FEDERAL COURT OF AUSTRALIA Commissioner of Taxation v Pacific Dunlop Ltd [1999] FCA 214 SALES TAX – car batteries – labels affixed to batteries indicating brand – discussion of general scheme of sales tax legislation – whether Commissioner erred in determining the sale value of the goods - factors that Commissioner must take into account in making calculation – whether time at which goods are treated as stock for sale by retail is to be taken as the moment before they are branded or some time thereafter – if the taxing point is the moment of branding should the sale value take into account the Marshall brand – in an appeal from an assessment made under s 25(2) Sales Tax Assessment Act (No 1) 1930 must a taxpayer show not merely that the assessment was wrong but what the correct sale value is – did the Commissioner wrongly adopt a mathematical approach – power of Commissioner to assess under the Sales Tax Assessment Act (No 1) 1930 – power of the Commissioner to levy additional tax by way of penalty WORDS AND PHRASES – "treated", "treated as stock for sale by retail" Sales Tax Assessment Act (No 1) 1930 – ss 18(1), 18(2), 18(3A), 25(1), 25(2A), 25AA, 45, 46 Income Tax Assessment Act 1936 – ss 166, 167 Copperart Pty Ltd v Commissioner of Taxation (1994) 50 FCR 345 cited Deputy Commissioner of Taxation for the State of South Australia v Ellis & Clark Ltd (1934) 52 CLR 85 cited Brayson Motors Pty Ltd v Federal Commissioner of Taxation (1985) 156 CLR 651 cited Genex Corporation Pty Ltd v Commonwealth of Australia (1991) 30 FCR 193 cited Re Clyne; Ex parte Deputy Commissioner of Taxation (1983) 50 ALR 137 cited Palette Shoes Pty Ltd v Krohn (1937) 58 CLR 1 cited DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) (1982) 149 CLR 431 cited Federal Commissioner of Taxation v York Motors Pty Ltd (1946) 73 CLR 459 discussed B Morris Ltd v Lunzer [1942] 1 KB 356 cited Estee Lauder Pty Ltd v Federal Commissioner of Taxation (1988) 80 ALR 314 discussed Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 discussed, distinguished George v Federal Commissioner of Taxation (1952) 86 CLR 183 cited Federal Commissioner of Taxation v ANZ Savings Bank Ltd (1994) 181 CLR 466 cited Vale Press Pty Ltd v Federal Commissioner of Taxation (1994) 94 ATC 4587 followed McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263 discussed, distinguished Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353 cited Dalgety Downs Pastoral Co Pty Ltd v Federal Commissioner of Taxation (1952) 86 CLR 335 cited Duggan v Federal Commissioner of Taxation (1972) 129 CLR 365 referred to Revlon Manufacturing Limited v Commissioner of Taxation (1995) 63 FCR 535 discussed Queensland Independent Wholesalers Ltd v Federal Commissioner of Taxation (1991) 29 FCR 312 cited EMI (Australia) Ltd v Federal Commissioner of Taxation (1971) 2 ATR 325 referred to Commonwealth Quarries (Footscray) Pty Ltd v Federal Commissioner of Taxation (1938) 59 CLR 111 cited Spencer v The Commonwealth (1907) 5 CLR 418 cited COMMISSIONER OF TAXATION v PACIFIC DUNLOP LIMITED VG 125 of 1998 HILL, SUNDBERG AND GOLDBERG JJ 15 MARCH 1999 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 125 OF 1998 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT BETWEEN: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant AND: PACIFIC DUNLOP LIMITED AND: Respondent PACIFIC DUNLOP LIMITED Cross‑Appellant THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Cross‑Respondent JUDGES: HILL, SUNDBERG AND GOLDBERG JJ DATE OF ORDER: 15 MARCH 1999 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The appeal be dismissed and the cross appeal allowed. 2. The orders made by the learned trial judge be varied by deleting order 2 of his Honour's orders and substituting: "2. The objection decision of the Commissioner of Taxation be set aside and in lieu thereof it be ordered that the Commissioner allow the objection of the taxpayer." 3. The Commissioner pay the respondent's costs of the appeal. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 125 OF 1998 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT BETWEEN: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant AND: PACIFIC DUNLOP LIMITED AND: Respondent PACIFIC DUNLOP LIMITED Cross‑Appellant THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Cross‑Respondent JUDGE: HILL, SUNDBERG AND GOLDBERG JJ DATE: 15 MARCH 1999 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 THE COURT: The respondent, Pacific Dunlop Limited ('PDL') in the relevant period (1 September 1989 to 31 March 1992), manufactured a range of motor vehicle batteries. It sold, either on its own account or through wholly owned subsidiaries, batteries by wholesale. It also sold them by retail. In the main, batteries which it sold by retail were sold under the brand-name "Marshall". Batteries which it sold by wholesale were either unbranded (and installed or sold for use with popular makes of car) or bore different labels. Although the batteries which it manufactured were of various sizes and specifications there was generally no difference between the batteries sold by wholesale and those sold by retail save for the distinguishing label identifying the battery to be a Marshall battery. 2 In the relevant period PDL sold Marshall batteries through its wholly-owned Marshall outlets. It also sold them to franchised Marshall stores and to other outlets in the motor trade. The retail selling price of Marshall batteries was equivalent to the standard cost of manufacture increased by 123 per cent. 3 During the relevant period and prior to the making of retail sales of Marshall batteries PDL treated the Marshall batteries which it intended to sell itself by retail as stock for sale by retail. At this point of time it became liable to pay sales tax on the stock so treated. That liability fell, at least initially, to be determined by reference to the sale value defined in s 18(2) of the Sales Tax Assessment Act (No 1) 1930 (the No 1 Assessment Act): "the amount for which those goods could reasonably be expected to be sold by the [taxpayer] by wholesale." 4 As it was obliged to do, PDL in the relevant period lodged monthly sales tax returns in which it accounted for the sales tax which it determined was payable by it, inter alia, in relation to the stock which in the preceding month it had treated as stock for sale by retail. These returns were lodged on the basis, initially, that the sale value was the standard cost of manufacture increased by 27 per cent. In a later period the sale value was determined by PDL to be standard cost increased by 20 per cent. In the relevant period the total sale value of the stock of Marshall batteries which PDL treated as stock for sale by retail amounted to $18,436,400. 5 The appellant, the Commissioner of Taxation formed the view that the amount returned by PDL in respect of the Marshall batteries which it treated as stock for sale by retail was less than the amount which he calculated to be a fair and reasonable wholesale value (see s 18(3A) of the No 1 Assessment Act set out later in these reasons). Accordingly, purporting to act under that section he altered the sale value of the Marshall batteries treated as stock for sale by retail. The total came to a sale value of $25,042,777.70. The elements of the calculation are dealt with later in these reasons. In the result he purported to issue an assessment under s 25(2) of the No 1 Assessment Act 6 In that assessment an additional amount of sales tax of $1,321,275.39 was said to be payable after applying the rate of 20 per cent applicable in the relevant period to batteries to the figure which the Commissioner had derived under s 18(3A), and subtracting the sales tax which PDL had paid with its return and based upon its calculation of sale value under s 18(2)(b). The Commissioner purported to add additional tax for late payment under s 29(1) of the No 1 Assessment Act of $418,4590.10 and additional tax under s 45(2) of the No 1 Assessment Act of $264,255.00. It is no longer in dispute that the additional tax purporting to be added for late payment under s 29(1) was incorrectly imposed (see Copperart Pty Ltd v Commissioner of Taxation (1994) 50 FCR 345.) 7 PDL objected to that assessment. The objection was disallowed. PDL then appealed to this Court against the objection decision. That appeal is an application in the original jurisdiction of the Court. The appeal was heard by a judge of the Court; PDL was successful in it. His Honour ordered that the matter be remitted to the Commissioner for an assessment in terms consistent with the reasons he gave. The Commissioner now appeals against that judgment. In turn PDL cross appeals against so much of the judgment as resulted in an order that the matter be remitted to the Commissioner for an assessment consistent with his Honour's reasons. THE JUDGMENT APPEALED FROM 8 After setting out the relevant facts and legislative provisions the learned trial judge considered a submission whether the attack mounted by PDL against the assessment went to the power of the Commissioner to make an assessment, or was merely a challenge to the exercise by the Commissioner of a discretion in exercising the power to assess. It will be necessary in more detail to consider this question later. Suffice it to say that his Honour took the view that it was the latter, not the former, observing that there was no condition which had to pre-exist before the opinion of the Commissioner exercisable under s 25(2) was formed. 9 His Honour then considered the point of time at which the Marshall batteries should be taken to have been treated as stock for sale by retail. This was, his Honour found,the moment of time after the batteries had been formed and which preceded the affixing of the Marshall label to the batteries. His Honour said: "[The] act of treating the batteries as stock for sale by retail must, as a matter of logic and common sense, commence at a point of time that precedes the affixing of a Marshall label; it may only be an instant in time but nevertheless, a Marshall label will not be affixed to a battery (thereby identifying it as intended for sale by retail) unless there has been a prior thought process – ie, a decision that relevant batteries are earmarked for sale by retail. The actual labelling of a battery with a brand-name 'Marshall' then becomes the physical manifestation of the thought process and one of the concluding steps in the decision to treat the relevant batteries as stock for sale by retail." 10 It may be observed here that in his Honour's judgment nothing appeared to turn on whether the taxing point preceded momentarily the affixation of the label or was coextensive with it. As will be seen there may indeed be a difference. 11 His Honour then turned to consider whether rebates and volume discounts should be taken into account in determining the sale value or whether the matter should be considered on a battery to battery basis. Rejecting the latter approach his Honour said: "Counsel for the taxpayer in his final submissions, put forward the proposition that monthly notional sales should be converted to annual sales so that the question might be posed: what would be the expected wholesale price payable by one only purchaser who notionally purchased about 200,000 to 250,000 batteries per annum from the taxpayer? In support of that proposition he claimed that the evidence was clear that prices in the trade were negotiated on the basis of the expected annual sale volume. I accept that proposition. Although one is required to engage in a hypothetical or speculative exercise of determining an appropriate wholesale price, there is no warrant to extend the hypothesis by assuming terms and conditions of sale that are inconsistent with actual business practices; nor should it be assumed that there might be more than one notional purchaser. Insofar as the manufacturer is the retailer, the hypothesis should proceed upon the premise that the wholesale price will be fixed upon the premise that there is one only purchaser of the batteries who is a long term purchaser ready willing and able to pay for the batteries on ordinary trading terms. In other words, I assess the hypothetical wholesale price as that which would be afforded to a most favoured purchaser." 12 His Honour rejected a submission advanced by the Commissioner that because the legislation required monthly returns, the hypothetical exercise to be undertaken had to be conducted by reference to the batteries sold in the month. 13 His Honour also held that the notional sale value would include an amount to cover the costs incurred in affixing a Marshall label, on the basis that the notional purchaser would more likely than not require the label to be affixed as part of the transaction. His Honour left out of consideration the cost of freight saying: "I do not believe that there is evidence sufficient to express an opinion on that subject. In any event, it is the task of the Commissioner in the first instance to make the decision whether to include freight as a cost of the wholesale sale and the Court will only interfere if, on a review, it is apparent that the Commissioner erred in law in his treatment of that subject." 14 His Honour then turned to examine the way the Commissioner had made his calculations. We will return in more detail to that shortly. Suffice it to say here that PDL attacked the Commissioner's calculations on a number of grounds, especially the way the Commissioner had calculated a standard cost to which he then applied a mark-up of 63 percent. The methodology of computing a standard cost and then adding a mark-up was not itself challenged and rightly so as his Honour observed. What was in issue between the parties were matters of detail in the computation of the standard cost. These included an item referred to in the evidence as "productivity credit", which his Honour found to involve no error of principle, and various other costs which were challenged in evidence. 15 In addition to these matters of detail, PDL attacked the exercise of discretion as failing to take into account or give due weight to a number of factors which his Honour listed as follows: "(a) the comparable wholesale selling prices of batteries sold by the Applicant to OEM's; (b) the comparable wholesale selling prices of batteries sold by Aliph Pty Ltd for sales to battery specialists; (c) the wholesale selling price of comparable batteries sold by Century to Besco and other battery specialists; (d) the wholesale profit usually sought by battery manufacturers when selling goods by wholesale to large volume buyers; (e) the Applicant's actual costs of manufacturing and selling the goods; (f) volume of goods to be sold; (g) market support required; (h) the Applicant's available production capacity; (i) required level of customer support; (j) market share considerations." 16 The reference to OEMs in this list is a reference to original equipment manufacturers such as Ford, General Motors and Mitsubishi to whom PDL sold unbranded batteries for use in cars or trucks manufactured by those companies at a wholesale price of cost of manufacture plus 18 per cent. 17 The basis upon which the learned primary judge found for PDL did not depend upon the matters of detail which were argued. Rather, his Honour took the view that in exercising the discretion conferred upon him by s 25(2), the Commissioner erred in adopting a strictly mathematical approach, ignoring other important factors such as competitors in the market place, and volume rebate or discounts. His Honour said: "The fact that the taxpayer engaged, during the relevant period, in wholesale sales at very different prices is cogent evidence of the fact that the exercise is not merely one of adding a desired profit to standard cost; market forces require there to be an objective assessment of actual trading terms and that factor is to be incorporated in the hypothetical transaction. For example, the larger the hypothetical sale, the more likely that there will be a lower wholesale price. It is at this stage, in my opinion, that the Commissioner should have had regard to actual wholesale sales that were made by the taxpayer in the relevant period. The closest, in terms of size, were the sales to the OEMs. … Everything points to the Commissioner having erred by failing to take into account properly, or at all, the relevant consideration of actual wholesale sales that were made by the taxpayer in the relevant period… In my opinion there has been … an error and the matter should be returned to the Commissioner for him to reconsider the matter in terms consistent with these reasons." 18 The OEM sales were not, the Commissioner submitted to his Honour and to us, comparable sales at all, but made on special terms and conditions. His Honour made no finding about this, indicating that it was for the Commissioner to evaluate whether there is substance in these criticisms and how they might ultimately affect his exercise of discretion. 19 There were other wholesale sales which his Honour regarded as in the same category and requiring consideration by the Commissioner, namely, sales by Century Yuasa Batteries (PDL's only competitor) to Besco and other battery specialists. 20 Of the list set out above of matters which PDL submitted should have been taken into account, his Honour thus accepted that the Commissioner erred in respect of matters (a), (b) and (f). His Honour said that he discounted(d), disregarded (e) and (h), but as to the remaining matters found that it had not been shown on the evidence that these were not considered by the Commissioner properly or at all, but that they should be when the matter was remitted to the Commissioner. 21 Because he was of the view that the Commissioner had erred in failing to give appropriate consideration to the matters (a), (b) and (f), his Honour remitted the matter to the Commissioner to exercise afresh the discretion conferred upon him under s 25(2). 22 His Honour also held that if he were wrong in finding for PDL on the basis indicated he would not interfere with the penalty imposed upon PDL pursuant to s 45 of the No 1 Assessment Act. THE STATUTORY BACKGROUND 23 The general scheme of the sales tax legislation as initially enacted is set out in the seminal judgment of Dixon J, as his Honour then was, in Deputy Commissioner of Taxation for the State of South Australia v Ellis & Clark Ltd (1934) 52 CLR 85, in its form prior to being replaced by the so-called 'streamlined" sales tax legislation of 1991. The scheme and policy of the legislation has been more recently discussed in the judgment of the High Court in Brayson Motors Pty Ltd v Federal Commissioner of Taxation (1985) 156 CLR 651 and by the Full Court of this Court in Genex Corporation Pty Ltd v Commonwealth of Australia (1991) 30 FCR 193. That discussion need not be here repeated. It suffices to say that the legislative scheme is that sales tax is to be paid, so far as possible, on the last wholesale sale of goods and by reference to the amount for which the goods are sold in that sale. Where there is no wholesale sale, or where the amount for which the goods are sold may cast doubt on that being an appropriate wholesale sale value (for example in non arm's length transactions or where avoidance may be involved), the legislation seeks to ensure that the sale value on which sales tax is calculated is ultimately a real wholesale sale value. 24 One circumstance where there will be no wholesale sale is where the manufacturer of the goods sells them by retail. In such a case the sale value is that set out in s 18(1)(b), namely: "(i) if the goods are of a class which the manufacturer himself sells by wholesale – the amount for which the goods could reasonably be expected to have been sold by the manufacturer by wholesale; or (ii) in any other case – the amount for which the manufacturer could reasonably be expected to have purchased 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." 25 It will be appreciated that where in the ordinary course of commerce goods are sold by the manufacturer in a wholesale transaction to a retailer, the sales tax will be payable on that wholesale sale and will be accounted for in the monthly returns by reference to the date of the wholesale sale even though the stock may be held by the retailer for some time before a sale to a consumer. In other words, the retail stock of the retailer will have borne sales tax at a point of time prior to the actual retail sale. Without specific provision, a manufacturer selling by retail would thus have a competitive advantage over retailers of the same goods, if not required to account for sales tax until the time of the actual retail sale. Thus, to equate manufacturers selling by retail with other retailers selling goods of the same manufacturer, or comparable goods, the legislation took as a taxing point the act of the manufacturer treating goods as stock for sale by retail, that is to say, the act of bringing the goods into retail stock. 26 In the case, therefore, of goods being treated as stock for sale by retail, the sale value is that to be determined in accordance with s 18(2) of the No 1 Assessment Act. That is to say: "(a) if 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 …" 27 In a case such as the present where a manufacturer might sell goods of the class put into retail stock by wholesale, but perhaps in transactions not regarded as giving an appropriate wholesale value (for example, because not arm's length, or on special terms) the legislation permitted the Commissioner to alter the sale value provided for by s 18(2). Section 18(3A) provided, relevantly: "Where, in the case of goods to which…sub-section (2)… applies… (a) no sale value of the goods has been set forth in any return required to be furnished under this Act; or (b) the amount set forth in any return required to be furnished under this Act as the sale value of the goods is less than the amount which, in the opinion of the Commissioner, is a fair and reasonable wholesale value of the goods, the Commissioner may, whether or not the goods are of a class sold by any other person by wholesale, determine the amount which, in his opinion, is a fair and reasonable wholesale value of the goods, and, if he does so, the Commissioner shall be deemed to have altered the sale value of the goods (whether a sale value was set forth in the return or not) to the amount so determined by him, and the value as so deemed to be altered shall, notwithstanding sub-section … (2)…, be the sale value of those goods for the purposes of this Act." LEGISLATIVE BACKGROUND - THE POWER TO ASSESS 28 Unlike income tax for which the time of payment depends upon assessment, sales tax is a self assessing tax payable on a return basis in the month following the point of time at which the relevant taxing event (generally referred to as the taxing point) occurs and within 21 days of the end of that month: s 24(1). Thus, without assessment, unpaid sales tax may be recovered by suit of the Commissioner, as a debt from the time it is due and payable at the end of the 21 day period. The quantum of tax so recoverable in the case of a taxpayer who has treated goods as stock for sale by retail, will be the sale value determined in accordance with s 18(2) of the No 1 Assessment Act. 29 Notwithstanding the self assessment nature of the tax, the legislation does, however, provide for assessment in four circumstances dealt with in ss 25(1), 25(2), 25(2A) and 25AA. 30 Section 25AA has no relevance in the present case. It requires the Commissioner, where requested by a taxpayer, to make an assessment of sales tax in respect, generally speaking, of a particular transaction and thus through the process of objection and appeal enables the taxpayer to test the correctness of that assessment. 31 Section 25(1) is what may be termed the normal assessing provision, if that is an appropriate use of language in the context of a tax which is not contemplated to be assessed at all. It provides: "Where the Commissioner finds in any case that tax or further tax is payable by a person, the Commissioner may make an assessment in relation to the person." 32 Section 25(2), the assessing section which the Commissioner purported to use in the present case, is in the following terms: "Where, under sub-section 18(3A)… the sale value of any goods has been altered, the Commissioner shall make an assessment in relation to those goods." 33 Section 25(2) is then followed by s 25(2A), which is in the following terms: "Where – (a) a person makes default in furnishing a return; (b) the Commissioner is not satisfied with a return furnished by a person; or (c) the Commissioner has reason to believe or suspect that a person (although not having furnished a return) is liable to pay sales tax, the Commissioner may determine an amount to be the amount upon which, in the opinion of the Commissioner, sales tax should be paid and may make an assessment in relation to the person." 34 It may be observed in passing that s 25(1) of the No 1 Assessment Act roughly coincides with s 166 of the Income Tax Assessment Act 1936 ('the Income Tax Act'),the ordinary assessing provision for income tax and s 25(2A) of the No 1 Assessment Act with s 167 of the Income Tax Act, under which default assessments of income tax are made. There is no section in the Income TaxAct which corresponds with s 25(2) of the No 1 Assessment Act under which the present assessment was made. ADDITIONAL TAX 35 For relevant purposes, additional tax (dealt with in Part VIII of the No 1 Assessment Act) may arise under either s 45 or s 46. Section 45 provides in subs (1) for a penalty by way of additional tax where a taxpayer refuses or fails to furnish a return or other information. It is not suggested here that s 45(1) had any application. 36 Section 45(2) then provides: "Where – (a) a taxpayer – (i) makes a statement to a taxation officer, or to a person other than a taxation officer for a purpose in connection with the operation of a relevant sales tax law, that is false or misleading in a material particular; or (ii) omits from a statement made to a taxation officer, or to a person other than a taxation officer for a purpose in connection with the operation of a relevant sales tax law, any matter or thing without which the statement is misleading in a material particular; and (b) the tax properly payable by the taxpayer exceeds the tax that would have been payable by the taxpayer if it were assessed or determined on the basis that the statement were not false or misleading, as the case may be, the taxpayer is liable to pay, by way of penalty, additional tax equal to double the amount of the excess." 37 Additional tax which is required to be assessed under Part VIII may be included in an assessment of ordinary sales tax: s 47(2). Additional tax may, as was the case here, be remitted by the Commissioner in whole or in part: s 47(2). In the present case the additional tax said to be payable under s 45(2) was remitted to the amount shown in the assessment. 38 Section 46 then provides: "Where, under sub-section 25(2), the Commissioner has made an assessment in relation to a person in consequence of an alteration of the sale value of goods (other than an alteration made under sub-section 18(3A)), the person is liable to pay additional tax, by way of penalty, equal to double the amount of the difference between the tax properly payable and the tax that would have been payable if the sale value concerned had not been altered." THE ISSUES ON THE APPEAL 39 The submissions of counsel for both the Commissioner and PDL raised numerous issues, not all of which require to be addressed in these reasons. Rather than seeking to summarise those submissions at this stage, it is useful to state the issues which divide the parties. These are: 1. Whether the time at which goods are treated as stock for sale by retail is to be taken as the moment before they are branded, as his Honour held, or at some, and if so what, later time. 2. If the relevant taxing point is the moment of branding the goods should the sale value take into account the Marshall brand? To some extent this overlaps the question of comparable sales addressed in issue 4. 3. In an appeal from an assessment made under s 25(2) must a taxpayer show not merely that the assessment is wrong but what the correct sale value is. The relevance of this issue lies in a submission by the Commissioner that it was not sufficient for PDL to show that the Commissioner erred in the way his Honour said he did, but rather it had to establish that the sale value as altered by the Commissioner was wrong, and thus excessive. Dependent upon the resolution of this issue is the question arising from the cross appeal, namely, if his Honour was otherwise correct, should the objection decision have been allowed, or should the matter have been remitted to the Commissioner to be done again by him in the light of the reasons? 4. Did the Commissioner, as his Honour found, adopt, and wrongly adopt, a "mathematical approach" ignoring both the evidence of other wholesale sales and matters such as volume discounts? 5. If his Honour was wrong in finding that the Commissioner erred in failing to take into account comparable sales or trading terms such as volume rebates, should his Honour have found for PDL by reference to other errors said to have been committed by the Commissioner? Among these are matters going to the allocation of expenses in calculating standard costs said to relate to retail, rather than wholesale costs. The most significant of these is freight, not dealt with by his Honour. 6. Did s 45(2) of the No 1 Assessment Act authorise a penalty in a case where an assessment was made as a consequence of the alteration of sale value by the operation of s 18(3A)? 40 We turn to discuss these issues. THE TIME AT WHICH THE TAXING POINT ARISES 41 As the provisions of s 18(1)(b) make clear the taxing point in the present case is the point of time at which PDL treated the batteries which it proposed to sell by retail as Marshall batteries as its stock for sale by retail. Prima facie it is at this time that sale value is to be calculated. 42 As the summary of the reasons of the learned primary judge set out earlier makes clear, his Honour was of the view that this occurred at the moment of time at which the batteries were formed and immediately before there was attached to them a label indicating that they were Marshall batteries. 43 The relevance of this issue may be said, on the present facts, to be two fold. First is the question whether at that time, since all batteries manufactured by PDL (apart from size and capacity) were the same, it was appropriate for the relevant goods to be treated as Marshall batteries – batteries which had a rather higher retail price than other batteries manufactured by PDL. Related to that question is whether sales made, for example to OEMs or other purchasers of unbranded or other-branded batteries, were properly to be treated as capable of being comparable. It is necessary at this stage to set out some relevant factual material. 44 Batteries of different sizes and capacities were manufactured in the relevant period at the Elizabeth plant of PDL in five production lines. After assembly, unformed batteries were removed into a separate area on site for storage. Some 7000 to 9000 batteries were assembled per production day. "Formation" involved the addition of acid, charging the battery, sealing of the plastic container and testing. It converted the assembled batteries into a condition where they were ready for sale and use. 45 Until around September 1989 batteries were formed at the Elizabeth plant. After that date formation took place, for those batteries destined for the Eastern seaboard markets, in Padstow in New South Wales. After formation finished, batteries were stacked onto pallets and checked to ensure compliance with quality control standards. If the pallet passed the quality control check it was transferred into a separate warehouse building on the Elizabeth site, or in the case of batteries formed at Padstow transferred to a finished goods area for shipment. 46 Batteries intended by PDL to be sold by retail as Marshall batteries were physically identified immediately before Marshall labels were affixed to them. That method of affixation continued until at least the establishment of centralised warehouses at the premises at which the batteries were formed. There is reference in the evidence to the establishment of centralised warehouses, although it is not clear when or where these were established. It does appear, however, that after they were established most labelling by PDL occurred at these warehouses. No suggestion was made by either party that any different consequence followed as a result of the establishment of these warehouses, nor were we taken to any evidence concerning it. 47 We proceed on the basis on which the learned trial judge proceeded as did the parties in their submissions, namely that formation and affixation of labels occurred at the same premises. 48 There has been little attention given in the case law to the point of time at which goods are to be treated as goods for sale by retail and a sale value attributed to them. Generally it may be thought that once the point of time is established at which the taxing point arises there will be no difficulty in establishing the sale value. However, it may be possible that a difference in sale value may arise between the moment before the taxing point (the time of calculation of sale value adopted by the learned trial judge) and the moment of, or after the taxing point. 49 Not surprisingly the law has always shown a reluctance to divide moments of time. Often artificial rules are adopted to avoid the problem. So, bankruptcy is treated as dating back to the first moment of the day on which a sequestration order is made: Re Clyne; Ex parte Deputy Commissioner of Taxation (1983) 50 ALR 137 at 145. Death, on the other hand is by statute (eg in Victoria, the Property Law Act 1958, s 184) presumed to occur in order of seniority to determine succession by survivorship. Where an agreement is made for consideration to hold property upon the terms of a trust, equity operates to impose that trust from the very moment of acquisition, without division of time: Palette Shoes Pty Ltd v Krohn (1937) 58 CLR 1. However, for revenue purposes it would seem that time may still be split, so that where property is transferred to another to hold upon trust for the transferor the transfer may be said to take effect first before equity operates to impose a trust: DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) (1982) 149 CLR 431 at 442-3 per Gibbs CJ. 50 In Ellis & Clark Ltd, in the course of describing the legislative scheme, Dixon J said at 92: "The whole plan of the legislation suggests that it is concerned only with the course of commercial dealing in goods between the time they first appear in Australia, either as a result of manufacture or importation, and the time when they are retailed. It takes them at the point of importation and manufacture and provides a scheme for following them to that point at which, in the actual course of commerce in the particular articles, they go into the retail market, and then, as nearly as possible, tax is imposed either upon the antecedent sale by wholesale or upon the immediately antecedent wholesale value which they possessed." [emphasis added]. 51 While the emphasised words might suggest that a wholesale value is to be assessed at a point of time antecedent to the taxing point, they must be treated with some caution. First, it is clear that the passage cited involves a level of generalisation. Second, and more importantly, the question of the moment of time at which sale value is to be calculated was not an issue in Ellis & Clark Ltd and not the subject of any argument. 52 The only case in which a court has had the necessity to explore the meaning of the words "treated … as stock for sale by retail" was Federal Commissioner of Taxation v York Motors Pty Ltd (1946) 73 CLR 459. In that case the taxpayer, which manufactured and assembled motor cars and sold some by wholesale and some by retail, learned of an impending rise in the sales tax rate applicable to cars. Its normal practice was to hold cars in a common pool and appropriate cars to a retail or wholesale transaction as one occurred. It determined, on learning of the impending increase, to advance its liability to tax with respect to cars which it proposed to sell by retail and thereby ensure that the then lower rate would apply. To achieve this the directors of the taxpayer made a decision to treat certain vehicles as retail stock. This decision was then given effect to by the company's accountant who made memoranda in the company's stock book stating that, with exceptions which were specified, the stock was transferred to stock for sale by retail. The Commissioner argued that the cars had not been treated by the taxpayer as stock for sale by retail because, inter alia, some of the cars recorded in the memoranda as retail stock were in fact sold by wholesale. The Commissioner was successful in the Board of Review which found that, while there was an intention to treat the goods as stock for sale by retail, there was no actual treatment. 53 Williams J at first instance and Latham CJ, Rich, Starke and Dixon JJ (McTiernan J dissenting) were all of the view that the taxpayer should succeed, although different judgments may be thought to differ in emphasis at least on the appropriate test to be applied. 54 Williams J made reference to the English Finance (No 2) Act 1940 which applied a purchase tax where chargeable goods were appropriated or applied to the purposes of a business and the decision of the Court of Appeal in B Morris Ltd v Lunzer [1942] 1 KB 356 at 362 where their Lordships said: "In the typical case of a wholesaler who has a retail business, the point of time selected is that at which he does some act in relation to his goods which indicates that he has ceased to be a wholesaler and has become a retailer in regard to them." 55 In his Honour's view there was no difference between the language of the English legislation and that of the No 1 Assessment Act in this regard. His Honour referred to the definition of "treat" in the Shorter Oxford English Dictionary as meaning: "to consider or regard in a particular aspect and deal with accordingly" and at 468 continued: "In my opinion a manufacturer treats his manufactured stock as stock for sale by retail when he reaches a definite decision not to sell it wholesale to another retailer but to sell it himself by retail, and he does some final and unconditional act which, in the words of the Court of Appeal, 'indicates that he has ceased to be a wholesaler and has become a retailer in regard thereto.' " 56 However, his Honour was of the view that what had been done by the taxpayer was sufficient, giving effect to the Board's decision to constitute treatment of the cars as stock for sale by retail. 57 Latham CJ, on the other hand may be thought to have suggested a test of decision, rather than both decision and giving effect to it. So, at 477, his Honour said: "Treatment as stock for sale by retail, if distinguishable from actual sale, must include any proved decision to regard the stock as stock for retail sale, that is, any decision to allocate or assign the stock to the category of goods intended to be sold by retail. Until sale, the goods remain in the possession or control of the owner. Treatment as stock for sale by retail does not involve any change in possession or control. It means that the stock is regarded in a particular way, namely as available for disposal by retail sale; that is, the treatment of stock to which the Act refers is a mental determination which, however, must be proved to exist if the question of whether or not it did exist is called in question." 58 His Honour rejected, as indeed all the majority of the Court did, a suggestion that the treatment to which the legislation referred had to be such an act as was "irrevocable". 59 Rich J did not attempt to deal fully with the concept of treatment or, except perhaps obliquely, to distinguish between intention to treat, on the one hand, and the act giving effect to that intention on the other. It sufficed in his Honour's view that the entries made were "sufficiently definitive" of the treatment. 60 Starke J , at 480-481, after quoting from Williams J's judgment the passage we have set out above, said: "Doubtless a taxpayer who so decides and acts treats his goods as stock for sale by retail but I should not think that his act must be final and unconditional, so that he can never change his method of dealing with such goods or sell them by wholesale or apply them to his own use. It is enough if he decides to sell his stock by retail and evidences in some manner his decision." 61 Dixon J more obviously adopted a test which required both intention and act. His Honour said at 484-5: "The legislation evidently means that if the taxpayer devoted goods to his retail stock, he shall then and there be taxable. Acts indicative of an intention to appropriate or devote goods to retail sale would amount to overt admissions of the requisite purpose, and if they were unequivocal would naturally be regarded as sufficient to justify the imposition of liability. But here conduct which, if the taxpayer were seeking to avoid liability for sales tax imposed on the footing that he had treated goods as stock by retail, would be seized on as an admission comes to wear rather the appearance of an allegation…. '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… Appropriation in accounts is a recognized method of devoting money or goods to a purpose and in my opinion we should hold that by definitive entries in a book a manufacturer may treat his goods as stock for sale by retail." 62 McTiernan J, who dissented, said at 485 that the Board of Review had correctly stated the meaning of the phrase "treated by him as stock for sale by retail", and then set out the following passage from the Board's decision: "Of the meanings given to the verb 'treat' in the Oxford Dictionary only one is possibly relevant in this case and that is 'to consider or regard in a particular aspect and deal with accordingly.' The two elements are necessary to constitute a treating but it would seem that the really important thing is … the action taken for that is the only evidence of the mental attitude or intention. The company must show that it regarded and actually dealt with the cars in question as 'stock for sale by retail'… One thing which is certain…is that goods cannot become stock actually held for sale by retail by virtue of a notion or intention which has not been consummated by action; some act must be done which, if or when disclosed, is sufficient to establish that the goods are in fact held as stock for sale by retail." 63 It was submitted by counsel for PDL that York Motors should be treated as authority for the view that formation of intention sufficed to constitute treatment for the purposes of the legislation. On this view some of the comments referred to above would merely be directed to matters of evidence of intention, rather than as to what constitutes treatment. Counsel for the Commissioner submitted that the case should be taken as authority for the necessity for both intention and subsequent act. In our view there must be both intention and some act indicative of the giving effect to that intention. That accords with the views of Williams, Starke, Dixon and McTiernan JJ in York Motors, and with the ordinary meaning of the words 'treated as stock for sale by retail.' 64 The more difficult question here is whether on the facts of the present case the acts of treatment should be regarded as the placing of the unbranded batteries on a pallet coupled with an intention that they (or at least in some cases, only some of the batteries on a pallet) would be sold by retail, or whether the treatment encompasses and concludes by the labelling of the batteries as Marshall batteries. In our view the legislation should be interpreted commercially – it is, after all, legislation peculiarly directed to commerce. Treatment may, but need not necessarily, consist of a single act. In a particular context, it may be a process. The present is such a case. In our view the giving effect to a decision to treat batteries as stock in trade for resale, batteries which were intended, and of necessity had to be sold as Marshall batteries, encompassed the selection of the relevant batteries, and included the step of labelling them. It was only then that the intended batteries were ready for retail sale. 65 Once it is appreciated that the labelling was part of the process of treating the batteries as stock for sale by retail there is no reason why sale value should be calculated prior to the labelling. In our opinion the sale value should be calculated at the very time the goods are treated as stock for sale by retail – that is to say at the moment the batteries in the present case become retail stock. 66 In our view a majority of the justices of the High Court in York Motors (including the judge at first instance) applied a test which requires both intention and some act performed thereafter. With respect, to treat mere intention as treatment seems to fly in the face of the statutory language, assuming it was possible to prove mere intention by, for example, minutes of meetings of directors. BRANDED GOODS 67 It follows from the view we have taken as to the point of time at which goods are treated as stock for sale by retail that the sale value of the Marshall batteries should be determined upon the basis that the batteries sold are what is described as branded goods. This may have significance on the facts of the present case. 68 It might be expected that unbranded batteries would be sold by retail at a lesser price than branded batteries. No doubt, the reason for this would be related to the goodwill which the trade mark attracts: cf Estee Lauder Pty Ltd v Federal Commissioner of Taxation (1988) 80 ALR 314. In that case Burchett J observed 318: "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 trade marks … and by promotion and advertising of the products." 69 Estee Lauder was a case where the taxing point was likewise treatment of goods as stock for sale by retail. The statutory hypothesis to be applied in determining sale value was that in s 18(2)(b) as then in force. It required a calculation of the amount for which the manufacturer could reasonably be expected to purchase identical goods from another manufacturer. It was argued that the calculation required no amount to be paid by the manufacturer for the Estee Lauder name and reputation. The manufacturer itself paid no amount to any person for the right to affix the name. The argument was rejected. The analogy is not perfect – the statutory calculation is different. However, it would indeed be strange if different results arose where subs 18(2)(b) applied and where subs (3A) applied at least in respect of this matter. Both sections, ultimately are concerned with reaching a value approximating to the fair wholesale value of the goods. To treat the goods as unbranded goods departs from this policy. It will be necessary to return later to Estee Lauder. THE ISSUE IN AN APPEAL ARISING UNDER SECTION 25(2) 70 The view that in an appeal from an assessment made under s 25(2) the taxpayer must show not merely that the assessment is wrong but also what the correct sale value is, relies upon a number of income tax cases, the most recent of which is Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 and see also George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 201, 204 and Federal Commissioner of Taxation v ANZ Savings Bank Ltd (1994) 181 CLR 466 at 479. A similar view was taken in the context of a default assessment of sales tax by Hill J in Vale Press Pty Ltd v Federal Commissioner of Taxation (1994) 94 ATC 4587 at 4592. 71 Dalco involved an assessment made under s 167 of the Income Tax Act, that is to say otherwise than in accordance with returns lodged by the taxpayer. A Full Court of this Court had held that the taxpayer had succeeded in showing that each of the assessments was excessive in that each was not warranted by law. On appeal the High Court held that it was not enough to show that the assessments were wrong. The question posed for decision, as stated by Brennan J at 619 was: "In proceedings on appeal to a court … against an assessment made under s 167(b), does the taxpayer discharge the burden of proving that the assessment is excessive where (a) he does not prove that the amount assessed as his taxable income in fact exceeds his taxable income, but (b) he shows that the Commissioner formed a judgment as to the amount of his taxable income on a wrong basis?" 72 All members of the Court were of the view that the Full Federal Court had erred in not requiring the taxpayer to show that the amount assessed exceeded his real taxable income, but merely that the assessment itself was made on an erroneous basis. 73 In Dalco the Court distinguished McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263. In that case the Court was concerned with an amended assessment. The power to make an amended assessment depended upon the satisfaction of certain conditions. It was held that s 170(2) of the Income Tax Act created a condition precedent governing the power to make an amended assessment so that, as Brennan J observed in Dalco at 622-3: " … the satisfaction of the requirements of s 170(2) is not merely part of the due making of the assessment which does not affect substantive liability. It was held that s 170(2) creates a condition precedent, the satisfaction of which was not protected from challenge in appeal proceedings by s 177(1). As the amount of the amended assessments would be shown to be excessive if the requirements of s 170(b) were not satisfied, s 190(b) imposed on the taxpayer the burden of showing that the requirements had not been satisfied. 74 Under s 167(b) of the Income Tax Act the Commissioner (or a delegate) has two functions. He or she must first determine whether he or she is satisfied by the return. He or she must then form a judgment of the amount upon which the tax ought to be levied. The former was held in George's case to be a mere procedural step and not a condition precedent to the validity of the assessment. It follows from Dalco that the second is likewise. Thus the issue under s 167 differed from that in McAndrew where the prerequisites were conditions precedent going to validity. Among what may be said to be implicit reasons for the latter conclusion is that upon the expiration of the limitation provisions in s 170 authorising amendment to an assessment, the liability of a taxpayer becomes that which is assessed to him or her in the original assessment. Once it is shown that the prerequisites for amendment are not satisfied, one is left with the liability as originally assessed. There can thus be no requirement for a taxpayer showing the extent to which the taxable income is less than that shown in the amended assessment. 75 The parties before us sought to bring the present case within either Dalco or McAndrew. In truth it differs from each, both by reference to the language of the relevant assessing section and the statutory scheme for sales tax which we have already described. 76 In Vale Press, Hill J discussed in some detail the income tax cases and the statutory background to them. He concluded, and we agree, that these cases and the comments in them do not suggest that the comments in cases such as Dalco were in the income tax context confined to assessments made under s 167. We are of this view despite the fact that there are numerous income tax cases where a taxpayer has succeeded in an appeal by showing that a discretion upon which the assessment depended was exercised arbitrarily or capriciously or wrongly. It suffices to refer to cases such as Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353 and Dalgety Downs Pastoral Co Pty Ltd v Federal Commissioner of Taxation (1952) 86 CLR 335 involving discretions which the Commissioner was required to exercise under the then s 80 of the Income Tax Act. 77 It is important to keep in mind the context in which these discretion cases were decided. First, it would be fair to say that the issue litigated between the parties was the question whether the discretion was properly exercised. But, more importantly, cases such as Avon Downs and Dalgety Downs were concerned with legislation which first allowed a general class of deduction and then excluded the right to the deduction in a particular case where the Commissioner formed a specified opinion. If the discretion was erroneously exercised, so that it had not been exercised at all, the consequence was that the Act operated to allow the deduction. Thus a taxpayer who succeeded in establishing that the discretion had miscarried had shown what his true taxable income was (except in the rare case where some other question intervened, such as the existence of other sources of income.) 78 The case of Duggan v Federal Commissioner of Taxation (1972) 129 CLR 365 is somewhat analogous. The rate of tax payable by the trustee in that case, depended upon whether the Commissioner had exercised the discretion conferred upon him under s99A(2) of the Act that it was not unreasonable that s99A (which imposed the maximum rate of tax) should apply. It was held by Stephen J that the Commissioner's decision was vitiated by legal error and thus wrongly exercised. It was held that the assessment should be set aside, with the Commissioner being free to make such further assessments in accordance with law as might be appropriate. 79 After considering the income tax cases Hill J in Vale Press at 4593 turned to consider the applicability of these cases to sales tax. His Honour did so, however, in the context where the Commissioner had assessed upon the basis of a discount from retail price to determine the wholesale value of printing material always produced and sold by retail. The taxpayer had complained that the Commissioner's approach was arbitrary but made no attempt to show what the real figure was. Indeed it was the taxpayer's position that no sale value could be calculated. The assessment before the Court was a special assessment under s 25AA. 80 Hill J said: "The sales tax legislation differs from the income tax legislation in that the assessment is not prima facie evidence in a sales tax appeal… However, s 14ZZO [of the Taxation Administration Act 1953] applies not only to income tax appeals but also to sales tax appeals. In sales tax, as in income tax, therefore, the statutory issue will ultimately be the excessiveness of the assessment. Hence, although a sales tax assessment is not given any prima facie status when tendered in a sales tax appeal, it is clear that it is for the taxpayer in a sales tax matter to show the assessment to be excessive, just as it is for a taxpayer in an income tax matter to show the assessment to be excessive." 81 What is there said must be seen in the context of the matter before the Court. The assessment was a special assessment made at the request of the taxpayer under s 25AA. It was a case which involved neither preconditions to the making of the assessment, nor questions of whether exercises of discretion were procedural or not. It involved no alteration of sale value which could operate to change the taxpayer's liability to sales tax. His Honour was not called upon to, and did not, consider an assessment made under s 25(2) consequent upon the exercise of discretion under s 18(3A). 82 While there is no doubt that ss 25(1), 25(2A) and 25AA do not involve any condition precedent to the making of an assessment (unless the making of an application to assess under s 25AA should be so considered) and that any element of discretion is procedural only so that the taxpayer on an appeal must show not only that the assessment is erroneous, but what his true liability is, the position is less clear where an assessment is made under s 25(2) consequent upon the exercise of discretion under s 18(3A). First, the power to issue the assessment arises only where there has been an alteration of sale value under s 18(3A). We leave out of consideration the other occasions where an assessment is directed under s 25(2). So, it may be said that if the exercise of discretion under s 18(3A) miscarries, there is no alteration of sale value, and in consequence no power to assess. Second, and more important, if there is no alteration of sale value the Act operates in the usual way. That is to say, in the absence of an effective exercise of discretion by the Commissioner, the self –assessment mechanism operates. So the case is more similar to cases such as McAndrew or for that matter, Duggan to which reference has earlier been made, than to Dalco. 83 In our opinion, there is no alteration of sale value unless the Commissioner properly exercises the discretion conferred upon him under s 18(3A), that is to say in a case arising under s 18(3A)(b), unless the Commissioner properly forms an opinion that the amount set forth in a return as the sale value of the goods is less than the amount which in his opinion is a fair and reasonable wholesale value, there arises no power to assess. 84 It follows that if PDL succeeds in showing that the Commissioner's discretion miscarried under s 18(3A), it succeeds in showing the assessment to be excessive and is entitled to an order that the objection decision against the assessment be allowed and that the assessment be set aside. It may be said that there is little practical difference whether the assessment is ultimately set aside. There seems no reason why the Commissioner might not at any time form an opinion properly under s 18(3A) and in consequence issue an assessment under s 25(2). No statutory time limits apply such as is the case in income tax where s 170 limits the power of the Commissioner to make amended assessments. DID THE COMMISSIONER WRONGLY ADOPT A MATHEMATICAL APPROACH? 85 The view that in determining sale value it is an error of principle to adopt a strictly mathematical approach derives from the decision of a Full Court of this Court in Revlon Manufacturing Limited v Commissioner of Taxation (1995) 63 FCR 535 at 553 per Beaumont J, and at 566 per Tamberlin J. That case, an appeal from a decision of the Administrative Appeals Tribunal, involved a challenge by the taxpayer to the sale value computed under s 18A(4) in respect of a manufacturer who sold goods and performed services for a fee, including transport of the goods ex-warehouse (that being the point of sale), in circumstances said to involve a purpose of reducing sale value within s 18A(1)(b) of the No 1 Assessment Act. The assessment, which was upheld by the Tribunal, was made on a "mathematical basis", that being, so it would seem an addition to the selling price of a part of the taxpayer's profit mark-up for services. Beaumont J said at 553-4: "But, as the Tribunal noted, the Commissioner's assessment, which was upheld by the Tribunal, was made on a 'mathematical basis'. With respect, I cannot agree that, in law, this is the correct approach. The question of law to be addressed under s 18A(4), on the hypothesis there stated, is to be considered between seller and buyer in terms of what 'amount' they could reasonably be expected to agree as the sale value of the goods. That is an evaluation involving a judgment, rather than a mathematical exercise of the kind undertaken here by the Commissioner and adopted as appropriate by the Tribunal." 86 Wilcox J was of the view that the appeal should be allowed because the Tribunal was bound itself to form a judgment of the hypothetical sale price and did not do so. No doubt in accordance with the jurisprudence relevant to the Tribunal, what his Honour said is correct. It places, however, a different gloss on what was said by Beaumont J, with which it seems Wilcox J agreed. 87 Tamberlin J said at 566: "The second error is that discussed in the reasons of Beaumont J. It appears …that the Deputy President considered it correct to determine the question on a 'mathematical basis'. The approach approved was not the correct approach. The exercise required by s 18A(4) of the Sales Tax Assessment Act (No 1) 1930 (Cth), call [sic] for the exercise of judgment and appraisal rather than the application of an arithmetic formula whereby deductions are made from the gross price paid. It does not follow that the deduction of freight cost or any other specified cost from the gross price will establish how much the goods could reasonably have been expected to have been sold for if the agreements had not been entered into. A buyer, for example, may not be prepared to pay an amount so arrived at in every case. The section requires an estimation of what price would be paid in the market for the goods if the agreements did not exist. This will often involve a process of negotiation and bargaining based on many and varied considerations. Market price does not automatically reflect costs incurred by the seller. Furthermore, some cost components may not be capable of precise mathematical calculation and an allowance or estimate may need to be made of such components." 88 Whatever may be meant by a "mathematical calculation" it is clear that an assessment made by the Commissioner by applying a mathematical formula will not necessarily be excessive on that account, any more than a valuation of shares made by reference to a formula, at least once a capitalisation rate is selected, is thereby incorrect. It all depends upon the facts. For example, the assessment made by the Commissioner of a wholesale value for the sale by retail of material produced by a printer, of necessity must proceed on a mathematical basis, typically retail price less retail profit and costs: cf Vale Press, if for no other reason than that there are no comparable wholesale sales to draw upon, where printing occurs solely in a retail context. Indeed, the adoption of a formula and allocation of costs or profit margins within that formula likewise both involve matters of judgment. Within the particular statutory context it is right to say that the task is one of arriving at market wholesale prices, but where there is no comparable market, the exercise will be performed in the way that business people perform similar tasks, that is to say by means of a mathematical approach involving matters of judgment. For example, the technique of valuing private company shares by reference to capitalisation of expected maintainable earnings reflects the way business people approach the task – it has never been said to be unusable merely because it involves mathematics. 89 It is now necessary to examine what in fact the Commissioner did in the present case. 90 No attempt was made by PDL to call the assessor who prepared the assessment. The only evidence upon which it is possible to know what the Commissioner did was a letter dated 1 May 1992 which set out the basis for the Commissioner's calculations. The letter reads relevantly as follows: "The purpose of this letter is to confirm this Office's view that the sale value adopted is not adequate for the purposes of section 18(2) Sales Tax Assessment Act (No. 1). Section 18(2) states, inter alia that – '… the sale value of goods treated by the manufacturer as stock for sale by retail shall be the amount for which those goods could reasonably be expected to be sold by the manufacturer by wholesale.' In forming an opinion as to 'the amount for which the goods could reasonably be expected to be sold by the manufacturer by wholesale' the Commissioner is required to examine other wholesale sales made by PDL which bear a close relationship to the circumstances of the 'Marshall' branded batteries transferred to stock for sale by retail. Upon examination of the records, it was found that, PDL makes wholesale sales of batteries to the following companies: (i) Original Equipment Manufacturers ('OEMs') such as General Motors-Holden's Automotive Limited and Ford Motor Company of Australia Limited; (ii) GNB Australia Ltd ('GNB'), a subsidiary of PDL, which primarily markets batteries under the 'Exide' brand; and (iii) Aliph Pty Ltd ('Aliph'), another subsidiary of PDL, which markets a full range of batteries specialising in truck and tractor batteries. While it is accepted that sales to OEMs are made at arms length and form part of PDL's business, the sales are made under agreements which provide for certain contractual obligations on the parties which are outside the scope of an ordinary contract for the sale of goods. The view held by this Office is that the special conditions attached to these sales will inevitably influence the selling price, and as a consequence, render that price inappropriate as a yardstick for the amount that the 'Marshall' batteries could reasonably be expected to be sold by wholesale. In addition, an initial examination of the financial records for the 'Marshall' operations for the year ended 30 June 1990, disclosed that a sale value based on standard cost of manufacture increased by 20% would not adequately cover all costs associated with the manufacture and wholesale distribution of the batteries. Under the circumstances, a sale value based on the selling price to OEMs, which is arrived at by increasing the standard cost of manufacture by 20%, cannot be accepted as an adequate sale value for 'Marshall' branded batteries treated as stock for sale by retail. The other wholesale sales made by PDL, are made at standard cost prices to its subsidiaries, GNB and Aliph, and are of no assistance in arriving at an appropriate arms length sale value. However, as requested in Mr Fehily's letter of 7 January 1992, consideration has also been given to wholesale sales made by other companies within the PDL group. An examination of 'Exide' branded batteries sold by wholesale by GNB for the year ended 30 June 1990 disclosed an average selling price equal to the standard cost of manufacture increased by 88%. Sales made by Aliph by wholesale for the same period, disclosed an average selling price equal to the standard cost of manufacture increased by 20.4%. However, the average selling price in this case is significantly affected by the predominance of sales of truck batteries which, by and large, yield lower margins than car batteries. While sales by GNB and Aliph provide a useful guide as to a reasonable arms length wholesale selling price of batteries by the PDL group, they are also inappropriate as a yardstick for the sale value to be adopted for the 'Marshall' branded batteries as they are made at a different level in the marketing chain. There are no other arms length wholesale sales made in the ordinary course of PDL's business which are presupposed with the same terms and conditions which exist in the treatment of 'Marshall' branded batteries as stock for sale by retail. After considering the alternatives, it was decided that an opinion of a reasonable wholesale value could best be formed by examining all of the costs associated with the 'Marshall' operation and deducting retail expenses." 91 Accompanying the letter was a document setting out various figures. The starting point of that document was a figure of "standard cost". It, and indeed all other figures are said to have been obtained from the "Marshall Sales Report Year Ended 30/6/90." Operating costs and costs of distribution are then taken and apportioned between wholesale and retail. Of special relevance among these costs is the cost of freight. It is common ground that included in wholesale costs is the cost of moving batteries from the place where they were labelled to actual retail sites. Other expenses allocated and which were said to have been allocated incorrectly to wholesale included salaries of employees, computer costs, consultants fees, printing and stationery, licensing fees and costs of a national franchise strategy. The end result of the calculation is recorded as follows: "Standard cost + Wholesale Exps + Profit Margin = Sale Value $6,732 + $3,877 + $371 = $10,980" 92 The figures shown represent amounts in the thousands. 93 Mathematically the result translates into standard cost + 63 per cent. 94 The gravamen of the criticism of the Commissioner's approach was that because market forces require there to be an objective assessment of actual trading terms, for example the size of hypothetical sales, mere formulae calculations will not arrive at a market sale value. Hence it was said consideration needed to be given by the Commissioner to actual wholesale sales made by PDL in the period. With respect to his Honour, the Commissioner did direct attention to the actual wholesale sales made by PDL in the period particularly sales to OEMs and subsidiaries, but rejected the usefulness of such information for the reasons set out in the letter. Where sales are made on special terms and conditions or to related companies it will be obvious that they will yield little useful information as to market prices between arm's length parties. 95 It is important here both to consider what the Commissioner is directed to do under the legislation and to distinguish the task to be performed by him under s 18(2) from other calculations which the Commissioner has to perform in computing sale values. 96 In the ordinary course a sale value of goods sold by wholesale will be the amount for which those goods were sold: s 18(1)(a). In most cases this will be the purchase price which the taxpayer realises in selling the goods. It will have regard to the actual trading terms between the taxpayer and a purchaser. Clearly enough it will take into account volume discounts that may be negotiated as well as other discounts: Queensland Independent Wholesalers Ltd v Federal Commissioner of Taxation (1991) 29 FCR 312. Likewise, if the sale is on terms that title is to pass to the purchaser on delivery to the purchaser's premises, the sale value will include the cost of freight, being part of what the purchaser will have to pay to the vendor to obtain title to the goods: cf per Windeyer J in EMI (Australia) Ltd v Federal Commissioner of Taxation (1971) 2 ATR 325 at 332. 97 Where goods are sold by a taxpayer by retail there is an actual sale made by that taxpayer, although that actual sale is by retail and not wholesale. Where, as in Commonwealth Quarries (Footscray) Pty Ltd v Federal Commissioner of Taxation (1938) 59 CLR 111, a taxpayer sells goods both by wholesale and retail (the terms of sale being identical in both cases) and it is necessary to find a sale value for the retail sales nothing else is required to be done other than to assume that the retail sale, the sale value of which is required to be calculated, is a wholesale sale. The terms upon which the taxpayer can be hypothesised to make a wholesale sale are those upon which it actually makes its wholesale sales being in fact the same terms as those upon which it makes the relevant retail sales. In other words, the only hypothesis necessary to be made to compute the sale value of that taxpayer's retail sales is that the actual retail sales are wholesale sales. 98 If, therefore the actual wholesale and retail sales made by the taxpayer are on terms that title to the goods passes on delivery of them to the purchaser then the sale value to be applied to the retail sales will include the cost of freight. Whether the same result would have followed in Commonwealth Quarries had the actual retail sales been on terms different from those applicable to the taxpayer's wholesale sales was not the subject of decision in that case. 99 Under the law as it stood at the time Estee Lauder Pty Ltd (supra) fell to be decided, s 18(2) defined a sale value in the case of goods treated as stock for sale by retail as being, in the case where the manufacturer did not sell by wholesale, 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 taxpayer by wholesale. It will be seen that in this case there is no actual sale. What is required is the application of a statutory hypothesis of a sale between a hypothetical manufacturer and the taxpayer on wholesale terms. Burchett J at 321, after referring to Commonwealth Quarries and the statutory hypothesis required to be applied in that case then said: "But para (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 manufacturers 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 s 18(2)(b), to attempt to estimate an amount of delivery costs. No particular manufacturer is contemplated, and none at all need exist… If … one is to hypothesise 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 hand, if delivery charges are once admitted, the Commissioner could hypothesise that the goods are to be delivered from 200 kilometres away." 100 The substantive matter in controversy in the case, resolved in favour of the Commissioner, was whether the hypothetical manufacturer should be taken to have the intellectual property rights which Estee Lauder itself had and to charge in essence for the trade mark in the hypothetical manufacturing process. An argument made by Estee Lauder that marketing expenditure should be taken into account was also rejected. Burchett J commented at 327: "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." 101 When one turns to s 18(2) as framed at the time the relevant goods were treated as stock for sale by retail it provided for a sale value to be the amount for which the batteries could reasonably be expected to be sold by PDL by wholesale. If PDL had, for example, some uniform terms of trade by wholesale, no doubt those would be relevant to the sale value. The statutory hypothesis to be applied is a sale by PDL by wholesale. Matters such as volume discounts actually given by PDL would obviously be unaffected by the statutory hypothesis. 102 If the statutory hypothesis in the former s 18(2)(b) was "barren" that in s 18(3A) may be thought to be even more sparse. Not only is there a hypothetical vendor, but also a hypothetical purchaser. The calculation required is the determination of an amount which is a "fair and reasonable wholesale value." This expression is somewhat elliptical, because on one view it can be said that value may be an inherent characteristic of goods, whereas what is obviously involved in the present context is the resultant figure which would emerge from a wholesale transaction. The ordinary test of valuation in compensation cases, adopted for use in other revenue contexts, is that enunciated by the High Court in Spencer v The Commonwealth (1907) 5 CLR 418, namely "What would a man desiring to buy … have had to pay … on that day to a vendor willing to sell …it for a fair price but not desirous to sell." To this must be added, as a result of s 18(3A), the qualification "in a wholesale sale". 103 Section 18(3A) assumes no particular terms of sale. It presumes no particular annual sales volume, it presumes no special discounts, and in particular it adopts nothing which is part of the taxpayer's actual trading pattern. This is not to say that sales of the same goods to arm's length purchasers by wholesale by the taxpayer would be irrelevant. As in all valuation cases actual arm's length sales give the best evidence of value. But, where sales made by a taxpayer are on special terms and conditions or are not arm's length, they assist not at all. It is obvious that the Commissioner considered but discarded the evidence of sales to OEMs or related companies. He was entitled to do so. In fact it appeared from evidence adduced before the learned trial judge that there were actual sales of Marshall batteries by PDL at prices higher than the sale value determined by the Commissioner. But in determining whether the Commissioner erred in making the calculation it is of little assistance to take into account evidence which was not before him. 104 As we have said, it is not necessarily an error for the Commissioner to take a mathematical approach. There was no evidence before him of comparable arm's length sales, and the only approach to valuation that was open to him was to proceed by way of a formula which attempted to derive a wholesale value by commencing with cost and adding wholesale cost and wholesale profit. 105 Before turning to the next issue it is desirable to say something about volume discounts. It was submitted by senior counsel for PDL that it should be assumed that the wholesale value should be calculated on the basis of the price which PDL would require and receive if the purchases were to be calculated on a yearly basis, with the appropriate quantity discount which would be available to a purchaser of such quantities. As will be clear from what has already been said this involves a fallacy. The legislation requires liability to be calculated on a monthly basis. It is hard to see how prices for a yearly supply could have any relevance. The other difficulty is that the range of hypothetical purchasers must include those who would buy large quantities and those who would buy small quantities. They may be assumed to be in competition with each other. The hypothetical vendor will be interested to maximise his or her returns. While no doubt a purchaser will wish to pay as little as possible, it does not mean that the vendor would strike a price which is less than the real wholesale selling price. 106 The issue is not really different from valuation issues arising in other contexts. The value of a parcel of shares will not be affected merely because there may be persons in the market for those shares who would pay less if they could get a large number of them. If the actual parcel of shares is large it may contain a premium for control or need to be discounted for blockage. But that premium or discount depends on the number of shares to be valued, not the existence of persons in the market who trade the shares at a premium or a discount. So too here, the number of batteries to be valued in the relevant return period will control the price to be arrived at in the hypothetical sale, not the fact that if that number of batteries were sold together with other batteries over a larger period of time there could be a different outcome. DID THE COMMISSIONER ERR OTHERWISE IN THE COMPUTATION OF SALE VALUE? 107 We have already pointed to the problem which arises as a result of an allocation to wholesale costs of the cost of freight from the taxing point to the point of retail sale. 108 It may be said that, in general terms, matters of allocation involve judgment upon which minds may differ, so that a wrong allocation may not involve any error of law. However, merely because an error arises from the process of allocation does not mean that it does not involve legal error. What has happened here is more than a mere error of judgment. It is an error of principle. To treat as wholesale costs the freight costs of moving batteries from the place of labelling to the place of sale is to ignore the statutory hypothesis. That, like the hypothesis involved in Estee Lauder, is unconcerned with freight to the consumer, or indeed any costs incurred after the wholesale sale which is required to be assumed. What freight costs could be assumed? Not those of the taxpayer, for the matter is looked at hypothetically. To adapt what was said by Burchett J in Estee Lauder, why should the freight be to retail premises next door, as against premises two hundred kilometres hence? It follows that PDL has demonstrated an error of principle on which it was entitled to succeed. 109 As we have already said, matters such as volume discounts avail PDL not at all. One matter forcefully put forward as involving legal error was the matter of the impact on the calculation of what was referred to in evidence as a "productivity credit". As we understand the argument, the figure used by the Commissioner as standard cost represents a deduction in respect of the 1990 year from actual standard cost for savings that resulted from the consolidation of two manufacturing plants and an upgrading of one of the sites to increase output. It is said that the consequence of reducing what otherwise were the standard costs in this way is that the percentage then added to standard cost in the future was increased. In other words the wrong percentage figure was then being applied to a higher standard cost. The true percentage mark-up if the productivity credit was added to standard cost would have been, so it was argued before his Honour, 55.2 per cent. 110 This argument did not find favour at first instance. His Honour was of the view that the explanation of the productivity credit given by an expert accountant left alternative approaches open. This being the case his Honour was of the view that no error of law had been established. In the absence of factual findings which would demonstrate the error which is said to arise we are not persuaded that PDL has shown on the appeal that the trial judge was in error. 111 Numerous other errors were said to have been committed by the Commissioner in various allocations between wholesale and retail expenses. It is unnecessary to detail them. Given the absence of evidence of the allocation of costs adopted by the Commissioner to wholesale or retail as the case may be, save as the result of that allocation as set out in the letter referred to above and accompanying attachment, it is not clear that any error of principle emerges. DID SECTION 45(2) AUTHORISE A PENALTY? 112 The learned trial judge, although of the view that PDL should succeed, considered the question of whether a penalty should be imposed. His Honour held that PDL had not satisfied the requirements of s 45(2)(a)(ii) in that it had omitted information about all comparable sales without which the statement in correspondence accompanying returns would have been misleading in a material particular. Given that there were no comparable sales relevant to the making of the present assessment (at least upon which the Commissioner chose to base the assessment), that finding may be doubted. But there is a more fundamental problem than that. For it is submitted that in the case of an assessment made under s 18(2A) in conjunction with s 18(3A) no penalty was exigible. 113 Subsection 45(1) operates to impose additional tax quantified by reference to the "amount of tax payable by the taxpayer in respect of the goods." Subsection (2) of the same section quantifies the additional tax payable by reference to the "tax properly payable by the taxpayer". In the case of a taxpayer who has treated goods as stock for sale by retail that tax is calculated by reference to the amount for which the relevant goods could reasonably be expected to be sold by the manufacturer by retail. That liability - whatever its amount - arises in the month following the taxable event. The liability remains that figure until the Commissioner forms the opinion under s 18(3A) and is deemed to have "altered" the sale value. Thereupon a new and additional sales tax liability arises which is required to be the subject of an assessment to be made under s 25(2). 114 Where a default is made in furnishing a return or an occasion arises under s 25(2A) to determine an amount upon which in the Commissioner's opinion sales tax should be paid (other than where there is a deemed alteration of sale value under s 18(3A)), s 46 operates to impose additional tax. Because, however, there has been an alteration of sale value (and therefore a change in the amount of sales tax payable) the additional tax payable under s 46 is quantified by reference to the difference between sales tax payable if the sale value had not been altered (that is to say in the case of a taxpayer who treats goods as stock for sale by retail, the tax payable under s 18(2)) and the tax payable as a result of the alteration ("the tax properly payable"). 115 However, as s 46 makes clear the additional tax under that section has no application to a case where the alteration of sale value arises under s 18(3A). The exclusion from s 46 of a case to which s 18(3A) applies might suggest either that a s 18(3A) case falls to have additional tax imposed under s 45, or that the legislature did not intend such a case to be the subject of additional tax at all. The former is the view of the Commissioner, the latter that submitted for by PDL. 116 What lends support to PDL's submission is that if the Commissioner is correct additional tax is imposed at different times quantified on different bases. It would mean that the additional tax in the case of a false statement would be quantified fourteen days after the expiration of the month in which the taxable event occurred (assuming a taxpayer is required to lodge monthly returns and not a quarterly return) by reference to s 18(2) and upon alteration by reference to the sales tax increase brought about by the Commissioner's alteration of sale value. That result is unlikely to have been intended by the legislature. It suggests that s 45(1) was not intended to operate in the field where sale value was altered and in the result sales tax liability imposed under the No 1 Assessment Act increased by virtue of a determination made by the Commissioner except in cases falling within s 46. Why otherwise was s46 enacted, but in a way which excluded an assessment made under s 18(3A)? 117 It follows, in our view, that there is much to be said for the submission advanced by PDL that an alteration of sale value leading to the imposition of a fresh liability to sales tax made under s 18(3A) is not a circumstance in which s 45 authorises additional tax. However, it is not necessary to reach a final conclusion on this question as the objection decision of the Commissioner should have been allowed. Once the alteration of sale value made by the Commissioner goes, it must follow that if s 45 did operate to impose additional tax in a case where s 18(3A) operated, the additional tax arising as a result of an unauthorised alteration of sale value would itself be unauthorised. 118 The appeal should be dismissed and the cross appeal allowed. The orders made by the learned trial judge should be varied by deleting order 2 of his Honour's orders and substituting: "2. The objection decision of the Commissioner of Taxation be set aside and in lieu thereof it be ordered that the Commissioner allow the objection of the taxpayer." 119 The Commissioner must pay PDL's costs of the appeal. I certify that the preceding one hundred and nineteen (119) numbered paragraphs are a true copy of the Reasons for Judgment of the Court Associate: Dated: 15 March 1999 Counsel for the Applicant: Mr D H Bloom QC; Ms H M Symon Solicitor for the Applicant: Australian Government Solicitor Counsel for the Respondent: Mr J W de Wijn QC Solicitor for the Respondent: Mallesons Stephen Jaques Date of Hearing: 26 & 27 November 1998 Date of Judgment: 15 March 1999