular ingredients from an overseas affiliate, Mr Burger's calculations assume that Kolmar would have imported the same product at the same price from the same affiliate, being authorised by Estee Lauder todo so. If bottles or plastic 10. containers were obtained by Estee Lauder from particular sources, Mr Burger's calculations assume the same sources and the same prices. But although this was, indeed, precisely the way in which Estee Lauder went about the actual manufacturing of the goods in question, it is not really true that Mr Burger's calculations assume Kolmar did whatever Estee Lauder did in manufacturing the product. For Estee Lauder has only been able to utilize exclusive formulations and manufacturing specifications, and to obtain exclusively produced materials from its affiliates, because it pays royalties and technical service fees required of it as a member of the Estee Lauder group of companies. For it, those royalties and technical service fees, calculated in total at 6% of the net value of consignments, constitute a necessary expense without which it could not manufacture the cosmetics which it produces. Yet it does not necessarily follow that Mr Burger's approach is incorrect for the purposes of s.18(2)(b). Clearly, his approach is not incorrect in the context of his own business operations, which are conducted, in relation to a number of cosmetics companies and stores such as Coles, upon that very basis. Whether it is incorrect for the purposes of 8.18(2)(b), depends upon the construction of that provision. Before I turn to that question of construction, there are some preliminary matters to be dealt with. Section 18(2)(b) has to be seen in the context of 8.17. By sub-s. 1 of that section, provision is made for the levy of sales tax "upon the sale value of goods manufactured in Australia by a taxpayer and sold by him or treated by him as stock for sale by retail or 11. applied to his own use." It will be seen that three distinct situations are embraced by s.17(1), each of which involves some action or decision by the taxpayer: he either sells the goods in question, or he treats them as stock for sale by retail, or he applies them to his own use. Section 18(2) picks up the second of these three situations, providing for the method of determining the sale value of "goods treated by the manufacturer of the goods as stock for sale by retail". Logically, the first question to be decided is when the goods in question were so treated. Then the cost of getting the goods to that point can be considered. In Federal Commissioner of Taxation v. York Motors Proprietary Limited (1946) 73 CLR 459 at 484, Dixon J. said: "The legislation evidently means that if the taxpayer devoted goods to his retail stock, he shall then and there be taxable. "Treat" in the statutes covers, I think, any measure taken in the conduct of business with reference to the goods unequivocally referable to a present intention or decision that the goods shall then and there be retail stock." In that case, the High Court was concerned with a motor vehicle importing business in which 95% of the vehicles were sold by retail and 5% by wholesale (see per Latham C.J. at 474). The making of memoranda in the company's stock-book was held a sufficient act to demonstrate that certain vehicles had been treated as stock for sale by retail. By parity of reasoning, it seems to me that it is necessary to find in the present case some measure taken in the conduct of the business demonstrating a decision to treat stock as stock for sale by retail. Such a measure, on the evidence, is taken by Estee Lauder when an 12. activity is performed which was described as "picking and packing". That activity involves the selection of certain of the products, until then undifferentiated, to be utilized by Estee Lauder in ways other than by sale. Between 4% and 5% of the total are selected for these purposes, which include, for example, use as "testers", that is, cosmetics which are applied by sales staff to prospective customers to test their suitability and desirability for use by those particular customers. At the same time, the remaining 95% to 96% of the company's regular products are selected and prepared for despatch as stock for sale by retail. I am satisfied that at that stage the goods are "treated by the manufacturer of the goods as stock for sale by retail", within the meaning of s.18(2). A further question was raised in relation to the handling of the goods. The calculations presented on behalf of Estee Lauder did not include any allowance for the cost of delivery by Kolmar, as the hypothetical manufacturer, to Estee Lauder. Senior Counsel for the Commissioner asserted that allowance should be made in the price. It seems to me that this submission misconceives the operation of s.18(2). Paragraph (a) of the provision deals with the case where a manufacturer, who sells by retail, also sells by wholesale; in such a case, it should be relatively easy to derive an amount for which the goods could reasonably be expected to be sold by their manufacturer by wholesale. So far as delivery costs are concerned, if he generally bears thea, the basis on which he does so will be known; and if he requires his purchasers to pick up the goods at his factory door, that also will be known. There is no necessity 13. for an actual wholesale transaction to involve cartage: see Commonwealth Quarries (Footscray) Proprietary Limited v. The Federal Commissioner of Taxation (1938) 59 CLR 111. But paragraph (b) is wholly hypothetical. It provides for the construction of a notional wholesale price in circumstances where no wholesale transaction is entered into. It does not even postulate a hypothetical wholesale sale by the taxpayer, but a purchase by him of goods identical to those he himself manufactures and sells by retail. The hypothesis is that some "other manufacturer had in the ordinary course of his business manufactured the identical goods for sale and had sold them to (Estee Lauder) by wholesale." The provision then requires a conclusion to be drawn as to the amount for which Estee Lauder "could reasonably be expected to purchase" those identical goods. It would be quite foreign to the hypothetical exercise required to be undertaken, in order to comply with the terms of 8.18(2)(b), to attempt to estimate an amount of delivery costs. No particular manufacturer is contemplated, and none at all need exist. (Cf. the Commonwealth arries (Footscray) case (supra, at 123), where the hypothetical aspect of the sale was engrafted onto a real transaction.) As in the present case, the actual manufacturer may have exclusive rights which may preclude the possibility of there being another manufacturer, unless special arrangements are made such as, for example, are involved in the operation of companies like Kolmar. If, in these circumstances, one is to hypothesize a notional manufacturer, one could as well locate him in the same building which houses the taxpayer's own warehouse, or next door, as in the next suburb. On the other 14. hand, if delivery charges are once admitted, the Commissioner could hypothesize that the goods are to be delivered from 200 kilometres away. The Commissioner's argument overlooked these problems in the present case, because it simply sought to assert that Mr Burger's calculations should provide for the cost of delivery from Kolmar's premises to Estee Lauder's. This, of course, was to confound an aid to calculation of hypothetical prices, by reference to the price quotation methods in fact adopted by Kolmar, with an actual sale from the production of a particular factory, Kolmar's factory. But if, despite the notional nature of the exercise, and despite the Commissioner's rejection of the type of dealing undertaken by Kolmar as a proper basis for assessing the notional amount involved, regard is to be had to the realities of production at Kolmar's factory, the evidence indicates that Kolmar produces and sells by wholesale "ex-factory", and does not arrange and charge for delivery. Similarly, the Commissioner contended that Mr Burger's calculation of prices erred by failing to allow for the "picking and packing" exercise to which I have earlier referred. Again, I can see no basis in paragraph (b) for this contention. The hypothesis required by the paragraph is not that Estee Lauder conducts its retailing business in some other way than it does in fact conduct that business. The hypothesis is simply that it purchases goods, identical to those it manufactures, from another manufacturer selling them by wholesale. There is no suggestion in this that the other manufacturer must perform operations which Estee Lauder itself performs only at a point subsequent to that at which the goods appear as manufactured goods in its factory. 1s. If Estee Lauder purchased part of its output, instead of manufacturing it, there is no reason why it would not still, for the purpose of its retail operations, set about selecting part of the goods purchased, as well as part of those manufactured, for use as "testers" and for other purposes amounting to use of the goods by itself, putting aside the balance for sale by retail, exactly as it does in actuality. "Picking and packing" constitutes an essential step related to the despatch of the goods for sale or to serve some other purpose in the business of Estee Lauder. I turn to the central question of construction upon which the validity of Estee Lauder's approach to the calculation of the sale values in dispute must depend. As has been said, s8.18(2)(b) sets up a hypothetical or notional sale by another manufacturer on the hypothesis that that other manufacturer had, in the ordinary course of his business, manufactured the identical goods for sale, and had sold them to the taxpayer by wholesale. The provision then requires the question to be answered, what would be the amount for which the taxpayer could reasonably be expected to purchase those identical goods? But no information at all is given concerning the nature of the hypothetical business, the nature of which must determine' the price at which- a transaction could be expected to occur in the ordinary course of that business. This may not present insuperable problems in the case of goods of a kind commonly manufactured by numbers of different persons or companies, 50 that the hypothetical transaction can be set in the circumstances of a known market. But greater difficulty is inevitable in 16. circumstances, such as those of the present case, where goods are manufactured exclusively pursuant to rights conferred by the ownership of industrial property, so that the envisaging of a hypothetical manufacturer of those goods will either necessarily involve an ignoring of the exclusivity of the actual manufacturer's rights, or the making of assumptions about the basis on which those rights might be made available for utilization by the notional manufacturer. Senior Counsel for Estee Lauder submitted that, particularly as the legislation imposes a tax, which ought only to be imposed by clear language (The Commissioner of Taxation of the Commonwealth of Australia v. Westraders Proprietary Limited (1980) 144 CLR 55 at 59-60; The Commissioner of Taxes v. The Executors of the Estate of Mark Rubin, deceased (1930) 44 CLR 132 at 148, 154; Anderson v. The Commissioner of Taxes (Victoria) (1937) 57 CLR 233 at 243), no assumptions ought to be made other than the bare hypothesis demanded by the provision. In his subaission, that hypothesis should be applied directly to the circumstances of Estee Lauder, without disturbing any of those circumstances except to the extent absolutely required by the precise terms of the hypothesis itself. Therefore, he claimed, it would be wrong to attribute the industrial property utilized in the manufacture of the goods to the notional manufacturer; Estee Lauder has exclusive rights in respect of that property in Australia, and it is possible to apply the bare statutory hypothesis by envisaging a sale to Estee Lauder pursuant to an arrangement such as that into which Kolmar enters when it manufactures for Mary Kay or for Coles. On this basis, Estee 17. Lauder would, without charge, permit the notional manufacturer to utilize its industrial property rights, so that it could have goods manufactured for it according to its own formulations and specifications and with the benefit of its own designs, packaging, trademarks and brand names. But that, it seems to me, is to create an unworkable alloy of the real and the notional. Estee Lauder could indeed contract with Kolmar for actual manufacture of the cosmetics in question along the lines evidenced by Mr Burger; but it did not do so. The cosmetics were manufactured by Estee Lauder itself, and there is nothing in the provision of the statute to suggest either an actual or a notional agreement on its part to manufacture being carried out by anyone else. The statutory hypothesis is simply that someone else does manufacture, not the same goods, but identical goods, in the ordinary course of his business. The statutory hypothesis then goes on, for the first time, to involve the taxpayer (in this case, Estee Lauder) by envisaging that a sale takes place to it by wholesale. It is not to confine oneself to the bare statutory hypothesis, but to embroider it, to go back to the foundation of the notional business of manufacture of identical goods, and assume a prior agreement allowing that manufacture to take place under circumstances which permit the use, by arrangement, of Estee Lauder's industrial property without charge. Rather, I think, the statute contemplates a purely notional manufacture of identical goods by another manufacturer in the ordinary course of his business, an ordinary course which must also be notional, at least in the case of goods manufactured by the use of exclusive 18. industrial property, since there is no warrant for adding to the purity of the statutory hypothesis any contamination of special arrangement. After all, if one should once begin to introduce speculations about possible arrangements, such speculations could not be limited to the kinds of arrangement into which Kolmar enters, and would have to include modification for a royalty or other consideration of the exclusive rights, as equally conceivable, to permit of their non-exclusive exercise by the other manufacturer. Adherence to the principle of not travelling beyond the hypothesis the statute requires one to entertain precludes any assumption of arrangements which would affect the costs in fact incurred in the manufacture of the goods. What is involved is simply the envisaging of a notional manufacture and sale. There is another way in which the problem may be approached. Section 18(2)(b) is dealing with a manufacturer-retailer who necessarily has rights, whether exclusive or non-exclusive, enabling him to manufacture the goods. But the hypothetical transaction does not ask for any assumption about those rights - the concept stated in the provision is simply of a purchase at wholesale of identical goods manufactured in the ordinary course of his business by another manufacturer. - In the absence of any limiting words in the statute defining the terms and conditions of the purchase, three views seem possible: that the fictional purchase is from a wholesaler who has the industrial property rights held by the real manufacturer in whose shoes (qua manufacturer, though not qua retailer) the statute puts him; that he is to be considered 19. as manufacturing for the real manufacturer at his request and therefore able to benefit from the real manufacturer's rights without payment (as Kolmar does, and as was done in R.C.A. Limited v. The Commissioner of Taxation of the Commonwealth of Australia (1977) 137 CLR 583, with which may be compared E.M.1. (Australia) Limited v. The Commissioner of Taxation of the Commonwealth (1971) 45 ALJR 349); and that the choice is left to the Commissioner of Taxation or the appropriate tribunal on appeal, the question involving a very flexible discretion of the kind referred to in Crown Bedding Co., Ltd. v. Inland Revenue Commissioners (1946) 1 All ER 452 at 457. In construing language which is so opaque, I think the Court is entitled to follow those glimmers of workable and consistent meaning which can be discerned. Consistency suggests that if the fictional wholesaler stands in the shoes of the real manufacturer to the extent of manufacturing the identical goods, he should be seen as doing so under the same, rather than under different, conditions. That would provide a basis more likely than the alternative to give a measure of a realistic wholesale price for the goods in fact manufactured, and one more consistent with the wholesale price which would have applied under 8.18(2)(a) if the manufacturer had sold some of his output by wholesale. It- should not be assumed the legislature intended to impose taxes on the same or similar goods, manufactured in the same or similar circumstances, varying more widely and more capriciously, and without any apparent justification for the variance, than the statutory language absolutely requires. In a case involving exclusive industrial property rights, the 20. provision would operate in that manner unless the fictional transaction is understood to concern identical goods manufactured with the same burdens in respect of those exclusive rights. The problem is less likely to arise in relation to goods the manufacture of which does not entail the use of exclusive rights, since in such cases it may be expected there will be an actual alternative manufacturer of identical goods (as defined) whose price, if he sells by wholesale, or costs, if he does not, can be utilized as a yardstick. In those cases, the taxes borne by the two actual manufacturers will be comparable. But in the case of goods, such as perfumes, manufactured by manufacturers who are licensees of exclusive industrial property rights, if one manufacturer under licence sells by wholesale and another only by retail, according to Estee Lauder's argument, the former incurs sales tax on a price which includes his licence fees, while the latter pays on a notional price constructed by statute so as to exclude his licence fees. The legislature is unlikely to have intended to construct so partial a price. The fundamental purpose of the provision, plainly enough, is to provide a measure for an appropriate wholesale price for goods sold only by retail. If the measure is based on a cost structure radically different from that which applies to the goods actually made, it can only be appropriate by accident. In my opinion, 8.18(2)(b) should be construed as looking, at least in a case where there is no wholesaler of identical goods as defined, to a hypothetical manufacturer and wholesaler manufacturing the goods under conditions similar to those which apply to the taxpayer. It may be, though I do not have to decide 21. the point and do not express any opinion upon it, that in a case where identical goods are in fact manufactured by another wholesaler on some such basis as that on which Kolmar manufactures goods, the position would be governed by that reality. If so, this would be because of the principle that the Act takes transactions as it finds them (cf. Magna Alloys and Research Pty. Ltd. v. Federal Commissioner of Taxation (1980) 33 ALR 213 at 222). But where it finds none, and has to construct a hypothetical transaction, there ig no reason to think the Act intends to construct it by a less than appropriate means. The provision does not look to any particular transaction, and no necessary answer can be thrust upon the enquirer by the fabrication of a particular hypothetical transaction. There may be no warrant for the assumption that that transaction is the one that would reasonably be expected. But equally the Act does not imagine the skeleton of a wholesale transaction. Some transactions are skeletal, but the Act envisages a transaction fleshed out in the form which would be expected in relation to identical goods. What would be expected is not a test measured by a ruler; it requires an exercise in judgment, as was made clear in the Crown Bedding case (supra). But I think one can safely say that it could reasonably be expected the price of identical goods, purchased by wholesale, would include the full cost of their manufacture, including any royalties and licence fees necessarily incurred to enable goods of that kind to be produced in Australia. The fact is that at the relevant time no other manufacturer in Australia did produce, or was entitled to produce, identical goods (whether under 22. contract with Estee Lauder, or by virtue of an independent licence from the overseas owners of the relevant industrial property or otherwise), and the "other manufacturer" referred to in the provision is entirely notional. But the necessary hypothetical purchase can be envisaged, and its price can be estimated by reference to the manufacturing costs involved, of most of which Mr Burger's calculations provide evidence. However, if Mr Burger's calculations are used, it will be necessary to add the cost of availability to the notional manufacturer of the industrial property in respect of which Estee Lauder pays royalties and technical service fees. That cost can be measured by reference to those royalties and technical service fees. I do not think I am forbidden to construe 8.18(2)(b) in the manner I have indicated by any principle relating to the construction of revenue legislation. In W.T. Ramsay Ltd. v. Inland Revenue Commissioners (1982) Ac 300 at 323, Lord Wilberforce said: "A subject is only to be taxed upon clear words, not upon "intendment" or upon the "equity" of an Act. Any taxing Act of Parliament is to be construed in accordance with this principle. What are "clear words" is to be ascertained upon normal principles: these do not confine the courts to literal interpretation. There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded: see Inland Revenue Commissioners v. Wesleyan and General ssurance Socie per tord Greene M.R. and Mangin v. Inland Revenue Commissioner [1971] A.C. ' , per Lor Bonovan. The relevant Act in these cases is the Finance Act 1965, the purpose of which is to impose a tax on gains less allowable losses, arising from disposals." 23. It is by reference to the context, scheme and purpose of the sales tax legislation that I arrive at the conclusions I have expressed. In Brayson Motors Proprietary Limited (in liquidation) v. The Commissioner of Taxation for the Commonwealth of Australia (1985) 156 CLR 651 at 656-7, the joint judgment of Gibbs C.J., Mason, Wilson, Deane and Dawson JJ, expounded a consistent intention which their Honours discerned in the sales tax Acts, including an intention that goods "should be taxed at their full wholesale value". Once a general purpose and policy may be discerned in a provision, that general purpose and that policy, together with the consistency and fairness of the operation of the provision, should be regarded as important guides to its true construction: Commissioner for Railways (NSW) v. Agalianos (1955) 92 CLR 390 at 397, per Dixon C.J. Senior Counsel for the Commissioner sought to exclude Kolmar's prices on a different footing. He submitted manufacture and sale on a basis similar to that on which Kolmar manufactures Starlet for Coles, would not be "in the ordinary course" within s.18(2)(b), since Kolmar is bound to sell Starlet exclusively to Coles. But the ordinary course referred to in s.18(2)(b) is the ordinary course of the business of the hypothetical manufacturer. Since it is the ordinary course for some manufacturers, such as Kolmar, to manufacture on the basis on which Kolmar does in fact manufacture Starlet, and to do so exclusively for a particular purchaser, I do not see how the Commissioner's argument can be accepted. It is not for that reason that Kolmar's prices are 24. inappropriate, but because they exclude part of the true cost of manufacture. The other major attack on the prices calculated by Mr Burger relates to his failure to allow anything in respect of the very large expenditure which Estee Lauder in fact incurs in respect of advertising, promotion, training of sales staff, creation and maintenance of a suitable selling environment, and other matters associated with sales. The Commissioner points out that large sums were spent by Estee Lauder in these ways when it was a wholesaler. The proposition is advanced that, for this reason, the best guide to the notional wholesale price is the actual wholesale price previously charged by Estee Lauder, updated to allow for inflation and other changes in costs. On behalf of Estee Lauder, it is pointed out that one difficulty with this argument arises out of the history of the legislation. Section 18(2), in its original form when the Sales Tax Assessment Act (No.1) was enacted in 1930, read as follows: "For the purposes of this Act the sale value of goods treated by the manufacturer of the goods on or after the first day of August one thousand nine hundred and thirty as stock for sale by him by retail, shall be the amount which would be the fair market value of those goods if sold by him by wholesale." When the Act was in that form, it certainly looked to the activities of the taxpayer himself, and what he would have done, but in 1932 the Act was amended to introduce the substance of the present provision, which has been retained ever since. In 25. explaining the amendment, the then Prime Minister, Mr _ Lyons, justified it as ""simplify(ing) the ascertainment of the sale value of goods, in the case of manufacturers, where the required sale value is not the actual sale price of the goods". He said: "Under the existing law the burden is placed on the department of establishing a wholesale ar market value of goods in such cases. Almost insuperable difficulties have arisen in administration of the law in this connexion. To remove these difficulties it has been decided to prescribe for all such cases that the sale value of the goods shall be the price for which the manufacturer concerned could have purchased those goods from other manufacturers. This will also remove the undesirable implication, in the present form of the law, that the tax applies only to goods of a class which' the taxpayer manufactures for sale." (See House of Representatives Hansard for 16 September 1932 pp 586-7.) To resort to the activities of Estee Lauder in connection with the sale of the goods, either when it was a wholesaler or now, is to adopt the criterion which Parliament did once adopt, but later decided to change. As Senior Counsel for Estee Lauder points out, the Commissioner's argument amounts to *Plus g* change, plus c'est la méme chose." Not only does the Commissioner's argument ignore the change effected by Parliament, but it also ignores the fundamental change in its operations made by Estee Lauder. That change cannot properly be ignored: cf Customs and Excise Commissioners v. Top Ten Promotions Ltd. (1969) 1 WER 1163 at 1177, per Lord Wilberforce. Estee Lauder is, and was at all times relevant to the present proceedings, a 26. retailer and not a wholesaler. The advertising, marketing and promotion activities in which it engaged are not transformed by some statutory alchemy into activities of a wholesaler. If Estee Lauder's change to retailing had been a sham, the position would of course be quite different. But the Acts provide, as the High Court has emphasised, both in the foundation decision in Deputy Federal Commissioner of Taxation for the State of South Australia v. Bllis & Clark Limited (1934) 52 CLR 85 and in the Brayson Motors case (supra), for taxation on wholesale prices. They do not impose value added taxes. If the retail prices are enhanced greatly by activities carried out by Estee Lauder as a_ retailer, that does not mean the wholesale prices must be correspondingly high. They may or may not be. Section 18(2)(b) provides for the artificial construction of a wholesale price, but it does not interfere with a fundamental feature of the situation which is a condition of its operation - that Estee Lauder is a retailer. I have held that the notional manufacturer could reasonably be expected to manufacture, in a case such as_ the present, under conditions similar to those which apply to Estee Lauder; but there is nothing in the Act which suggests that the notional manufacturer sells under the same conditions. It is manifest that he does not. Estee Lauder sells as a_ retailer, employing department stores, pharmacies and perfumeries as agents. The notional manufacturer is required by the statutory hypothesis to sell by wholesale, and to sell to Estee Lauder, not either through or to department stores, pharmacies and perfumeries. Section 18(2)(b), assumes that Estee Lauder has to buy identical goods wholesale, instead of manufacturing them, in 27. order to carry on Estee Lauder's business. The price does not assume that the hypothetical manufacturer carries on Estee Lauder's business, but that Estee Lauder does so. The hypothetical manufacturer is not distributing through David Jones and other outlets. Estee Lauder continues to do so. When Estee Lauder sells, it expects to receive a price which returns it the costs of its activities together with a profit; when it notionally buys from a manufacturer, it certainly could not be expected to pay for its own marketing operations. Not only is it impossible to attribute Estee Lauder's actual marketing expenditure to the notional wholesaler for the purpose of assessing a price, but it is also impossible to construct some alternative notional marketing framework in order to attribute to it a cost factor to be taken into account in the calculation of a notional price. For the barrenness of the statutory hypothesis does not provide any foothold for the assumption of any particular marketing strategy on the part of the notional manufacturer. On the evidence, some manufacturers who sell by wholesale do, and some do not, incur expenditure of that kind. Kolmar does not. Nor do the other companies carrying on similar businesses, to which Mr Burger referred in his evidence. On the other hand, the evidence indicates that the well-known cosmetic houses which are competitors of Estee Lauder do incur expenditure of this kind, though their expenditure in connection with the point of sale by retail is considerably less than Estee Lauder's. There is no basis for selecting a particular level of expenditure, and attributing it to the notional manufacturer. 28. In my opinion, the amount for which Estee Lauder could reasonably be expected to purchase identical goods would include an allowance for the use of industrial property, belonging to members of the Estee Lauder group, necessarily utilized in their production; but it would not include the promotion, advertising, testing, and selling expenses which are not only not necessarily involved in a wholesale transaction (though they may be), but are in fact expenses associated in their nature with selling to the general public, and were at the relevant times assumed by Estee Lauder, which then operated (so far as the activity of selling was concerned) exclusively as a retailer. For these reasons, I conclude that the special questions should be answered on the basis of the calculations provided by Mr Burger, for which Estee Lauder contended, but subject to the inclusion of allowances calculated to accord with the appropriate proportion of the total royalties and technical service fees paid by Estee Lauder in respect of the relevant periods. It was suggested at the hearing that if I came to a conclusion which did not simply accept Mr Burger's figures, I should give the parties an opportunity to make fresh calculations having regard to my reasons. I think that is proper. I direct Estee Lauder to bring in short minutes to reflect these reasons, and when that is done I shall also hear the parties on the matter of the appropriate order as to costs. I certify that this and the preceding twenty-eight (28) pages are a true copy of the Reasons for Judgment herein of is Honour Mr. Justice 29. Associate Dated: 26 May 1988 Counsel for the Applicant/ Cross—Respondent: Solicitors for the Applicant/ Cross-Respondent: Counsel for the Respondent/ Cross-Claimant: Solicitors for the Respondent/ Cross-Claimant: Dates of hearing: Mr A.M. Gleeson QC Mr D.H. Bloom Qc Messrs Baker & Mckenzie Mr P.R. Graham QC Mr A.H. Slater Australian Government Solicitor 8, 28, 29, 30 October 1987 2, 3 November 1987