Daihatsu Australia Pty Ltd v Commissioner of Taxation [2000] FCA 1718

FEDERAL COURT OF AUSTRALIA

Daihatsu Australia Pty Ltd v Commissioner of Taxation [2000] FCA 1718

DAIHATSU AUSTRALIA PTY LIMITED v MICHAEL JOSEPH CARMODY COMMISSIONER OF TAXATION

N 908 of 2000

LINDGREN J 23 NOVEMBER 2000

SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY N 908 OF 2000

BETWEEN: DAIHATSU AUSTRALIA PTY LIMITED (ACN 001 282 462)

APPLICANT

AND: MICHAEL JOSEPH CARMODY COMMISSIONER OF TAXATION

RESPONDENT

JUDGE: LINDGREN J

DATE OF ORDER: 23 NOVEMBER 2000

WHERE MADE: SYDNEY

THE COURT ORDERS THAT:

1. The motion be dismissed. 2. The applicant pay the respondent's costs of the motion. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY N 908 OF 2000

BETWEEN: DAIHATSU AUSTRALIA PTY LIMITED (ACN 001 282 462)

APPLICANT

AND: MICHAEL JOSEPH CARMODY COMMISSIONER OF TAXATION

RESPONDENT

JUDGE: LINDGREN J

DATE: 23 NOVEMBER 2000

PLACE: SYDNEY

REASONS FOR JUDGMENT 1 The applicant ("DAPL") seeks relief under s 39B of the Judiciary Act 1903 (Cth) in relation to assessments to income tax issued by the respondent Commissioner on 26 June 2000 in respect of years of income extending from the year ended 30 June 1992 to the year ended 31 December 1996 (during that period there was a change in the applicant's income tax year). The notices of assessment refer to the amount due on 28 July 2000 as being $21,724,832.58. 2 The proceeding is fixed for a hearing to commence next Monday, 27 November. By a notice of motion filed on 17 November, DAPL sought leave to file and serve a notice to answer interrogatories. The proposed notice to answer interrogatories is divided into 26 paragraphs. Some paragraphs are divided into subparagraphs. Analysis will show that some questions in fact comprise more than one question. 3 In a related proceeding, N 1145 of 2000, the Commissioner seeks to recover judgment for the amounts of the assessments and interest. That proceeding commenced life as proceeding 12147 of 2000 in the Common Law Division of the Supreme Court of New South Wales and was transferred to this Court on 23 October 2000. In that proceeding there is a motion by the Commissioner also returnable next Monday 27 November, seeking orders striking out DAPL's defence and cross-claim and entering judgment for the Commissioner. 4 DAPL is a subsidiary of the Japanese corporation, Daihatsu Motor Corporation Ltd ("DMCL") which manufactures motor cars and trucks. DAPL imports and sells products of DMCL. DAPL buys motor vehicles, spare parts and accessories from DMCL and pays research, development and management fees to DMCL. It pays money to DMCL for other purposes also and pays money to other Daihatsu companies. 5 The Commissioner took the view that article 5 of the Double Taxation Agreement between Australia and Japan, which is found in schedule 6 to the International Tax Agreements Act 1953 (Cth), and Division 13 (ss 136AA-136AG) of Part III of the Income Tax Assessment Act 1936 (Cth) (the "ITAA 36") were applicable. He considered that DAPL had acquired property under an international agreement from a party with which it was not dealing "at arm's length" and that the amount that DAPL agreed to pay by way of consideration for its acquisitions exceeded an "arm's length consideration" and determined that subs 136AD(3) of the ITAA 36 should apply. The Commissioner determined on a lesser amount, than the amount paid by DAPL, as the amount of the arm's length consideration applicable under subs 136AD(4) of the ITAA 36. 6 By its statement of claim DAPL seeks to overcome the effect of ss 175 and 177 of the ITAA 36. It pleads that the Commissioner's determinations are not reasonably capable of reference to the powers given to him; that he acted in bad faith in not making a genuine attempt to issue valid assessments; and that he did not turn his mind to, or make any judgment about, the particular facts and circumstances of DAPL in each of the relevant years of income, "thereby rendering the assessments purportedly made null and void". 7 In the course of the hearing I was taken to all of the interrogatories and to the documents to which they respectively refer. Since the hearing I have re-read the interrogatories and that material. Those documents included an "audit report" dated 16 June 2000. I will set out a selection of the interrogatories so that some idea can be gained of their general nature. "1. Q. Look at the third last paragraph of page 15 of the Audit Report and specify whether and if so upon what basis the Commissioner considered the applicant's transfer pricing policies and method (Ľ) was the most appropriate methodology to be applied to the transfer pricing adjustment. Ľ 3. Q. Look at the Functional Analysis Summary on page 21 of the Audit Report ('the Summary'): (a) specify precisely how did the Commissioner satisfy himself that he had identified and described accurately all of the functions and all of the risks referred to and set forth in the table appearing thereunder? Ľ 5. Q. Look at the second last paragraph of page 24 of the Audit Report and specify the reasons why the decision maker who made the assessments considered it appropriate to apply a simple average calculated over a six year period from 'comparable' enterprises to each of the relevant years of income of the applicant. Ľ 7. Q. Look at paragraph 39 on page 7 of Appendix 5: (a) specify on what basis is it stated that 'there are no independent motor vehicle distributors operating in Australia'. (b) Specify the reasons why: A) Hyundai Automotive Distributors Aust Pty Limited; B) Inscape Automotive Australia Pty Limited; and C) Subaru (Aust) Pty Limited were excluded from consideration. Ľ 9. Q. Look at Appendix 5 and state how the authors reconciled differences in the markets and economies in which the 'comparables' operated during the years of income in question. Ľ 12. Q. Look at paragraph 41 on page 7 of Appendix 5 and specify precisely how the authors performed the comparability analysis in accordance with paragraph 10.11 of Tax Ruling TR98/11. Ľ 15. Q. Look at Section 5.1 on page 23 of the Audit Report headed 'The Search for Comparables': (a) Specify precisely upon what criteria it was found that there were no independent motor vehicle distributors operating in Australia. (b) Specify precisely what criteria were utilised to broaden the analysis by looking at other independent motor vehicle and other distributors as therein specified. Ľ 18. Q. (a) Is it the fact that at all material times prior to the making of the Assessments the respondent intended to issue a Position Paper to the applicant prior to making the Assessments or any of them. (b) Is it the fact that at some time on or before 16 June 2000 and if so when the respondent determined that a Position Paper would not be issued to the applicant prior to the making of the Assessments. Ľ 23. Q. At the time of the making of the Assessments were there any and if so what factors taken into account by the decision maker in deciding that traditional transaction methods (as defined in the OECD Transfer Pricing Guidelines 1995) were not applicable in making transfer pricing adjustments." 8 Under Order 16 of the Federal Court Rules the Court is empowered to give leave to a party to file and serve upon another party a notice requiring the party served to answer interrogatories relating to any matter in question between the interrogating party and the party served. The purpose of interrogatories has been discussed in a number of cases. There is no substantial dispute between the parties as to the applicable principles. 9 In my opinion the interrogatories should not be allowed for three reasons. The first reason is that they are in the nature of a "fishing" expedition. In order for interrogatories to be supportable there must be at least a showing of a case. It is not an appropriate use of interrogatories to "fish" to see whether a case exists at all. Yet in my opinion the 26 interrogatories are of this nature. 10 The second reason, related to the first, is that the interrogatories are irrelevant to the matters in question between DAPL and the Commissioner, because they are directed to showing that the Commissioner erred. But error is properly the subject of the procedure of objection with the possibility of subsequent application for review or appeal, as provided for in Part IVC of the Taxation Administration Act 1953 (Cth): see subs 136AF(6) of the ITAA 36. Error is different from non-referability to power, bad faith, and lack of consideration of the individual years of income. 11 The third reason is, in fact, a complex of factors, including the lateness of DAPL's motion and defects in the form of the interrogatories. If the interrogatories or some of them were to be allowed, they would have to be redrafted, served and answered, with only the remainder of today (Thursday), tomorrow, and the weekend remaining before the commencement of the hearing next Monday. Having regard to the lateness of the motion, it would be unjust to require the Commissioner to answer interrogatories within so short a period. 12 Apparently one consequence of my declining to grant the leave sought will be that DAPL will seek on the hearing next week to lead evidence from Peter Gerard Coakley, an officer of the Australian Taxation Office, touching the matters or some of the matters referred to in the interrogatories. That will be a matter for the trial judge to deal with. 13 The orders of the Court are that: 1. The motion be dismissed; 2. The applicant pay the respondent's costs of the motion.