FEDERAL COURT OF AUSTRALIA Bob Jane T-Marts Pty Ltd v Commissioner of Taxation [1999] FCA 415 SALES TAX – sale value and taxable value of goods – sale by retailer under indirect marketing arrangement – determination of hypothetical wholesale price at which taxpayer would sell goods by wholesale – taxpayer operating a franchise network - whether costs of operating that network are to be taken into account in ascertaining the hypothetical wholesale price – whether taxpayer's previous wholesale selling prices are a guide – whether cost plus price a guide - inclusion of cost of freight and insurance – exclusion of cost of warehousing Sales Tax Assessment Act (No. 3) 1930 (Cth)ss 3, 4 Sales Tax Assessment Act (No. 7) 1930 (Cth) ss 3, 4 Sales Tax Assessment Act 1992 (Cth)s 16 and Table 1 Amway of Australia Pty Ltd v Federal Commissioner of Taxation (1998) 158 ALR 652, applied Aston v Harlee Manufacturing Co (1960) 103 CLR 391, cited Brayson Motors Pty Ltd (in liq) v Federal Commissioner of Taxation (1985) 156 CLR 651, cited Case No. D53 (1953) 4 T.B.R.D. 289, cited Commonwealth Quarries (Footscray) Pty Ltd v Federal Commissioner of Taxation (1938) 59 CLR 111, applied Deputy Federal Commissioner of Taxation (S.A.) v Ellis & Clark Ltd (1934) 52 CLR 85, cited Estee Lauder Pty Ltd v Federal Commissioner of Taxation (1988) 80 ALR 314, discussed Freeland v Sun Oil Co 277 F2d 154 (5th Cir 1960), discussed Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286, applied Pacific Dunlop Ltd v FC of T (1998) 98 ATC 4208, distinguished Piney Woods Country Life School v Shell Oil Co 726 F2d 225 (5th Cir 1984), discussed Revlon Manufacturing Ltd v Commissioner of Taxation (1995) 63 FCR 535, discussed Tanu Pty Ltd v Commissioner of Taxation [1999] FCA 8, cited BOB JANE T-MARTS PTY LTD V COMMISSIONER OF TAXATION NO. VG 351 of 1993 JUDGE: FINKELSTEIN J PLACE: MELBOURNE DATE: 14 APRIL 1999 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 351 of 1993 BETWEEN: BOB JANE T-MARTS PTY LTD Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: FINKELSTEIN J DATE OF ORDER: 14 APRIL 1999 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The claim and cross claim be dismissed. 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 351 of 1993 BETWEEN: BOB JANE T-MARTS PTY LTD Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: FINKELSTEIN J DATE: 14 APRIL 1999 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 The principal business activity conducted by the applicant, Bob Jane T-Marts Pty Ltd (Bob Jane), is selling tyres by retail. Some of the tyres that it sells are manufactured in Australia and some are imported. Bob Jane is neither the manufacturer nor the importer of the tyres nor is it the purchaser from the manufacturer or importer. Bob Jane purchases its tyres from a related company, Bob Jane Corporation Limited (Bob Jane Corporation). This case is concerned with the assessment of sales tax in respect of the tyres. In particular, the issue that is raised is how is the "sale value" or "taxable value" of the tyres to be determined. 2 Sales tax is an excise that is imposed on goods. It is designed to be levied on sales by manufacturers and wholesalers to retailers. The object of the legislation is that all goods that are produced in, or that are imported into, Australia shall bear the excise unless specifically exempt. 3 Until 1992 the imposition of sales tax was governed by twenty separate statutes that were described by Dixon J in Deputy Federal Commissioner of Taxation (S.A.) v Ellis & Clark Ltd (1934) 52 CLR 85 at 89 as a "single legislative scheme". On 1 January 1993 this legislation was replaced by eight statutes and four sets of regulations, the principal statute being the Sales Tax Assessment Act 1992 (Cth). The new scheme is referred to as "streamlined sales tax": see the Australian Taxation Office publication entitled "Guide to New Legislation, Streamlined Sales Tax" (1993). 4 Bob Jane and the respondent, the Commissioner of Taxation, have not been able to agree on the sale value or taxable value of the tyres sold by Bob Jane since 1991. Accordingly, it is necessary to have regard to both the old law and the new law. 5 The legislative policy of the old law was explained in detail by Dixon J in Ellis & Clark, supra. From that description three points should be noticed: sales tax was intended to be levied on the last wholesale sale of all imported and locally manufactured goods; it was not intended that more than one amount of tax be imposed, but it was the intention that the goods be taxed at their full wholesale value; where there was no wholesale sale of goods, provision was made for sales tax to be paid upon the sale value of goods where there was a retail sale of the goods by the taxpayer or where the goods were treated by him as stock for sale by retail or were applied to his own use: see also Brayson Motors Pty Ltd (in liq) v Federal Commissioner of Taxation (1985) 156 CLR 651 at 657. 6 The relevant old law is to be found in the Sales Tax Assessment Act (No. 3) 1930 (Cth) which is concerned with the assessment and collection of sales tax upon goods manufactured in Australia and sold by a person not being either the manufacturer or a purchaser from the manufacturer and the Sales Tax Assessment Act (No. 7) 1930 (Cth) which deals with the assessment and collection of sales tax upon goods imported into Australia and sold by a person other than the importer. Each Act provides that sales tax shall be levied and paid on the "sale value" of the goods with which the Act is concerned: see s 3. According to s 4(1) of each Act, in the case where goods are sold by retail, the sale value of the goods is "the amount which would be the fair market value of those goods if sold by [the taxpayer] by wholesale." 7 Prior to 1985, Bob Jane did not pay sales tax on its retail sales. Tax was levied on the sale of tyres by Bob Jane Corporation to Bob Jane, this being the last sale by wholesale. However, in 1985 the Sales Tax Assessment Actswere amended with the result being that where a vendor sold his goods under an "indirect marketing arrangement" the vendor was treated as a wholesaler and was required to pay sales tax in respect of his retail sales: see the Sales Tax Laws Amendment Act 1985 (Cth). By the new provisions a person sold goods under an indirect marketing arrangement if that person was not the manufacturer of the goods and sold the goods under an arrangement that provided, directly or indirectly, for the sale of goods by the vendor to another person acting for and on behalf of the vendor, whether in the name of the vendor or in any other name, but not being an employee of the vendor: see s 3(4A) of the Sales Tax Assessment Act (No. 1) 1930 (Cth). The vendor was then required to pay sales tax under the relevant Sales Tax Assessment Act. In the case of Bob Jane the relevant Sales Tax Assessment Acts were the Sales Tax Assessment Act (No. 3) and the Sales Tax Assessment Act (No. 7). 8 The changes to the Sales Tax Assessment Acts were introduced because of one effect of an indirect marketing arrangement was the elimination of the wholesaler's profit margin from the sale value of the goods by changing the status of the person who would ordinarily be a wholesaler to that of a retailer: see the Explanatory Memorandum that accompanied the Sales Tax Laws Amendment Bill. However, the new provisions applied to indirect marketing arrangements whether or not they were entered into for the purpose of reducing the incidence of sale tax. 9 Under the new law sales tax is imposed on the "taxable value" of goods when there has been an "assessable dealing" in respect of those goods: see s 16 of the Sales Tax Assessment Act 1992. Table 1 of the 1992 Act sets out the assessable dealings that are subject to sales tax and the taxable value on which the tax is imposed. There are four relevant assessable dealings: a retail sale by a person who is not the manufacturer of goods manufactured in Australia (AD2b), an indirect marketing sale of goods manufactured in Australia (AD2d); a retail sale by a person who obtained imported goods under quote (AD12b); and an indirect marketing sale of imported goods (AD12d). Section 20 of the 1992 Act defines an indirect marketing sale to include a "retail sale made by a person ("the marketer") who is not the manufacturer of the goods and [where] the sale is made: (a) under an arrangement that provides for the sale of the goods to be made by a person who is acting for the marketer but is not an employee of the marketer". In the case of each assessable dealing the taxable value of the goods is the "notional wholesale selling price" of the goods. That expression is defined in the notes to Table 1 to mean "the price (excluding sales tax) for which the taxpayer could reasonably have been expected to sell the goods by wholesale under an arm's length transaction." 10 Although the definition of "sale value" in the old law differs from the definition of "taxable value" in the new law, this case has been argued on the assumption that, notwithstanding those differences, on the facts under consideration the same value will be reached. The assumption appears to be warranted although this will not be so in all cases. 11 It is convenient now to set out the material facts upon which this case depends, most of which were not in dispute. Bob Jane is a member of the Bob Jane group of companies: the group is controlled by Mr Robert Jane. The group is involved in the wholesale and retail sale of wheels, tyres, tubes, batteries and other equipment for automobiles and tyres and tubes for motor cycles. As I have mentioned this case is only concerned with the retail sale of tyres. 12 Originally the tyre business was conducted by Bob Jane Wholesale Pty Ltd through retail and wholesale outlets in Melbourne, Sydney and Brisbane. In 1970 the retail tyre business was transferred to Bob Jane Tyre Service Pty Ltd and the wholesale business was transferred to Bob Jane Corporation. By 1971 the retail tyre business had expanded to the point where it was conducted through ten retail outlets. Each outlet traded under the name "Bob Jane T-Marts" and was of a visually distinctive appearance. According to the evidence, Bob Jane Tyre Services had developed a highly successful system for the operation and management of its retail outlets. 13 In 1971 it was decided that the number of outlets should be increased and that a system of franchising retail outlets should be established so that the retail business would be conducted from outlets that were operated by the company's employees as well as from outlets operated by franchise agents. Between 1971 and 1979 some forty retail outlets were established as franchise agencies. 14 In 1982 Bob Jane acquired the retailing operation of Bob Jane Tyre Services and had assigned to it (precisely how is not clear) all franchise agents' agreements. Thereafter, the number of franchise agencies continued to increase and there are now 109 such outlets. The remaining retail outlets (sixteen in all) are operated by employees of Bob Jane. The evidence shows that in all capital cities, other than Perth and Hobart, Bob Jane has the largest share of the retail market for new tyres. 15 There are two tyre manufacturers in Australia, Tyre Marketers (Australia) Ltd (a "partnership" comprised of Pacific Dunlop Tyres and Goodyear Tyres) (sometimes referred to as the South Pacific Tyre Group) and Bridgestone Tyres. In addition to those that are locally manufactured, tyres are imported from Asia, Europe and the United States of America. Bob Jane sells both locally manufactured and imported tyres through its employee operated outlets and through its franchise agents. Imported tyres account for approximately 50 per cent of its business. 16 Bob Jane purchases all of its tyres from Bob Jane Corporation. In turn, that company purchases tyres from the local manufacturers, except in the case of tyres manufactured by Bridgestone which are purchased by another company in the Bob Jane group, Mainline Transport Pty Ltd, and immediately sold to Bob Jane Corporation. Bob Jane Corporation also imports tyres into Australia and sells those tyres to Bob Jane for sale by retail. 17 Each franchisee enters into a written franchise agreement with Bob Jane. Several franchise agency agreements are in evidence and they follow a common form. I was told that all other franchise agency agreements adopt the same form. 18 The principal features of the franchise agreement are as follows. The franchisee agrees to make a payment, called a premium, to Bob Jane. The premium can be as a high as $500,000. In consideration for the payment of the premium the franchisee is granted the right to "own and operate the franchise business under the T-Mart system" for a term which is typically ten years with an option to extend the term for two further periods of five years each. The "T-Mart system" is the "national system for the identification, layout, operation, management and sale of tyres, wheels and certain ancillary services": the definition appears in a recital. 19 Bob Jane undertakes to provide the franchisee with premises at which the franchise business is to be conducted. The premises may be owned or leased by Bob Jane. The franchisee is required to pay a rental for the use and occupation of the premises in an amount to be agreed. Usually that amount is the market rental for the premises but sometimes the rent is agreed at a lower rate. 20 The franchisee agrees to act as Bob Jane's agent for the sale of goods by retail: the goods include tyres, wheels and accessories. The franchisee also agrees to provide certain services to the public such as wheel alignments, wheel balancing, puncture repairs and tyre and wheel fitting. As regards the price at which the goods are to be sold, the franchisee undertakes that he will not charge more than Bob Jane's recommended retail price. 21 The franchisee is required to remit to Bob Jane each day the full price of the goods sold during the previous day less any agreed commission. The commission to which the franchisee is entitled is in accordance with a rate published from time to time by Bob Jane. 22 There is an established procedure for the ordering and delivery of tyres sold by the franchisee. The procedure is not recorded in the franchise agreement but it appears to be an aspect of the T-Mart system. In the case of locally manufactured tyres the franchisee places an order with the manufacturer and for imported tyres the order is placed with South Pacific Tyre Group. That organisation warehouses imported tyres on behalf of Bob Jane Corporation. The company on whom the order is placed arranges for the delivery of the tyres to the franchisee, except in Victoria where Bob Jane delivers the tyres using its own transport. The tyres are then invoiced to Bob Jane Corporation, except in the case of tyres purchased from Bridgestone, which are invoiced to Mainline Transport Pty Ltd who in turn invoices the tyres to Bob Jane Corporation. The tyres are then invoiced to Bob Jane at cost: the cost being the price paid for the tyres. 23 Bob Jane produces a "product file listing" each month and a copy is provided to all franchisees. The product file listing sets out, among other information, the recommended retail price of each tyre to be sold on behalf of Bob Jane and the amount that the franchisee must remit to Bob Jane in respect of that tyre. The difference between the amount to be remitted and the price at which the tyre is sold (which cannot be more than the recommended retail price) is the commission to which the franchisee is entitled. The rate of commission varies from tyre model to tyre model. 24 Mr Maurice Ryding, the finance director of Bob Jane, said that the commission was designed to "return income to the [franchise] agents in line with [their] investment. So we try and pitch it at the correct level." The "correct" level of commission, he explained, was around 1.2C per cent of the price for which the tyres are sold, that being the percentage required to enable the franchisees to "be able to support themselves". (In the preceding sentence and elsewhere in my reasons, I have used a symbol instead of the actual figure because the information is commercially sensitive. There is a confidential schedule attached to these reasons where each symbol is defined. That schedule will not be published.) It is to be noted that in addition to the payment of the premium and the rent for the franchise premises, a franchisee will incur expenditure that is typical of that incurred by many small businesses. For example, the franchise agreement requires the franchisee, at the franchisee's expense, to paint and identify the franchise premises in such a format as may be required by Bob Jane, to maintain appropriate insurance, to advertise and promote the goods offered for sale and to install and utilise computer equipment that has been recommended by Bob Jane. In addition there will be the cost of staff and those other direct and indirect costs (e.g. gas, electricity, cleaning) that are commonly incurred in maintaining a retail outlet. Accordingly, the commission that is set by Bob Jane is designed to provide each franchisee with sufficient income to cover his operating expenses and to provide him with a reasonable profit. Although little evidence was directed to this issue, I assume that in determining what is a reasonable profit (that is, in setting the rate of commission) Bob Jane has taken into account the premium that is paid by the franchisee. 25 Bob Jane provides financial support to its franchise agents in a variety of ways. Each franchisee is guaranteed a minimum commission of .5C per cent on the retail price of goods sold. This percentage is one half of the commission that an average franchisee must earn in order to recover his direct and indirect costs of selling tyres; that is to say the franchisee's "break even" point to adopt the terminology of Mr Ryding. So, if a franchisee is required to offer tyres for sale at a price significantly below the recommended retail price in order to meet competition the guarantee will come into operation. In addition, if a particular agency is experiencing financial difficulties, Bob Jane will often agree to a reduction in the rent payable for the franchise premises. However, because the franchise operation has been very successful, the cost to Bob Jane of providing financial support is minimal. 26 Little evidence was led with regard to the operation of the retail outlets under the control of Bob Jane's employees. Mr Ryding did say that those outlets operated along similar lines to a franchise agency. Bob Jane also appoints agents to sell tyres in areas that are considered too small for a franchise agent or retail outlet. Typically such an agency is established as a secondary business to a mechanical workshop or a new or used vehicle dealer outlet. Mr Ryding said that these agencies also operate along similar lines to a franchise agency. 27 In addition to its retailing operations Bob Jane also sells tyres by wholesale. Some wholesale sales occur when another tyre retailer is short of stock and purchases that stock from a Bob Jane outlet. This accounts for only a small volume of the wholesale sales. Most wholesale sales are made to Marquay Pty Ltd (Marquay) a company that operates a retail outlet in Haberfield, New South Wales. 28 The relationship between Bob Jane and Marquay came about in the following circumstances. In 1990 Bob Jane carried out a study of its franchise operations. It reached the conclusion that in order to increase its share of the tyre market Bob Jane should develop a new dealer system that would be "simple in structure and attractive in terms of profitability". It decided to establish a new dealer system that would operate along the same lines as the existing franchisees save that tyres would be sold to the new dealers ex-store at cost plus A per cent. Where tyres were to be delivered to the dealer, the cost of freight would be charged to the dealer. 29 Marquay was the first to be appointed as a franchise dealer. Its franchise dealer agreement is dated 2 January 1991. By that agreement Marquay, in consideration of the payment of an "appointment fee" of $500,000, was appointed to own and operate a franchise business from premises in Fyshwick, Australian Capital Territory, for a term of ten years. Within a short time it was agreed that the dealership would be relocated to Haberfield, New South Wales. A substitute franchise dealer agreement was executed. The substitute agreement differs from the original agreement in two significant respects. First, the "appointment fee" of $500,000 was replaced by an annual license fee of $97,000. The second difference is that the term of the franchise was reduced to five years and there was an option to extend the term for a further five years. 30 The franchise dealer agreement contains most of the provisions that are to be found in a franchise agency agreement. The principal differences between the two agreements is that under a franchise dealer agreement the dealer is to purchase its goods from Bob Jane and is liable to bear the cost of freight of the goods purchased. It should be noted that the price of the goods to be supplied to Marquay is "as set out in [Bob Jane's] price list calculated on an ex-store basis." 31 According to Mr Richard Crosher, the managing director of Marquay, there are no procedural differences in the manner in which a franchise dealership is conducted as compared with a franchise agency. He said that the only material difference is that a dealer purchases tyres from Bob Jane whereas an agent does not take title to the tyres at any stage. He also said that it was as a consequence of the ownership of the tyres that the dealer is responsible for the cost of freight as well as the cost of insuring the tyres. 32 From the commencement of the dealership until the present time (it appears that the option to extend the term was exercised) the price that Marquay has been charged for tyres that it purchased from Bob Jane was cost (that is the cost to Bob Jane) plus A per cent plus sales tax. When asked to explain the basis for fixing this price Mr Ryding said: "Well, we looked at the market and on a broad range of products we felt that A per cent was the appropriate margin for our products." 33 Mr Crosher gave evidence that there had been many occasions on which Marquay had purchased tyres that were identical with, or comparable to, the tyres supplied by Bob Jane from suppliers other than Bob Jane. He produced a table that contained a comparison of the prices charged by Bob Jane and its competitors. This table shows that the prices offered by Bob Jane's competitors were, on average, B per cent less than those offered by Bob Jane. However, the prices that were charged by Bob Jane's competitors were free into store whereas the prices charged by Bob Jane were ex- store. When the cost of freight is taken into account the difference is greater than the table suggests. 34 An important aspect of the evidence, although its importance will not become apparent until later in these reasons, concerns certain services performed by Bob Jane for the benefit of its franchise agents. Some of the services are carried out in pursuance of obligations imposed upon Bob Jane by the franchise agency agreements but some appear to be voluntarily undertaken. The provision of these services causes Bob Jane to incur cost, labour and expenditure. 35 The most convenient way of describing the activities that are undertaken is to reproduce the list setting them out that was prepared by Mr Ryding. The list reads: "• Design and adaptation of store layout · Selection of Franchisees · Cadet Franchisee Program · Educational Program · Telephone Training Program · Sales Techniques Program · Retail Market Research · Advertising Strategy · Computer Software Development · Merchandising · Setting Recommended Retail Pricing · Arranging and Implementing Uniform Design · Stocking and Subsiding Uniforms · Property Management · Arranging for Bulk Purchase of: Merchandising Stands, Advertising, Business Cards, Various other stationery such as Computer Invoices, Insurance, Finance Facilities, Computer Hardware, Fitting and Alignment Machines. · Provision of Back Up and Training in respect of Equipment · Subsidy of Computer Hardware Maintenance · Subsidy of Computer Software Maintenance · Subsidy of Preparation of Monthly Accounts · Support for the Generation of Fleet Business · Guarantee Minimum Gross Commission · Assist in Staff Recruitment – Assessment and System of Recruitment · Development of Procedure Manuals · Rental Assistance to certain stores · Provision of additional commission to struggling Stores · Bulk buy of signage and provision of signage to stores · Provision of Market Information to stores by publishing and distributing monthly magazine "The Communicator" · Policy adjustment and customer opportunity support · Provision of salary to incoming Franchisees while they are in training · Road hazard and warranty supported by BJTM · Contribution to credit sales '12 months interest free' · Carry the cost of credit on the National Fleet Deal · Provision of State Managers to assist with Management of Outlets · Convening of monthly Franchise Meetings · Provision of Leasehold improvements · Computer communication system linkage between outlets · Pay for and organise freight · Developed the 'Virtual Wheel System' – A retail selling system for wheels which is computerised · Annual Bob Jane T-Marts Convention (National and State) · Assist in industrial and staff management problems · ADS provides local marketing consulting (ADS Pty Ltd wholly owned company) · Advice and consultation on legal aspects · Development of Australian workplace agreements for introduction into all outlets · Internet site for retail customers" 36 In his evidence-in-chief Mr Ryding said that the listed activities were "retail activities" carried out by Bob Jane. By this I took Mr Ryding to mean that each of the activities (apart from the provision of financial support) was undertaken solely for the purpose of promoting the retail sale of Bob Jane's goods. Mr Ryding said that the activities were "retail activities" because they would not be undertaken in a wholesale operation. 37 This evidence was supported by Mr Wayne Lonergan, a chartered accountant and partner in the Corporate Finance Group of Coopers & Lybrand, who was called to give evidence by Bob Jane. Mr Lonergan said that he would describe all of the listed activities as retail activities apart from the provision of computer services, the provision of merchandising stands and legal costs, some of which would be provided by a wholesaler. The foundation for Mr Lonergan's evidence that the activities were retail in nature was the proposition that "a conventional wholesaler" only "holds stock, funds debtors . . . but they don't market." In other words, according to Mr Lonergan a "conventional wholesaler" is not at all concerned with any activity that relates to the retail sale of the stock that has been sold by the wholesaler to a retailer at least insofar as its wholesaling operation is concerned. 38 Be that as it may, as Mr Ryding made clear during the course of his cross-examination, all of the listed activities, apart from the provision of financial support, are also provided to Marquay and would be provided to any other franchise dealer appointed by Bob Jane. In the cross-examination of Mr Ryding the following appears: "Q. Save for freight and insurance, therefore, and this guarantee margin of .5C, there really is no difference between the benefits that the franchise dealer gets from Bob Jane as compared with a franchise agent having regard to their legal status as agent versus dealer? A. Substantially they're the same." 39 I have mentioned the fact that Bob Jane Corporation sells tyres by wholesale to Bob Jane. It also sells a small proportion of its stock (about 1 per cent of total sales) to motor vehicle repairers, panel beaters and garages. Between 1991 and 1995 Bob Jane Corporation also sold tyres to Exuma Pty Ltd (Exuma) which, during that period, operated ten retail outlets in Western Australia. The Bob Jane group held 30 per cent of the capital of Exuma until 1995 when it sold its shares to the majority shareholder. 40 The price at which Bob Jane Corporation sold tyres to Exuma, after adjustment for volume discounts, freight and finance costs, varied between cost (of goods) plus a mark-up of .6A per cent and cost (of goods) plus a mark-up of 1.2A per cent. The cost of freight was between $5.00 to $8.00 per tyre dependent upon volume. The prices that I have mentioned were adjusted on the basis that the average cost of freight was $5.00 per tyre. Obviously if there had been no adjustment made for the cost of freight the mark-up would significantly increase. In that event, the price would be of the order of cost plus 7.5A per cent. 41 This is a sufficient summary of the facts for present purposes. I can now turn to the contentions of the parties. 42 Bob Jane asks for a declaration that, in relation to the period before 31 December 1992, the fair market value of the tyres if sold by wholesale and, in relation to the period after 1 January 1993, the price for which Bob Jane could have reasonably have been expected to sell its tyres by wholesale is cost (of goods) plus A per cent. This is the price at which Bob Jane sells tyres to Marquay and it contends that this price establishes the relevant notional wholesale price. Bob Jane also relies on the evidence of the price at which tyres were sold to Exuma as tending to establish the reasonableness of the wholesale price charged to Marquay. 43 In order to deal with this submission it is necessary to decide upon the proper method for ascertaining the fair wholesale market value of the tyres sold by retail by Bob Jane. (For reasons expressed earlier it is convenient to treat the ascertainment of "sale value" as defined in s 4(1) of the Sales Tax Assessment Act (No. 3) and the Sales Tax Assessment Act (No. 7) and of the notional wholesale selling price as defined in table 1 of Schedule 1 of the Sales Tax Assessment Act 1992 as imposing the same criteria. It is also convenient to refer to each as the fair wholesale market value or the fair wholesale market price of the goods in question). 44 The starting point must be the decision of the High Court in Commonwealth Quarries (Footscray) Pty Ltd v Federal Commissioner of Taxation (1938) 59 CLR 111. In that case the court was required to consider the effect of s 18(1) of the Sales Tax Assessment Act (No. 1) 1930 which, at the relevant time, provided: "(1) For the purposes of this Act, the sale value of goods, not being goods to which the next succeeding sub-section applies which are sold by the manufacturer to an unregistered person or to a registered person who has not quoted his certificate in respect of that sale shall be – (a) where the goods are sold by wholesale – the amount for which those goods are sold; and (b) where the goods are sold by retail – (i) if the goods are of a class which the manufacturer himself sells by wholesale–the amount for which the goods would be sold by the manufacturer if sold by wholesale; and (ii) in any other case – the amount for which those goods could have been purchased by the taxpayer from another manufacturer if that other manufacturer had manufactured those goods in the ordinary course of his business for sale to the taxpayer." 45 The issue that required resolution was whether the sale value of goods sold was the price charged less the cost of delivery. The court held that the sale value of the goods was the amount actually charged including the cost of delivery. In the course of reaching that conclusion Starke J said (at 119): "[T]he sub-section [s 18(1)(b)] takes the particular sale and substitutes for the amount for which the goods were sold by retail the amount for which they would have been sold by wholesale upon the same terms and conditions." In their joint judgment Dixon and McTiernan JJ said (at 122): "If in such a case [a manufacturer selling by retail] the goods are of a class which he usually sells by wholesale, the sale value is to be the amount for which the goods would be sold by the manufacturer if sold by wholesale . . . In the context we should interpret the paragraph [s 18(1)] as requiring that a sale by wholesale should be supposed with the same terms and conditions as the actual retail sale made, except in respect of the price and any other term or condition which would be absent or modified in a sale by wholesale." 46 What is required therefore is to consider each retail sale and ascertain, in respect of that sale, what would have been the wholesale price charged if the transaction had been a wholesale sale. The only term or condition of the actual sale which can be ignored for the purpose of determining the fair wholesale market price is a term or condition that would not be found in a retail sale. 47 In Tanu Pty Ltd v Commissioner of Taxation [1999] FCA 8 it was held that the principles established in Commonwealth Quarries apply to the ascertainment of the notional wholesale selling price under the Sales Tax Assessment Act 1992. I made an express finding to that effect and the other members of the court, Lindgren and Lehane JJ, so found by implication. 48 Counsel for Bob Jane submits that in the process of ascertaining the fair wholesale market value of the tyres that it sells by retail it is necessary to assume that there is but one purchaser (a retailer) of all the tyres sold. The reason for this submission, so it was explained, was that if it is to be assumed that there is only one retail purchaser of all of the tyres, that purchaser would be able to negotiate a lower price for the tyres than would a purchaser of only one or two tyres. Counsel argued that unless such an approach is adopted there would be an unwarranted departure from the reality of the particular market within which Bob Jane operates. The fact is that Bob Jane conducts business in a highly competitive market and, to maintain its strong position in that market, sells its tyres at the lowest possible price but at the highest possible volume. In turn, this enables Bob Jane Corporation to order goods in large volumes and to negotiate lower than usual prices that are to be paid to the manufacturers and importers. 49 There are two answers to this submission. The first is that it is inconsistent with the approach required by Commonwealth Quarries as was pointed out by Foster J who considered and rejected a similar argument in Amway of Australia Pty Ltd v Federal Commissioner of Taxation (1998) 158 ALR 652. (Judgment in that case was handed down shortly after the argument in this case had concluded). Amway sold goods by retail in competition with major department stores. It used a network of individuals, acting as distributors of its merchandise, who sold products as agents for Amway. That is to say, Amway sold its products under "indirect marketing arrangements". In relation to the ascertainment of the fair wholesale market value of the goods sold by it (the issue was raised in refund proceedings), Amway argued that the value must be determined on the basis that it would sell to those established retailers with which it was in competition. Foster J rejected this argument. He said (at 670): "What is then required is that that sale be required notionally as a sale by wholesale rather than by retail. The fair market value of the goods sold must then be arrived at on the basis that it was a wholesale sale to the same purchaser. It is not appropriate to change the whole concept of the sale by converting it into a sale to some other person such as, as is postulated by the applicant's argument, an established retailer." 50 It was said that Estee Lauder Pty Ltd v Federal Commissioner of Taxation (1988) 80 ALR 314 stands as authority for the proposition for which Bob Jane contends. With respect, I do not agree. Estee Lauder was concerned with the meaning of s 18(2) of the Sales Tax Assessment Act (No. 1) 1930 as was in force at the time of the decision. That sub-section read (omitting certain irrelevant parts): "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) 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." It was necessary for Burchett J to determine the sale value of goods in accordance with s 18(2)(b). His Honour pointed out that s 18(2)(b) did not postulate a wholesale sale by the taxpayer but a purchase by him of goods identical to those he manufactures and sells. In that context the notional fair wholesale market value was to be determined on the basis that there was one notional wholesaler or manufacturer selling to one purchaser (Estee Lauder Pty Ltd) goods that it notionally manufactured. 51 In 1988, subsequent to the decision in Estee Lauder, s 18(1) was amended by the Sales Tax Assessment (No. 1) Amendment Act 1988 to read: "18(1)Subject to subsections (1B), (1C) and (4A), where goods (other than goods treated by a manufacturer as stock for sale by retail) have been sold by the manufacturer to an unregistered person or to a registered person who has not quoted his certificate in respect of the sale, the sale value of the goods, for the purposes of this Act, is: (a) if goods were sold by wholesale – the amount for which the goods were sold; or (b) if the goods were sold by retail – the amount for which the goods could reasonably be expected to have been sold by the manufacturer by wholesale." The effect of this amendment was described in the Explanatory Memorandum that accompanied the Bill in the following way: "[T]o amend the sale value provisions of the Sales Tax Assessment Act (No. 1) 1930 so that where a manufacturer sells goods only by retail or only retails goods through an agent, the sale value [for tax purposes] is based on the manufacturer's own costs and profit and not, as is currently the case, the price charged by another manufacturer selling identical goods by wholesale." 52 The consequence of the amendment was to bring the case of a manufacturer selling by retail in line with a manufacturer who sold by wholesale. It now looked to the activities of the taxpayer as a notional wholesaler and not to a hypothetical manufacturer who was also a hypothetical wholesaler. 53 In Pacific Dunlop Ltd v FC of T (1998) 98 ATC 4208 O'Loughlin J was required to consider the application of s 18(2) of the Sales Tax Assessment Act (No. 1) 1930 to the case of goods treated by the manufacturer as stock for sale. In the course of dealing with the matter, his Honour posed the following question: "If the manufacturer is deemed to be a wholesaler to whom has the deemed wholesale [sale] been made?" His Honour recognised that the answer to this question might be of importance because a single purchaser might insist on a lower price than multiple purchasers. In answer to the question posed his Honour said (at 4221): "In my opinion, to adopt the words of Dixon J [in DFCT v Ellis & Clark Ltd, supra at 92] the [goods] 'go into the retail market' when the taxpayer treated them as stock for sale by retail. That exercise is performed on a continuous basis; as each [good] is identified, it is treated as stock for sale by retail by the taxpayer in its capacity as the retailer. But I do not consider that this therefore means that there is to be a hypothetical exercise of calculating the value of one [good], or even one pallet of [goods], on each occasion. On the contrary, I believe that the value is to be assessed by taking into account that the exercise of treating the [goods] as stock for sale by retail will be a continuous exercise in respect of the same notional retailer." His Honour said that the decision in Estee Lauder supported this conclusion for the reason that Burchett J, in applying the provisions of the legislation as it formerly stood, had identified the taxpayer as the sole notional retailer. 54 I do not regard the decision in Estee Lauder as supporting the conclusion reached by O'Loughlin J. As I have sought to demonstrate the language of the provision with which Burchett J was dealing supposed there to be one vendor and one purchaser and the language of s 18(2) is now different. 55 In any event, Pacific Dunlop does not govern the present case, a case that requires the ascertainment of a notional wholesale value of goods in respect of which there have been actual retail sales. Both the authority of the High Court in Commonwealth Quarries and the decision in Amway, a decision with which I respectfully agree, require me to conclude that it is necessary to determine the fair wholesale market value of the goods on each occasion when a sale is made. 56 Pacific Dunlop should be confined in its application to the case of goods treated by the manufacturer as stock for sale by retail. There is justification to be found in the language of s 18(2) that the proper assumption to make in that case is that there is but one notional purchaser. The reason is that when there is, in fact, no actual purchaser of the goods and a sale is to be assumed it is reasonable to treat the assumed sale as being to one notional purchaser rather than to two or more notional purchasers. On the other hand, what may be required to be determined is how the taxpayer, in the ordinary course of his business, would have disposed of his goods in a wholesale market. If the taxpayer would have sold those goods to more than one purchaser then that may be a basis for concluding that the notional fair wholesale market price is to be determined on the basis of that number of purchasers. However, I suspect that the enquiries that would need to be undertaken to establish that value would be so complex and apt to create many areas of dispute such that the approach is unworkable and thus not one that should be adopted if another and more sensible method is available. Fortunately, this is not a matter that I need to determine in the context of this case. 57 I did mention that there was a second reason why I would reject the submission made by Bob Jane that it is to be supposed that there is a single purchaser of its goods. The argument assumes that if the notional fair wholesale market price is determined on the basis that there is only one purchaser, the price will be arrived at without regard to the fact that Bob Jane is able to sell its tyres at a lower than usual price because of the volume of its trade in those goods. Thus, so the argument goes, unless it is assumed that there is only one purchaser of the tyres, the fair notional wholesale market price of those tyres will be artificially measured. The assumption that Bob Jane makes is unwarranted. Let me explain why this is so. 58 Bob Jane controls the price at which its goods are sold by its franchise agents and by its franchise dealer. The franchise agency agreement and the franchise dealer agreement each contain a provision that prohibits the sale of tyres at a price in excess of Bob Jane's recommended retail price. Further, when Bob Jane determines that its tyres should be offered for sale at a "special" price, that is when it decides that there should be discounting to meet the demands of the market, the agents and the dealer are not permitted to offer the tyres for sale at a price above the advertised "special" price. 59 It seems obvious, in my view, that the recommended retail price, and any special price that is set from time to time, is arrived at by taking into account the price at which Bob Jane Corporation is able to purchase its goods which in turn is dependent upon the volume of purchases by Bob Jane Corporation. It is equally obvious that when it comes to determining the fair wholesale market value of the tyres, that determination must take account of the actual retail price. After all, what must be ascertained is the price for which the tyres could be sold to a notional retailer who sells those tyres for their actual retail price. In a typical wholesale market it is to be expected that the retailer will only pay a particular price for his stock if the sum of that price, the costs and expenses incurred in selling the stock and a reasonable margin is recoverable in a retail sale. It is for this reason that the determination of the notional fair wholesale market price must take account of the actual retail price as well as the costs and expenses that would be incurred by the notional retailer selling the goods. In other words, a wholesale price will not be a fair wholesale market price if it is determined without regard to the state of the notional market into which the notional wholesale sale takes place and an aspect of that notional market is the actual retail price that is achieved on the sale of the goods. 60 It is also necessary to say something about the nature of franchising in order to determine whether the declaration that Bob Jane seeks ought to be made. In Aston v Harlee Manufacturing Co (1960) 103 CLR 391 at 395 Fullagar J said of the word "franchise" that it is a "very vague and indefinite term". In a modern commercial context, the term is employed to cover a variety of arrangements concerned with the manufacture and distribution of goods. Manufacturers grant franchises to retailers to distribute manufactured goods. Franchises are granted to enable goods to be manufactured and distributed under license. Wholesalers will appoint franchisees to distribute products for retail sale. Then there are what are often referred to as product and trade name franchises and business format franchises. These are arrangements by which the franchisee is permitted to conduct his business under a particular name, format or procedure that is owned or controlled by the franchisor. This type of franchise is an increasingly common means of distributing goods and services. The creation of a distribution network by the Singer Sewing Machine Company after the Civil War in the United States is one of the earliest examples: see Adams & Prichard Jones "Franchising" (2nd ed) (1987) at 3-4. 61 There are two important features of product and trade name franchises and business format franchises that should be noted. One is that although the franchisee operates his own business he is under considerable control and direction from the franchisor. The second feature is that typically the franchisor will provide marketing and other support to the franchisee. In the definition of "franchising" adopted by the International Franchise Association of the United States, the arrangement is defined as one in which the franchisor "offers or is obliged to maintain a continuing interest in the business of the franchisor in such areas as know how and training;". One element of the definition of "franchising" adopted by the British Franchising Association is that "the franchisor [is obliged] to provide the franchisee with assistance in carrying on the business which is the subject of the franchise (in relation to the organisation of the franchisee's business, the training of staff, merchandising, management or otherwise)". See also the definition of "franchising" in the Penguin Dictionary of Economics (5th ed) (1992) edited by G Bannock, R Baxter and E Davis. 62 I have already described the services that Bob Jane provides to its franchise agents and to Marquay. The franchise agreements impose an obligation upon Bob Jane to undertake some of them: e.g. to select and supply the franchise premises, to supply the design layout for the franchise premises, to train the franchisee's staff, to assist with management and accounting advice, to provide services and computer advice. A typical franchise agreement will impose an obligation upon a franchisor to provide these or like services: see e.g. the master form franchise agreement in Adams & Prichard Jones "Franchising" at 302 ff, especially clause 5.3 dealing with the provision of manuals, clauses 5.4 and 5.5 dealing with advertising, clause 5.7 dealing with training, clause 5.11 dealing with the organisation of annual conferences and clause 5.12 which is concerned with the provision of advice and assistance. See also the standard form of franchising agreement in Giles Redfern & Terry "Franchising Law and Practice" (1998) at 270,081 ff, especially clause 12. In the United States, the Financial Accounting Standards Board issued a statement (no. 45) in March 1981 entitled "Accounting for Franchise Fee Revenue". The statement deals with, among other matters, the proper accounting treatment of the franchisor's "initial services". Those services are described as: "(a) Assistance in the selection of a site. The assistance may be based on experience with factors, such as traffic patterns, residential configurations, and competition. (b) Assistance in obtaining facilities, including related financing and architectural and engineering services. The facilities may be purchased or leased by the franchisee, and lease payments may be guaranteed by the franchisor. (c) Assistance in advertising, either for the individual franchisee or as part of the general program. (d) Training of the franchisee's personnel. (e) Preparation and distribution of manuals and similar material concerning operations, administration, and record keeping. (f) Bookkeeping and advisory services, including setting up the franchisee's records and advising the franchisee about income, real estate, and other taxes or about local regulations affecting the franchisee's business; (g) Inspection, testing and other quality control programs." 63 There are several reasons why a franchisor will bear the cost of providing certain services to his franchisees, especially to franchisees who distribute the franchisor's goods. A franchisee must risk his own capital to establish or acquire a franchise outlet. The amount involved can be quite significant. In addition, a franchisee is usually required to pay a fee to the franchisor for the right to conduct a franchise outlet. The franchisee will be encouraged to incur this expenditure if the franchisor is willing to provide assistance to ensure the success of the franchise network. Of course, the franchisor will also benefit greatly from a successful franchise operation. Franchising is often a less costly method of expanding a distribution system and it certainly involves less capital risk. Further, common experience suggests that outlets that are privately owned are likely to be more profitable than those under the control of the franchisor's staff. Accordingly, providing services to his franchisees is likely to ensure a greater return to the franchisor. 64 It follows, therefore, that franchisors, whether they sell their goods through franchisees who are their agents or to franchisees who purchase those goods for resale, will provide services of the type described by Mr Ryding. That is to say, franchisors will provide those services whether they operate in a retail market or in a wholesale market. The services are provided to establish and maintain a successful franchise network. The cost labour and expenditure incurred in providing those services cannot simply be characterised as a wholesale cost or as a retail cost. They may be appropriately described as the cost labour and expenditure of maintaining a franchise operation. To the extent that those services are provided by a franchisor who sells his goods by wholesale, the cost labour and expenditure involved will form part of the operating cost of that enterprise. The same is true in the case of a franchisor who sells his goods by retail. 65 Thus, where a franchisor sells his goods by retail through franchise agents for whom such services are provided and it is necessary to determine the notional fair wholesale market price of those goods, the cost labour and expenditure of providing those services cannot be ignored. How they are to be taken into account is a matter to which I will return later in these reasons. 66 For the foregoing reasons I do not accept that the fair notional wholesale market price of Bob Jane's tyres is cost plus A per cent when that cost is confined to the cost of goods. A notional wholesaler who operates a franchise network and who provides the services that Bob Jane provides to its franchisees (both agent and dealer) will conduct his business at a substantial operating loss if he sells his goods at cost (of goods) plus A per cent. The fact is that Bob Jane does not incur a trading loss in its operations. From the sale of its goods it recovers an amount that exceeds the sum of the cost of those goods and its operating costs, including the cost of maintaining its franchise network. The vice of Bob Jane's argument is to characterise its operating costs as wholly referrable to a retailing operation. In my view, for the purpose of determining the fair notional wholesale market value of its goods, that is not the proper characterisation of those of its costs that are incurred in providing services to its franchisees. 67 What of the evidence of Mr Ryding and Mr Lonergan that is to the contrary effect? As far as Mr Lonergan is concerned his evidence concerning the activities that a wholesaler undertakes was in reference to a conventional wholesaler. In that regard his evidence may well be correct. But in this case we are not dealing with a conventional notional wholesaler. Here we are dealing with a notional wholesaler who, for sound commercial reasons, is involved in incurring expenditure of a type that is not incurred by a conventional wholesaler. In a sense, this was recognised by Mr Ryding. He accepted that each of the services provided to franchise agents were also provided to Marquay, and would be provided to any newly appointed franchise dealer. He also agreed, as common sense would indicate, that the provision of those services was for the benefit not only of the franchise agents but also for "the overall system", that is the franchise network. 68 Even if I am wrong in the foregoing analysis I would not accept that the price at which tyres are sold to Marquay is the fair wholesale market value of the tyres that Bob Jane sells by retail. I do agree that, in an ordinary case, the price at which a taxpayer sells his goods by wholesale will be a reliable guide to the notional wholesale value of like goods. It will usually be the best criterion: See e.g. Case No. D53 (1953) 4 T.B.R.D. 289 at 297-298. But it is not a reliable guide here. 69 In the first place, the price at which Bob Jane sells its tyres to Marquay was not arrived at in the ordinary course of negotiations between a buyer and seller but was determined by Bob Jane for the purpose of establishing a new aspect of its business, namely a network of franchise dealers. One object of setting the price of tyres at cost plus A per cent was the expectation that it would increase Bob Jane's already large share of the tyre market. This object may have induced Bob Jane to accept a price that was lower than the actual wholesale market price. It is likely that the price was struck without any regard to the wholesale market price for like goods. 70 In the second place, Bob Jane has been in dispute with the Commissioner concerning the proper method of determining the fair wholesale market price of its tyres for the duration of its agreement with Marquay. It is of considerable advantage to Bob Jane to maintain the price at which it sells tyres to Marquay and I cannot be satisfied that, if there had been no dispute with the Commissioner, the price would have remained unchanged. It is to be remembered that the price can be increased at will by Bob Jane. 71 In the third place, it is an inescapable conclusion to be inferred from the established facts that if there had been a substantial dealer network those dealers would have been charged a price for tyres greater than cost plus A per cent. In his evidence Mr Ryding said that negotiations of further franchise dealer agreements have been postponed pending the resolution of this dispute with the Commissioner. By implication Mr Ryding was suggesting that further dealerships could be established. As I have already said, a dealership is conducted in much the same way as a franchise agency and Bob Jane would provide the same services to a dealer as it provides to an agent. There is no reason to believe that Bob Jane would not wish to derive the same or a similar return from the sale of tyres to its dealers as it does on the sale of tyres by its agents. In my view, having regard to the manner in which Bob Jane conducts its franchise operation, if it had an established dealer network the price that Bob Jane would charge its dealers would approximate the amount that a franchise agent is required to remit to Bob Jane on the sale of a tyre. It is only by charging a price of that order that Bob Jane would recover the cost of maintaining a dealership network. 72 In the fourth place, I do not regard the fact that Bob Jane Corporation sold tyres to Exuma at around the same price that Bob Jane sold tyres to Marquay as confirmation of the fact that the price charged to Marquay is a reasonable wholesale market price. The fact is that Exuma was never a franchisee of Bob Jane or its predecessor and thus no useful comparison can be made. In any event, if the cost of freight is taken into account (as to which see later) Exuma was charged a price which equated to cost plus 7.4A per cent. 73 Finally, if the cost of freight is to be taken into account then, according to the evidence, Bob Jane would need to charge an average mark up of 1.6A per cent merely to break even. That is to say, if Bob Jane were to charge cost plus A per cent for all of its tyres it would conduct this part of its business at an operating loss. 74 Accordingly, I will not make the declaration that Bob Jane seeks. 75 I can now turn to the case put by the Commissioner. By his cross-claim the Commissioner seeks a declaration that the sale value of locally manufactured and imported tyres sold by retail between 1 January 1991 and 1 January 1993 and the taxable value of locally manufactured and imported tyres sold by Bob Jane by retail on or after 1 January 1993 is: (a) the cost of getting the tyres to their point of sale plus the expenses that would have been associated with selling the tyres if they were sold by wholesale plus a wholesale margin; alternatively (b) the price at which Bob Jane Corporation sold the goods by wholesale at or through Bob Jane's retail outlets, franchised agents and other agents; alternatively (c) the retail selling price of the tyres less commission paid by Bob Jane in respect of sales of the tyres (inclusive of sales tax). 76 During the course of his submissions, counsel for the Commissioner did not expressly abandon the alternative declarations that were sought but he did not press for any of them to be made in the event that I did not grant the first declaration. It is fair to say, however, that the Commissioner does not regard the alternative declarations as correctly stating the proper method of ascertaining the fair wholesale market value of the tyres. 77 Speaking generally, the factors that affect the price of goods, whether in a wholesale market or a retail market, are demand, competition and cost. It is often said that the price of a product is the outcome of the interaction between demand for the product and supply of the product. Cost and competition influence price because they affect supply. It is only in relatively uncompetitive markets that a seller will have some discretion in setting prices. 78 There are two basic approaches to determining the price of goods. One is to ascertain the price of like goods that are sold in the same or similar quantities on the same or similar terms and conditions and the other is the cost plus approach. The first needs no explanation. The second, cost plus pricing, is a simple enough process. It involves adding a mark-up to the cost (usually the full cost) of the goods. By full cost I mean all of the direct and indirect costs incurred in acquiring or producing and then distributing the goods. The mark-up is usually, but not always, based on the desired return on the capital invested in the business: it is often expressed as a percentage of cost. 79 Cost plus pricing has its difficulties. There is the difficulty of establishing the desired rate of return. Then there is the difficulty of determining the appropriate cost base. In some cases the cost base will not be the full cost of the goods but another base such as the variable manufacturing costs or the variable product costs. 80 In the present context there are at least two problems in adopting the cost plus approach. As the evidence shows, Bob Jane operates in a highly competitive market. This competition will affect the price at which goods are sold both in the wholesale and retail market. Where there is significant competition in a market the participants will usually be required to offer their goods for sale at less than the desired price. Even if the participants operate a profitable business the rate of return might be less than the desired rate. This tends to suggest that a rigid application of the cost plus approach is not likely to be appropriate if for no other reason than the fact that it would be difficult to establish the appropriate rate of return. 81 The second problem is determining precisely what costs are to be taken into account in arriving at a cost plus price. Bob Jane contends that the only cost that is to be brought to account is the cost of goods, that is the price paid for the tyres that it purchases from Bob Jane Corporation. The Commissioner says that this is not correct. He argues that the cost base is the sum of the cost of goods, the cost of the services provided by Bob Jane to its franchisees (whether agent or dealer), the cost of transporting the goods to the franchisees' premises, the cost of insurance and the deemed cost of warehousing the goods. No doubt there will be some other indirect costs of a minor nature that are also to be brought to account. 82 It is necessary to say a little more about the facts to appreciate the reason for these contentions. I have said sufficient about the cost of services to indicate why it is that the Commissioner asserts that they should be treated as part of the costs incurred by Bob Jane as a deemed wholesaler. But I have not yet considered whether the cost of freight, insurance and warehousing should also be taken into account. 83 The evidence discloses that Bob Jane carries out few, if any, warehousing functions. When a franchise agent or Marquay wishes to purchase stock it places an order for that stock on the manufacturer or importer and receives delivery into the franchise outlet where the stock is stored until it is sold to a customer who takes delivery at the outlet. 84 In the case of deliveries to the franchise agents the cost of freight is borne by Bob Jane. For deliveries that take place in Victoria, Bob Jane uses its own vehicles to transport the tyres. In other states the tyres are carried by third parties, usually the seller, at an average cost of around $2.20 per tyre. Marquay is required to pay for the delivery of tyres to it. 85 As regards insurance the position is that Bob Jane insures its goods until the point of sale. In the case of goods sold through its employee operated outlets or by its franchise agents Bob Jane does not receive any reimbursement for the cost of insurance. The cost is recovered out of the purchase price of the goods sold. Insofar as Marquay is concerned, because that company purchases goods from Bob Jane, it insures those goods at its own cost. 86 If a cost plus method is adopted to determine the price Bob Jane would have sold the goods the subject of an actual retail sale, it would be necessary to have regard to the full costs that would be attributable to Bob Jane as a notional wholesaler. It is true that Bob Jane, except to a very limited extent, is not a wholesaler but a retailer and that most of the cost labour and expenditure that it incurs is in relation to the sale of goods by retail. This is the reason why Bob Jane says that activities described by Mr Ryding should not be taken into account in determining the cost base. It submits that the expenditure involved in carrying out those activities is not part of the full cost of a wholesaling operation. 87 Here, however, in contrast to the position in Estee Lauder, the assumption that must be made for the purpose of determining the fair wholesale market price of the tyres is that Bob Jane, as a notional wholesaler, is distributing its goods through its owner operated outlets and through its franchise agents. And, as I have sought to demonstrate, even if Bob Jane conducted business solely as a wholesaler, it would incur the cost labour and expenditure of maintaining its franchise network. Accordingly, the cost plus method of determining the wholesale price of goods must bring to account the cost of maintaining the franchise network. My present view is that the cost base should include all of the costs incurred by Bob Jane in providing services to its franchisees. But I am not in a position to express a final view on this aspect of the case. The reason is that, having regard to the manner in which the case was conducted, no attention was drawn to the question whether, if the cost base was to include the services provided by Bob Jane, the cost of all of those services should be brought to account. It may be that some of those services are not necessarily associated with the maintenance of a franchise operation and could be characterised as exclusively retail costs. If that is so then it would not be proper to include them in the cost base. 88 I do not doubt that the cost base should include the cost of freight and insurance. As Burchett J said in Estee Lauder, supra (at 324) "if the fictional wholesaler stands in the shoes of the [real vendor] … he should be seen as doing so under the same, rather than under different, conditions." Those conditions are that Bob Jane bears the cost of the freight of its tyres to the point of sale (the retail outlet) as well as the cost of insurance to that point. 89 Nevertheless, as I have said, it is by no means clear that a cost plus approach is an appropriate method of determining price in a highly competitive market. First, it is difficult to establish the appropriate rate of return. In a competitive market the rate of return will vary from time to time and, in a highly competitive market, there will often be sales at a price where the vendor will not be able to recover his cost base let alone derive a profit. Then there is the further difficulty that in this case the notional fair wholesale market price of the tyres must be determined by taking into account both their actual retail price and the notional cost of selling them by retail. An adoption of the cost plus method either will not take these factors into account or will not sufficiently take them into account. 90 In any event, the grant of a declaration in the terms sought by the Commissioner would not resolve all matters in controversy between the parties. In particular the parties will remain in dispute about the cost base and what is the proper mark-up to be adopted. It is undesirable in those circumstances to make any declaration: Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286 at 307. 91 Whilst the Commissioner did not press his third proposed declaration, namely that the fair market wholesale value of the goods is the retail sale price (inclusive of sales tax) less the commission paid to the franchise agent, I should say something about that approach. 92 I am aware of cases where the market value of a commodity in a particular state or condition has been determined by deducting certain costs and expenses from the sale price of that commodity. The issue has arisen in the United States in respect of oil and gas leases. Such leases often contain a royalty clause requiring the payment of a royalty calculated as a percentage of the market value of the oil and gas produced. Difficulties arise when the oil and gas is not marketable. For example, it is often the case that gas that is produced is "sour", that is it contains hydrogen sulphide, and that the oil that is recovered is unstabilised. It is difficult to determine the market value of sour gas and unstabilised oil because there is usually no market for such products. One method of determining the market value of sour gas and unstabilised oil is the net back method. This matter was discussed in Piney Woods Country Life School v Shell Oil Co 726 F2d 225 (1984) (cert. denied, 471 US 1005 (1985)) a decision of the 5th Circuit of the United States Court of Appeals. As to the net back method the court said (at 238): "A number of courts have struggled with the question of how to prove market value. The only general rule that emerges from these cases is that the method of proof varies with the facts of each particular case. In determining market value at the well, the point is to determine the price a reasonable buyer would have paid for the gas at the well when produced. Comparable sales of gas at other wells may be used to do this. Another method is to use sales of processed gas and deduct processing costs. Yet another relevant measure is the one proposed by Shell, the actual sale price of the gas less costs. 'This is the least desirable method of determining market price', Montana Power, 586 P2d at 303-04, but its persuasiveness is a matter for the factfinder." (citations omitted) See also Freeland v Sun Oil Co 277 F2d 154 (5th Cir 1960) (cert. denied 364 US 826 (1960)) where the court said (at 157, 159): "In determining the market value of such gas [sour gas] at the well where there is no established criteria of a market, the Louisiana approach, which is binding on us, is to consider the end product of the extraction process as a factor. But it is a factor in reconstructing a market value at a place where in fact there was no, or little, market and consequently an appropriate deduction must be made. … To put it another way: in the analytical process of reconstructing a market value where none otherwise exists with sufficient definiteness, all increases in the ultimate sales value attributable to the expenses incurred in transporting and processing the commodity must be deducted." 93 These cases suggest that the net back method of valuation is a method of last resort. This is no doubt correct when the question to be determined is what is the objective market value of a commodity. But that is not the question in this case. Here the question is at what notional wholesale price could the taxpayer have sold its tyres in circumstances where the retail price is known. On one view, in order to arrive at a wholesale price the only matter that must be determined is the retail cost (including the retail profit) of selling the goods. If the retail cost is deducted from the retail price the figure arrived at should approximate the wholesale value of the goods. Thus, if the fact was that franchise agents only carried out functions of a retail nature it is certainly arguable that the difference between the actual price and the commission is the wholesale value of the tyres. It will be remembered that the rate of commission was struck by Bob Jane to be an approximation of the costs incurred by a franchise agent plus a reasonable rate of return. Mr Ryding said that as a general rule a franchise agent requires a commission of C per cent to break even (that is to recover his direct and indirect costs) and that the commission that is paid to them is around 1.2C per cent; the additional .2C per cent being paid to enable a franchise agent "to make a reasonable profit". 94 However, neither Bob Jane nor the Commissioner accept that it is appropriate to deduct the commission from the selling price in order to arrive at the notional fair wholesale market price of the tyres. Bob Jane disputes this approach because it says that it fails to take account of the totality of the retail expenses. The Commissioner objects for other reasons. First, he says that it would create an impossible system of administering sales tax; it would require an examination of every franchise agent's books of account to arrive at the result. That is not quite true. I have no doubt that the relevant commission could be ascertained without the need for a detailed examination of the books and records of each franchise agent, but I do agree that it might be an onerous task. Secondly, the Commissioner says that the franchise agents carry out wholesale as well as retail functions. By way of example, the Commissioner points to the fact that franchise agents hold stock on behalf of Bob Jane. He says that holding stock (that is, warehousing) is a wholesale function in respect of which the franchise agent receives reimbursement out of his commission. Thus, so the argument goes, simply deducting the commission from the price of the tyres ignores the fact that the franchise agent is recovering wholesale as well as retail costs. 95 It may be that certain functions that are performed by a franchise agent are wholesale functions. Holding stock is not one of them. Here the Commissioner falls into the same error as the taxpayer in drawing analogies from "conventional" wholesaling operations. No doubt it is true to say that a conventional wholesaler will warehouse stock for sale. But whether this is always true of a wholesaler who sells his goods through a franchise network I cannot say, although I doubt that it is correct. More importantly, it would not be true of the Bob Jane franchise network even if Bob Jane conducted business solely as a wholesaler. In other words, Bob Jane does not carry stock on behalf of Marquay, its principal wholesale customer, and it is to be supposed that it would not carry stock if all of its franchise agents operated on the same basis as Marquay. 96 Although I was quite attracted to the net back method (after making certain adjustments to ensure that all wholesale costs are ignored in the process) as an appropriate method to determine the wholesale value of the tyres in this case in the event of opposition by both parties to this approach, it is not appropriate for me to take the issue any further. 97 There is, of course, another difficulty not only with the net back method of determining price but with the cost plus approach as well. Each of them involves the mechanical application of a formula that will not necessarily arrive at the price for which the relevant goods could have been sold by wholesale. As the Full Court observed in Revlon Manufacturing Ltd v Commissioner of Taxation (1995) 63 FCR 535 the determination of the notional wholesale price is, in the end, a matter of a valuation and judgment and the adoption of a fixed method can often (but in my view not always) produce a false result. That is not to say that the price arrived at by the cost plus method or net back method should not be taken into account in determining the notional wholesale price of the tyres. No doubt either method, with appropriate adjustments and allowances, will produce a figure that should approximate the fair notional wholesale price. But both methods suffer from the disadvantage that they do not, or will not in all cases, take account of changing market forces that influence price both at the wholesale and retail level. 98 The result is that not only has Bob Jane failed to satisfy me that it is entitled to the declaration it seeks, but the Commissioner has also failed to establish that he is entitled to any of the declarations that he seeks. 99 This is an unsatisfactory result from the viewpoint of both parties because their dispute remains unresolved. However, it may be that I have said sufficient in my reasons to give the parties some guidance on how the notional market price is to be determined. It is the price at which Bob Jane is able to sell its tyres by wholesale having regard to the fact that the retail price is known. On the assumption that all sales are profitable it is most likely that the notional wholesale price will return to Bob Jane a sum that will cover all of its direct and indirect costs of selling the tyres, that is apart from those costs that are retail in character, as well as a profit. The difficulty lies in determining the rate of profit that Bob Jane should recover on a notional wholesale sale of its tyres. That profit should be determined on the basis that the notional retailer will also recover all his costs, together with a profit, out of the actual retail price. I do not doubt that an experienced businessman could nominate the wholesale value of the tyres in accordance with this approach and I suspect that most lawyers would not be able to do so. 100 The orders will be that the claim and cross-claim be dismissed. There will be no order as to costs. I certify that the preceding one hundred (100) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein. Associate: Dated: 14 April 1999 Counsel for the Applicant: Mr J W de Wijn QC Ms J J Batrouney Solicitor for the Applicant: Mallesons Stephen Jaques Counsel for the Respondent: Mr J I Fajgenbaum QC Ms H M Symon Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 17- 21 August 1998 Date of Judgment: 14 April 1999