FEDERAL COURT OF AUSTRALIA Daihatsu Australia Pty Limited v Commissioner of Taxation [2001] FCA 588 INCOME TAX – assessment – determinations under s 136AD of the Income Tax Assessment Act 1936 (Cth) – notice of amended assessment – validity – conclusiveness – application of ss 175 and 177 of the Income Tax Assessment Act 1936 (Cth) – "Hickman principle" – whether bona fide attempt to assess – whether assessment made in bad faith – whether failure to issue position paper raises inference of bad faith – whether failure to comply with Taxation Rulings raises inference of bad faith INCOME TAX – transfer pricing – determinations made by Commissioner that taxpayer not dealing at arm's length – calculation of arm's length price – application of s 136AD of the Income Tax Assessment Act 1936 (Cth) Judiciary Act 1903 (Cth) s 39B Income Tax Assessment Act 1936 (Cth) ss 136AA, 136AD, 175, 177 Taxation Administration Act 1953 (Cth) Part IVC, s 14ZZO Income Tax (International Agreements) Act 1953 (Cth) ss 4, 8, Sch 6 Federal Court Rules O 10 r 1(2)(j) R v Hickman; Ex parte Fox & Clinton (1945) 70 CLR 598 applied Kordan Pty Ltd v Commissioner of Taxation [2000] FCA 1807 followed Deputy Commissioner of Taxation v Richard Walter (1995) 183 CLR 168 referred to Sunrise Auto Ltd v Commissioner of Taxation (1995) 61 FCR 446 referred to Briglia v Federal Commissioner of Taxation 2000 ATC 4247 referred to Vanmeld Pty Ltd v Fairfield City Council (1999) 46 NSWLR 78 referred to Dan v Federal Commissioner of Taxation 2000 ATC 4350 referred to Darrell Lea Chocolate Shops Pty Ltd v Commissioner of Taxation (1996) 72 FCR 175 referred to R v Commissioner of Taxation (WA); Ex parte Briggs (1986) 12 FCR 301 referred to O'Toole v Charles David Pty Ltd (1991) 171 CLR 232 referred to Re Refugee Review Tribunal; Ex parte Aala (2000) 176 ALR 219 referred to Holloway v McFeeters (1956) 94 CLR 470 applied Madden v Madden (1996) 65 FCR 354 applied Corporation of the City of Enfield v Development Assessment Commission (1999) 199 CLR 135 referred to Cabal v Attorney-General of the Commonwealth [2001] FCA 583 referred to Aronson & Dyer, Judicial Review of Administrative Action (2nd ed, 2000) at 689ff Aronson, "The Resurgence of Jurisdictional Facts" (2001) 12 Public Law Review 17 DAIHATSU AUSTRALIA PTY LIMITED v COMMISSIONER OF TAXATION N908 of 2000 FINN J SYDNEY 24 MAY 2001 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N908 OF 2000 BETWEEN: DAIHATSU AUSTRALIA PTY LIMITED (ACN 001 282 462) APPLICANT AND: MICHAEL JOSEPH CARMODY COMMISSIONER OF TAXATION RESPONDENT JUDGE: FINN J DATE OF ORDER: 24 MAY 2001 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application 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 NEW SOUTH WALES DISTRICT REGISTRY N908 OF 2000 BETWEEN: DAIHATSU AUSTRALIA PTY LIMITED (ACN 001 282 462) APPLICANT AND: MICHAEL JOSEPH CARMODY COMMISSIONER OF TAXATION RESPONDENT JUDGE: FINN J DATE: 24 MAY 2001 PLACE: SYDNEY REASONS FOR JUDGMENT 1 In a proceeding brought under s 39B of the Judiciary Act 1903 (Cth), the applicant, Daihatsu Australia Pty Limited ("DAPL"), seeks to have invalidated assessments and an amended assessment of DAPL's taxable income for an almost six year period made by a delegate of the respondent Commissioner of Taxation. The objective of this attack is to avoid the conclusive effect of s 177 of the Income Tax Assessment Act 1936 (Cth) ("the ITA Act") and the consequential inability to challenge the assessments otherwise than under Part IVC of the Taxation Administration Act 1953 (Cth) ("the Administration Act"). 2 It is common ground between the parties that for DAPL to succeed, it must show that the Commissioner has breached what is commonly referred to as the Hickman principle: see R v Hickman; Ex parte Fox & Clinton (1945) 70 CLR 598. For present purposes it can be said that the assessments of which notices have been given will be effective for the purposes of the ITA Act if: (i) there was a bona fide attempt by the Commissioner to exercise the power to assess conferred by the Act; (ii) the exercise of that power related to the subject matter of the Act; and (iii) the decisions taken were reasonably capable of reference to the power given to the Commissioner. Where the parties diverge is as to the manner of application of those principles - and particularly the first - to the circumstances of this case. That divergence reflects differing views as to the proper content of the Hickman principle itself and in particular as to what is contemplated by the formula "a bona fide attempt to exercise the power". 3 The genesis of the present dispute lay in the Commissioner's application to DAPL of the transfer pricing provisions of s 136AD(3) and (4) of Division 13 of the ITA Act. Before outlining the factual setting of this matter, reference should be made to the ITA Act and to the Income Tax (International Agreements) Act 1953 (Cth) ("the International Agreements Act"). The ITA Act 4 Insofar as presently relevant s 6(1) defines "assessment" to mean "the ascertainment of…(i) the amount of taxable income; and of the tax payable on that taxable income". Section 166 imposes on the Commissioner the obligation to make an assessment from the taxpayer's return(s) and from any other information in his possession, or from any of these sources. Section 170 confers the power to amend an assessment. 5 Sections 175 and 177(1) provide respectively: "175 The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with." "177(1) The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct." Section 136AD provides (inter alia): "136AD(3) Where - (a) a taxpayer has acquired property under an international agreement; (b) the Commissioner, having regard to any connection between any 2 or more of the parties to the agreement or to any other relevant circumstances, is satisfied that the parties to the agreement, or any 2 or more of those parties, were not dealing at arm's length with each other in relation to the acquisition; (c) the taxpayer gave or agreed to give consideration in respect of the acquisition and the amount of that consideration exceeded the arm's length consideration in respect of the acquisition; and (d) the Commissioner determines that this subsection should apply in relation to the taxpayer in relation to the acquisition; then, for all purposes of the application of this Act in relation to the taxpayer, consideration equal to the arm's length consideration in respect of the acquisition shall be deemed to be the consideration given or agreed to be given by the taxpayer in respect of the acquisition. 136AD(4) For the purposes of this section, where, for any reason (including an insufficiency of information available to the Commissioner), it is not possible or not practicable for the Commissioner to ascertain the arm's length consideration in respect of the supply or acquisition of property, the arm's length consideration in respect of the supply or acquisition shall be deemed to be such amount as the Commissioner determines." 6 Finally, s 136AA(3)(d) provides that in Division 13, unless the contrary intention appears: "a reference to the arm's length consideration in respect of the acquisition of property is a reference to the consideration that might reasonably be expected to have been given or agreed to be given in respect of the acquisition if the property had been acquired under an agreement between independent parties dealing at arm's length with each other in relation to the acquisition." The International Agreements Act 7 Schedule 6 to this Act contains the agreement between Australia and Japan for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income ("the Agreement"). Section 8 of the Act gives to provisions of the Agreement, so far as they affect Australian tax, the "force of law". 8 Section 4(1) of the Act provides that, subject to sub-section (2), the ITA Act be incorporated and read as one with the International Agreements Act. Subsection (2) provides that: "4(2) The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act (other than section 160AO or Part IVA of that Act) or in an Act imposing Australian tax." 9 Article 5 of the Agreement provides: "(1) Where - (a) an enterprise of one of the Contracting States participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State; or (b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of one of the Contracting States and an enterprise of the other Contracting State, and, in either case, conditions are operative between the two enterprises in their commercial or financial relations which differ from those which might be expected to operate between independent enterprises dealing at arm's length with one another, then, if by reason of those circumstances profits which might be expected to accrue to one of the enterprises do not accrue to that enterprise, there may be included in the profits of that enterprise the profits which might have been expected so to accrue to it if it were an independent enterprise engaged in the same or similar activities and its dealings with the other enterprise were dealings at arm's length with that enterprise or an independent enterprise. (2) Profits included in the profits of an enterprise of one of the Contracting States under paragraph (1) of this Article shall be deemed to be income of that enterprise derived from sources in that Contracting State and shall be taxed accordingly." Protocol 3 to the Agreement provides: "Nothing in Articles 4 and 5 shall affect the application of any law of a Contracting State relating to the determination of the tax liability of an enterprise in cases where the information available to the competent authority of that Contracting State is inadequate to determine the profits for the purposes of Article 4 and paragraph (1) of Article 5, provided that that law shall be applied, so far as the information available to the competent authority permits, in accordance with the principles stated in Articles 4 and 5." The Factual Background 10 In light of the applicant's submissions it is necessary to refer to the factual setting in some detail. I would note, though, that the Commissioner has objected to the admission of most of the documentary material adduced by the applicant on the ground that nothing of relevance to a case on the Hickman principle could be gleaned from it. 11 DAPL was during the relevant period an importer and wholesale distributor of motor vehicles and spare parts manufactured by Daihatsu Motor Corporation Limited, a company incorporated in Japan ("DMC (Japan)"). DMC (Japan) was at the relevant times a majority shareholder in DAPL. 12 On 26 June 2000 the Commissioner issued DAPL with a Notice of Amended Assessment for the year ended 30 June 1992, and Notices of Assessment for each of the years ended 1993 to, relevantly, 1996. These were accompanied by documents entitled "Income Tax Adjustment Sheets" indicating the adjustments that had been made to taxable income previously assessed (for the year ended 30 June 1992) or returned (for the years ending 31 December 1992 to 1996). It is convenient to refer to these periods as "the relevant years of income". 13 In the letter accompanying the assessments it was noted that the Commissioner had been conducting an audit of DAPL "with a particular focus on the consideration paid for imported vehicles for the period 1992 to 1997"; had formed the view that the consideration paid for these should be adjusted; and had accordingly made determinations pursuant to Division 13 of the ITA Act and "in terms of" paragraph 3 of the Protocol. Likewise, the Adjustment Sheet for each year of income indicated that the deduction for purchases had been reduced by varying amounts for each year "in accordance with determinations made under Article 5 of Schedule 6 and paragraph 3 of the Protocol to Schedule 6" of the International Agreements Act, and ss 136AD(3) and (4) of the ITA Act. 14 The Division 13 determinations referred to in the 26 June letter were issued on 19 June 2000. They are in identical form for each year save for the reference to the respective year of income and the amount to be included in the assessable income for each year. They are expressed to have been made under ss 136AD(3) and 136 AD(4) of the ITA Act pursuant to paragraph 3 of the Protocol and were signed by Mr Peter Coakley of the Australian Taxation Office ("ATO") Large Business and International Program on behalf and under the authorisation of the Assistant Commissioner of that program. The determinations describe the authorisation from the Assistant Commissioner to exercise the latter's delegated functions and powers and to "form opinions, make determinations for the purposes of [the International Tax Act and the ITA Act] and to take such further action as I consider necessary to give effect to such determinations and the exercise of his discretions". The following paragraphs stated: I consider that the information available to me is adequate to determine the profits for the purposes of Article 5 [of the Agreement, being Schedule 6 to the International Agreements Act]. Should I be in error and the available information in [sic] inadequate to determine the profits for the purposes of Article 5, I hereby make a determination pursuant to [ss 136AD(3) and (4) of the ITA Act] pursuant to paragraph 3 of [the Protocol] and insofar as the information available to me permits in accordance with the principles stated in Article 5. Having had regard to the information and advice obtained in connection with the audit, I hereby record my findings and make a determination pursuant to sub-section 136AD(3) through the ascertainment of the arm's length consideration pursuant to sub-section 136AD(4)…". The findings, expressed in each determination as being in respect of the particular given year, were: · that during the relevant acquisition period DAPL had acquired property (motor vehicles, spare parts and consumables), manufactured by DMC (Japan), under an agreement between them; · that having regard to the connection between the two corporations and to any other relevant circumstances, the officer was satisfied that they were not dealing at arm's length in relation to the acquisitions; · that more than an arm's length consideration was paid or payable by DAPL in relation to the acquisitions; · that the officer had determined that s 136AD(3) should apply in relation to DAPL in relation to the acquisition of the property during the relevant period; · that pursuant to s 136AD(4) it had been determined that the consideration paid or payable was in excess of the arm's length consideration for the acquisition by a given amount (varying in respect of each determination for each year); and · that therefore that amount be included in the assessable income for the particular year. 15 In a document also dated 19 June 2000, Mr Coakley stated that in making the decision to amend the assessments by applying the provisions of Division 13 and the Agreement and Protocol, he had "had regard to information, advice and comment from a number of sources". These sources were listed as follows: the final audit report, the audit working papers, materials provided by DAPL and its agents, expert opinions commissioned by the ATO and "access to those experts to discuss the facts, their opinions and conclusions in relation to this case", advice from members of the Independent Audit Review Committee, advice from ATO economists and the Australian Government Solicitor and senior counsel, relevant (ATO) rulings and guidelines, and discussions with the audit team. The document noted that Mr Coakley had read the audit report and that he agreed with the recommendations in it (inter alia) to determine arm's length consideration for each of the 1992 to 1997 years, to make the Division 13 determinations, and to issue the assessments "without proposing the ATO position to DAPL for the reasons given in Section 7 [of the report]". 16 The audit report was produced by three officers of the ATO. It is a thirty-three page document with appendices of similar length. It records the background to the audit of DAPL that led to the purported determinations and assessments. It appears from the audit report that a Tax Strategy Review, of which DAPL was first advised in April 1997, was completed in May 1998 in respect of payment of royalties by DAPL to DMC (Japan) for certain years of income; that review identified the payments as a revenue risk; and the case was rolled over to be a transfer pricing audit to include the presently relevant years of income. This commenced in July 1998, although progress was described as having been impeded for a number of given reasons. The report records that it was considered appropriate in the circumstances to proceed to assessment. 17 Section 3 of the audit report identifies and characterises the cross-border dealings and looks in detail at DAPL. Section 4 deals with the selection of a Transfer Pricing Methodology and the factors to be taken into account (according to Taxation Ruling TR 97/20) in selecting the most appropriate methodology. For reasons related to the availability of public data, the Transactional Net Marketing Method ("TNMM") was selected, supported by analysis contained in an appended economists' report. I would note in passing that Appendix 5 to the audit report was the economists' report on the comparability analysis that was undertaken to arrive at an expected profit margin. Section 5 of the audit report ("application of the methodology") describes the search for comparable entities. It notes that as there were not found in Australia any directly comparable businesses (independent motor vehicle distributors), the criteria were relaxed to include Australian, European and North American distributors of functional or market similarity. Section 5 also contains the conclusions on arm's length consideration based on the economists' report. 18 Section 6 considers the application of the law. Section 7 deals with whether the ATO should issue assessments. Noting the taxation ruling ("TR") policy context, the report records a belief that there were very good reasons (these are listed) for issuing assessments without first proposing them to the taxpayer, and that the ATO was "in a position to issue assessments based on a 'genuine attempt' basis in terms of section 136AD(4) on the information available to the Commissioner". These beliefs were reflected in the recommendations in section 9 of the report. 19 To backtrack, on 2 February 2000 work had apparently commenced on the preparation of a position paper to be put to the taxpayer and the comparability analysis was in the process of finalisation. A meeting was held on 21 February 2000 with the ATO at the request of Mr Stephen Breckenridge of the firm KPMG, DAPL's adviser. ATO officers were advised that it would shortly be announced publicly that DAPL's national distributor agreement would be terminated on 30 June 2000 and reissued to the Toyota corporation which would also acquire stock including spare parts. Certain properties would also be sold. It was partly in consequence of this information that the audit process was accelerated so as to effect an assessment before the termination of the distributorship agreement. 20 On 14 March Peter Coakley wrote to various ATO officers expressing concurrence in the view that: "we need to continue progressing the document which could be either a position paper or an audit report for DAPL. Even though we can't issue a position paper or finalise an audit report at the moment, the skeleton of the report need [sic] to be quickly built on over the coming weeks so that we can move to protect the revenue. Clearly we need to work out what the last date is for moving to protect the revenue. … It would also be very useful in the event that we may need to move urgently to get [a report from Counsel] confirming that the Daihatsu situation is one envisaged in para 4.39 of TR 98/11 where we, due to a case of urgency, issue assessments before a position paper. Para 4.39 of TR98/11 provides that if the ATO forms the view that there is a material difference between the result of its analysis and the results achieved by the taxpayer, an adjustment or a series of adjustments will be proposed to the taxpayer, which, in the absence of a need for urgency, will be in the form of a position paper. 21 Over the following months there was discussion of the need to issue assessments and as to whether the taxpayer would be notified of this. On 19 May 2000, it was recorded (in relation to the possibility of seeking undertakings from DAPL that assets would not be dissipated before the issue of assessments), that some reluctance had been expressed at a meeting on 17 May to put DAPL on notice that assessments would shortly be issued, as this could result in DAPL seeking injunctions against their issue. It was noted that their issue would be likely to lead to s 39B Judiciary Act proceedings on such possible grounds as the failure of the ATO to satisfy legitimate expectations by not issuing a position paper. Nevertheless, the ATO was still expressing in internal documents the view that it would be "justified in issuing the assessments on a 'genuine attempt at assessment' basis". On 26 May 2000 the ATO Independent Audit Review Committee met again, by which time DAPL's integration into Toyota had been announced, to be effective from 1 July 2000. It was noted that the ATO expected that this process would involve the sale of stock and disposal of assets as from that date. It was noted that there was a strong likelihood that the ATO would not have completed its audit of DAPL by 1 July when DAPL may commence dissipating its assets as part of the intention to cease business in its own right in Australia. Concerns over the related party dealings and arm's length consideration remained. The question of whether the ATO could proceed to an assessment without issuing a position paper was discussed. It was considered that DAPL's proposed cessation of business would be likely to provide the grounds to conclude that a need for urgency existed for the purposes of para 4.39 of TR98/11. 22 Internal ATO correspondence in the period immediately prior to the 19 June signing of the s 136AD determinations reveals concerns with (i) the quality of the work that was able to be produced in the time available; (ii) such obligations as the ATO might have to advise the taxpayer of adjustments even if, due to urgency, it was not required to issue a position paper; and (iii) the need both for haste and secrecy given the apprehension about possible asset dissipation. 23 In a "file note" of 19 June the process by which Mr Coakley signed the determinations is set out in some detail. It recorded (inter alia) Mr Coakley's consideration of the "Functional Analysis of DAPL", the "Identification of [DAPL's] International Agreements", "Methodology Selection" and "Methodology Application". As to the first of these it noted that there was "no available Transfer Pricing Study from DAPL which, as one report, fully outlined amongst other things, DAPL's functionality, its international agreements, its arm's length methodology with a full explanation of how that method was selected…as the most appropriate method or how that method was applied and reviewed in practice to ensure an arm's length consideration". If DAPL had done this, it was noted, the ATO would easily have been able to test the claimed consideration. After considering the various agreements to which DAPL was a party Mr Coakley expressed the view that "clearly it would have been ideal in a theoretical or practical world to be able to adjust individual transactions of DAPL. Often times in practice due to the closely related nature of products, this may not be possible". Similarly, under "methodology selection", having stated his agreement with the audit report sections which selected the ATO method used (as opposed to other potential methods) Mr Coakley had noted that "ideally the arm's length principle should be applied on a transaction-by-transaction basis" but that he agreed with the Organisation for Economic Cooperation and Development (OECD) guidelines that there were circumstances in which it would be appropriate to aggregate transactions; that on the basis of the information available (and in accordance with the OECD Transfer Pricing guidelines) this was a case where separate transactions were so closely linked that they could not be evaluated adequately on a separate basis; and hence use of a profit comparison method which aggregated DAPL's international related party transactions was appropriate (reference was made to the ATO ruling 94/14 as indicating that Division 13 allows for such a method) and necessary to determine the arm's length consideration. It was noted that the methodology submitted (by DAPL) was not a non-arm's length methodology as this is described in the OECD guidelines. 24 In terms of application of the method selected, the file note recorded that the comparables selected had been determined "after much thought consideration and weighing up of factors by the ATO economists" and that aggregating transactions resulted in a consideration that was "conservative and in the taxpayer's favour". It was further noted: "The determination of an Operating Profit Ratio (3.3%) for each of the audit years, whilst being somewhat unusual gives the taxpayer an arm's length consideration in each year. The fact is that the actual dollar amount of the arm's length consideration differs for each audit year based on the fluctuating sales and economic cycle of the taxpayer and on average over 5 years determines an arm's length consideration." Other matters noted were that he had been assured that there was no current information in the public domain relating to the integration of DAPL's operations into those of Toyota; that the ATO had not had the opportunity to ask more focused questions although in terms of the OECD guidelines and some taxation rulings "this would have been very useful"; and that other information gathering processes may be necessary to satisfactorily and fairly deal with any objections of DAPL. 25 The file note set out in some detail the materials that Mr Coakley had in front of him when he made these determinations. Included in these were the 1979 and 1995 OECD Transfer Pricing guidelines, and three ATO taxation rulings (94/14, 97/20, 98/11). 26 There are several additional factual matters to which I would refer. First, the applicant has tendered what I will call ATO material. It includes TR94/14, TR97/20, TR98/11, IT2514 and two ATO information booklets. Secondly, affidavits and reports of a Professor Bewley were put in evidence by DAPL, their burden being to challenge the adequacy and appropriateness of the ATO's comparability analysis and its use of an averaged median figure (3.3%) across the tax years in question. Thirdly, the affidavit of DAPL's Financial Business Manager, Mr Messer, was read. It is unnecessary to refer to its contents other than to say that they reflect his views as to the inadequacies in the ATO's methods and methodologies in this matter Fourthly, the applicant subpoenaed Mr Coakley to give evidence. 27 Mr Coakley, whose evidence I accept, has had extensive experience in the ATO in relation to transfer pricing reviews. He confirmed that a comparability analysis was characteristically undertaken by economists in a "cell" in the ATO and that their views are relied upon because of the specialisation. He indicated that prior to his determinations: "I was assured because of our other work in the motor vehicle industry that international economists and the ATO who hired those economists had turned their mind to just about every conceivable comparability factor. Particularly when you're dealing with the top two or three transfer pricing external economists in the world and these issues were considered and I was assured of that." 28 He identified what he understood to be the issues the economists considered in determining the reliability of the selection of the four entities chosen for the comparability analysis and it was his own opinion when he made his determination on 19 June 2000 that the four entities were broadly comparable to DAPL. He also indicated that he relied upon the advice of the economists and of a Mr Jenkins (who responded to questions he directed to him) in accepting and applying the 3.3% median figure. Moreover he looked at its application on a year by year basis and evaluated its reasonableness year by year by having recourse to "Berry ratio" figures provided to him by Mr Jenkins. A Berry ratio, according to TR97/20, is a ratio of gross profit to operating expense and provides a good test of a business's profitability as a ratio, with 1:1 being break-even. The Hickman Principle and the ITA Act 29 As has recently been indicated by the Full Court of this Court in Kordan Pty Ltd v Commissioner of Taxation [2000] FCA 1807, it is the clear intendment of s 175 and s 177 of the ITA Act that taxpayers not be permitted to seek judicial review of the processes leading to, and the making of, assessments by the Commissioner of Taxation. Rather taxpayers are to be confined to the objection and appeal remedy now contained in Part IVC of the Administration Act: see Kordan's case at [1]. 30 Sections 175 and 177 are, though, subject to the rule of construction enunciated in R v Hickman; Ex parte Fox & Clinton, above, in relation to privative clauses: Deputy Commissioner of Taxation v Richard Walter (1995) 183 CLR 168; see also, Sunrise Auto Ltd v Commissioner of Taxation (1995) 61 FCR 446; with the consequence that an assessment will lose the protection of s 177(1) and s 175, and its validity will be open to challenge, if it is not made in compliance with the Hickman principle: Briglia v Federal Commissioner of Taxation 2000 ATC 4247 at 4249 and the cases referred to therein. 31 For present purposes it can be said that that principle will not be breached if in making the assessment in question (1) there was a bona fide attempt by the Commissioner to exercise the power of assessment; (2) that attempt related to the subject matter of the ITA Act; and (3) it was reasonably capable of reference to the Commissioner's power of assessment: but see Vanmeld Pty Ltd v Fairfield City Council (1999) 46 NSWLR 78 per Spigelman CJ where additional possible elements in the principle are considered. In the present case the assessments in question have been impugned principally in reliance on the first of these propositions ("bona fide attempt") although it is alleged as well that the third of the propositions ("reasonably capable of reference to the power of assessment") was not satisfied. 32 In Kordan's case, the Full Court observed that: "[t]he allegation that the Commissioner, or those exercising his powers by delegation, acted other than in good faith in assessing a taxpayer to income tax is a serious allegation and not one lightly to be made. It is, thus, not particularly surprising that applications directed at setting aside assessments on the basis of absence of good faith have generally been unsuccessful. Indeed one would hope that this was and would continue to be the case. As Hill J said in San Remo Macaroni Company Pty Ltd v Commissioner of Taxation 99 ATC 5138 at 5154 it would be a rare case where a taxpayer will succeed in showing that an assessment has in the relevant sense been made in bad faith and should for that reason be set aside." This view resonates with observations of other judges of this Court: see eg Dan v Federal Commissioner of Taxation 2000 ATC 4350 at 4356 affirmed in Kordan's case: "proof of bad faith necessitates proof of extreme circumstances". 33 It is unsurprising that the above view has been expressed. A premise of the rule of construction embodied in the Hickman principle is that, but for the privative clause in question (here s 175 with its s 177(1) overlay), a decision taken in the exercise of a power to which the clause relates might otherwise be invalidated in judicial review proceedings because, for example, the decision-maker "has not conformed to the requirements governing its proceedings or the exercise of its authority or has not confined its acts within the limits laid down by the instrument giving it authority": Hickman's case at 615. To the extent that it is effective the clause saves from invalidation an assessment that would otherwise be potentially reviewable for defect or irregularity: Richard Walter, above, at 180. Something more is required. 34 It is likewise unsurprising that courts have shrunk from attempting a comprehensive exposition of what is and is not countenanced by the formula "a bona fide attempt to exercise [a] power". Rather the burden of the formula has been illustrated by example as in the observations (i) "[p]lainly enough, an incorrect assessment does not demonstrate an absence of bona fides": Briglia, at 4250; or (ii) "once the Commissioner forms the view that there is no substantial possibility that the item of income is assessable income of a person, it could not be a bona fide exercise of the assessing power to assess that person to tax in respect of that income. Likewise here where it is conceded that there is no possibility at all that the assessments made were correct, there can be no assessment": Darrell Lea Chocolate Shops Pty Ltd v Commissioner of Taxation (1996) 72 FCR 175 at 187. 35 The formula likewise has been illustrated by resort to some alternate formula which is appropriate to the particular context in which it is used. In R v Commissioner of Taxation (WA); Ex parte Briggs (1986) 12 FCR 301, for example, the formula used (at 308) was "a genuine attempt to ascertain the taxable income of the taxpayer" in a setting in which it was conceded that the Commissioner never intended to, and did not, embark upon the process of ascertaining the taxpayer's income. And references commonly have been made to the terminology of "abuse of power" to characterise what was not a bona fide exercise of a power: see eg Richard Walter, above, at 219. 36 What is clear both from the premise of the Hickman principle itself and from judicial treatment of the "bona fide attempt" formula is that, in the setting of s 175 and s 177(1), the cases will be rare and extreme in which a bad faith assessment will be able to be made out for Hickman purposes. Often, I do not say invariably, they will be cases (i) where, knowingly, the assessment power has been exercised for an improper purpose; or (ii) where the purported assessment involved no actual attempt to ascertain or calculate the taxpayer's income as, for example, where the assessment was made on facts "known … to be untrue": Darrell Lea Chocolates, at 188. 37 Given its possible significance in this proceeding, I should also note that uncertainty arising from, or deficiency in, the information available to the Commissioner will not of itself preclude a bona fide attempt to assess being made: see Richard Walter, above, at 200-201. In the case of a determination under s 136AD(4), an insufficiency of information available to the Commissioner can be the very trigger justifying resort to that provision. 38 Finally, whether or not a denial of natural justice can in some circumstances defeat the bona fides requirement: cf O'Toole v Charles David Pty Ltd (1991) 171 CLR 232 at 305; or else some other requirement of the Hickman principle: O'Toole, at 287; Vanmeld's case, above, 105ff; Aronson and Dyer, Judicial Review of Administrative Action, 689ff (2nd ed, 2000); and on natural justice and "jurisdiction" see Re Refugee Review Tribunal; Ex parte Aala (2000) 176 ALR 219; are not matters into which I need inquire in this proceeding. As a particular of its allegation that the Commission has acted in bad faith, the applicant relies upon the Commissioner's alleged disregard of DAPL's "legitimate expectations" concerning the issue of a position paper. But as the written and oral submissions have made plain, the "legitimate expectations" argument has not been put so as to attract an obligation of procedural fairness. Rather it is said that the alleged disregard of known legitimate expectations "raises an inference of a lack of good faith which demands explanation". Submissions and Conclusions 39 DAPL's case is that in making the assessments in this matter the Commissioner failed in two ways to satisfy the requirements of the Hickman principle. First, there was not a bona fide attempt to exercise the power to assess. Secondly, in making determinations under s 136AD what was done was not reasonably capable of reference to the power so granted. No Bona Fide Attempt 40 The applicant's submission proceeds in the following way. A bona fide attempt is equated with "a genuine attempt", that formula having been drawn from Briggs's case as I earlier noted. It is accepted that in making his determinations Mr Coakley (a) had no ulterior or collateral motives and was not guilty of deliberate impropriety; and (b) was not, as a matter of law, bound to apply the ATO's various tax rulings and the OECD Transfer Pricing Guidelines that were put in evidence. Nonetheless it is said Mr Coakley's failure to comply specifically with the "onerous requirements" of TR97/20 and TR98/11 resulted, in the circumstances, in there being no genuine attempt to exercise the power to assess. 41 Using a formula that is more colourful than illuminating (notwithstanding its indebtedness to dictionary meanings of "genuine") DAPL proposes that there could be no "genuine attempt" for Hickman purposes where the decision-maker knew or ought to have known that the resultant product of the endeavour was not "pure and authentic". The alleged causes of impurity related first and foremost to Mr Coakley's failure to ensure that the comparable data used in the comparability analysis was reliable, given his acceptance that the relevant rulings were designed to ensure a reliable process and that the reliability of the comparability analysis was vital to the selection of the transfer pricing methodology and its application. It is said that Mr Coakley was unable to demonstrate specific compliance with the rulings' requirements, relying instead on the assurances of ATO economists; that there is no evidence that a detailed comparability analysis (as contemplated in the rulings) was carried out; and that the Commissioner failed to have regard or sufficient regard to DAPL information in deciding upon comparables. 42 A distinct strand to the "no genuine attempt" claim relates to the use of the median 3.3% figure for operating margins which in turn was allegedly applied to each year in question without the Commissioner turning his mind, in making the s 136AD(4) determinations, to the particular facts and circumstances of the taxpayer in each year. The Commissioner dealt with assessments as a "job lot". And as in Briggs,he could not be considered to have embarked on the process of ascertaining the taxpayer's income. 43 A third strand to the claim related to the Commissioner's failure to have regard to the legitimate expectations, created by ATO publications, that the Commissioner would issue a position paper to the taxpayer prior to the making of assessments, thereby robbing DAPL of the opportunity to show why the comparable data ought not to have been relied upon. The applicant contends there was no evidence that DAPL was either insolvent or dissipating its assets nor any need for urgency. It is alleged the absence of a position paper was designed to conceal the fundamental deficiencies in the Commissioner's position. The Commissioner's actions in concealing its intentions, when combined with the speed and superficiality of the process, raise the inference that the process was tainted. 44 Finally I am also asked to infer an improper purpose, hence a lack of good faith, from the Commissioner's raising an assessment for the alleged purpose of securing its position as a creditor without possessing any material indicating that such was necessary. 45 I have not made reference to a particular of bad faith based on the allegation that Mr Coakley knowingly ignored deficiencies in the economists' report which had been identified by him. That particular itself seems to have been misconceived. As I understood DAPL's oral submissions, nothing of consequence is now being pressed on account of the allegedly known deficiencies. 46 The respondent's contentions are both predictable and justified. DAPL's submissions, it is said, are an attempt to delve into the recommended methodology for a transfer pricing audit and assessment process. The issue whether that methodology has been complied with is relevant to the reliability of the result of the process adopted, and to whether the assessment which results is "excessive" in terms of s 14ZZO of the Administration Act. It is not relevant to a s 177 Hickman inquiry. 47 Apart from noting that DAPL's factual submissions are not properly founded in the evidence - and the written submissions detail this - the Commissioner (i) cautions against the attempt to mould the Briggs "genuine attempt" formula to the circumstances of this proceeding; and (ii) emphasises that the tax rulings were not in this matter binding on the Commissioner. 48 As I am in general agreement with the Commissioner's submissions, my own comments will be relatively short. This, simply, is not one of those rare and extreme cases where the absence of a bona fide attempt to assess the taxpayer's income has been made out. The present circumstances are quite devoid of the defects and irregularities that could sustain a bad faith allegation. DAPL's repeated disclaimer of any imputation of dishonesty, of some improper or ulterior motive, or of deliberate impropriety, against Mr Coakley was as telling as it was necessary to make. 49 DAPL has in consequence been forced to retreat to an attack on the methodology employed in, and methods employed in the making of, the assessments to make out what it says is the lack of a "genuine attempt". 50 In making the s 136AD determinations, it is clear that Mr Coakley was not, as a matter of law, bound by the taxation rulings. DAPL has conceded as much. The question whether he was engaged in a process which did or did not involve a bona fide attempt to assess cannot in consequence be answered simply by asking how far he strayed, knowingly or otherwise, from those rulings. His so doing, if such was the case, may have resulted in the adoption of a methodology that led to an assessment that could not be sustained in Part IVC proceedings. But, there being no question of ulterior purpose in this matter, where on the evidence here the methodology actually adopted and applied (i) was not based on judgments known to be inappropriate and was not applied to facts known to be untrue; (ii) involved a process of ascertainment and calculation; (iii) was based on information and judgment that the decision-maker honestly considered adequate (if not necessarily decisive) for the purpose; (iv) did not involve a deliberate disregard of legally binding requirements; and (v) was employed in a conscientious attempt to exercise the particular statutory power in question, then the resultant assessment should not be disentitled to the protection of s 177 on lack of a bona fide attempt grounds. In listing the above matters, I do not suggest that all are necessary to secure s 177's protection. Rather, they are sufficient to do so in the present matter. 51 The transfer pricing determination was being made, as Mr Coakley acknowledged, in an environment of haste and of imperfect information. He had concerns about the quality of the work that was able to be produced in the time available. But in light of the ATO documents tendered by DAPL to which I have referred and of Mr Coakley's own testimony, it is fanciful to suggest that what was done and the way it was done robbed the resultant assessments of the character of a bona fide attempt to assess. Far from the product of his endeavour not being "pure and genuine", the evidence is incapable of sustaining the inference that Mr Coakley knew or had reason to know his determination was wrong and that he persisted in it notwithstanding. I would add that the emphasis placed by DAPL on the potential international relations effects of the determinations so as to give the rulings themselves a privileged, though not exactly a binding, role in transfer pricing cases is as imaginative as it is unhelpful for Hickman purposes. 52 Distinctly, Mr Coakley recognised that use of the 3.3% median figure in each of the audit years was "unusual". Nonetheless, having relied on the advice of the economists, he accepted it and, having evaluated its reasonableness year by year by recourse to the results of Berry ratio figures, he applied it separately to each year. There was in other words separate consideration given to each year - a view was taken in relation to each year even if (though I make no such finding) that view was to be characterised as cursory or imperfect: Briggs at 308. Whether the resultant assessments were excessive because of this approach is a Part IVC matter. They do not raise a question of compliance with the Hickman principle. 53 Likewise, whether the need for secrecy and haste were as pressing or real as the ATO officers and Mr Coakley considered, the evidence clearly establishes that their view was genuinely entertained and informed their actions. The failure to issue a position paper on account of that view cannot conceivably be said to support an inference of lack of good faith in the attempt to exercise the power to assess. That inference would be far from "the most probable deduction from the established facts": Holloway v McFeeters (1956) 94 CLR 470 at 477. 54 The related alleged use of the assessment power for the improper purpose of securing the Commissioner's status as a creditor without possessing material indicating that such was necessary is unavailing for like reasons. The Commissioner, moreover, had such information available as properly could lead to the issuing of an assessment. The evidence does not, in my view, support an inference of improper purpose, let alone one of bad faith: see Madden v Madden (1996) 65 FCR 354 at 395-396. 55 I would have to say that, as formulated, the applicant's no bona fide attempt claim can only be characterised as adventurous. It involves no more than an attempted rechristening for s 39B Hickman purposes of allegations familiar in cases of merits review and of routine judicial review - of the decision made (because of the methodology adopted) being contrary to the merits; of denial of legitimate expectations; of a decision based on no evidence; of failure to have regard to relevant considerations; etc. 56 I would also have to say that this claim illustrates why judges of this Court have become restive with the slightness of allegations, now commonly made, directed at setting aside assessments on the basis of absence of good faith. Additionally, the injection of the Briggs formula of "genuine attempt" into this particular setting, where there is nothing contrived or colourable in what was done in the exercise of the assessment power, is inapt. It simply deflects attention from any possible question raised by the Hickman principle in this particular setting. "Not Referable to the Power" 57 The submissions based on the third Hickman proposition - that the assessments were not reasonably capable of reference to the power to assess and the determinations were not reasonably capable of reference to the power given by Division 13 of the ITA Act - can be dismissed shortly. 58 To the extent that the matters founding the no bona fide attempt claim are repackaged and relied upon for this ground – ie failure to observe guidelines, etc; and failure to take a view on each year – my previous findings are fatal to these here as well. 59 Additionally, DAPL has claimed that (i) the Commissioner had such information available to it as to have made it possible and practicable to have determined arms length consideration without the necessity to rely upon s 136AD(4); and (ii) Article 5 of the double taxation agreement with Japan provided no power to make transfer pricing adjustments so that any reliance thereon by the Commissioner was wholly misconceived. The latter of these submissions is founded upon the opinion of an English lawyer which I directed was to be received as a submission: see Federal Court Rules O 10 r 1(2)(j). That opinion made no reference to s 4 and s 8 of the International Agreements Act which give the Japanese agreement (insofar as presently relevant) the force of law in Australia and incorporate it into the ITA Act. 60 Both submissions are untenable. The sufficiency of the information available to the Commissioner to make it practicable and possible to ascertain an "arm's length consideration" (s 136AD(3) and (4)) would seem, prima facie, to be a matter for the judgment of the Commissioner. DAPL, I would note, has made no contrary submission that the insufficiency of the information available was itself an "objective" or "jurisdictional fact" to be determined before resort could be had to s 136AD(4): on jurisdictional facts, see Corporation of the City of Enfield v Development Assessment Commission (1999) 199 CLR 135; Cabal v Attorney-General of the Commonwealth [2001] FCA 583; Aronson, "The Resurgence of Jurisdictional Facts", (2001) 12 PLR 17. In the absence of such submission I express no view on that matter. At best the allegation made is that it was an error of judgment for Mr Coakley to decide to act as if he had insufficient information in the circumstances. But that error (if such there was) in no way changed the character of what Mr Coakley did. He relied, as he intended to, on s 136AD(4) in making his determination and what he did was reasonably capable of reference to that power. 61 As to the submission based on the Japan agreement, I need only indicate that the International Agreements Act gives the Japan agreement the force I have noted above. Even if the agreement, as incorporated into Australian law, did not authorise the inclusion of the appropriate "profits" in the taxable income of DAPL, the determinations made under s 136AD have the result of increasing the returned and previously assessed taxable income of DAPL accordingly. Both the agreement and the provisions of Division 13 of the ITA Act were relied upon in making the assessments (and in the notices thereof). In consequence the assessments were reasonably capable of reference to a power (or powers) given the Commissioner. 62 I reject the appellant's submissions. Conclusion 63 The order of the Court will be that the application be dismissed. I certify that the preceding sixty-three (63) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finn. Associate: Dated: 23 May 2001 Counsel for the Applicant: Mr C Branson QC with Mr R Hamilton Solicitor for the Applicant: KPMG Legal Counsel for the Respondent: Mr A Slater QC with Mr P Fraser Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 27-30 November 2000 Date of Judgment: 24 May 2001