Teac Australia Pty Ltd and Commissioner of Taxation [2002] AATA 1044; (2002) 51 ATR 1034; 2002 ATC 2206 (28 October 2002)

Last Updated: 5 October 2009

DECISION AND REASONS FOR DECISION [2002] AATA 1044

ADMINISTRATIVE APPEALS TRIBUNAL )

) No NT2000/219
TAXATION APPEALS DIVISION )
Re TEAC AUSTRALIA PTY LTD
Applicant
And COMMISSIONER OF TAXATION
Respondent

DECISION

Tribunal Mr M D Allen, Senior Member
Ms C Prime, Member

Date 28 October 2002

Place Sydney
Decision The decision under review is SET ASIDE and this matter remitted to the Respondent with the direction that the Applicant is entitled to a credit pursuant to Section 51 and Credit Ground CR1 to Table 3 of the Sales Tax Assessment Act 1992 (as amended).

(Sgd) M. D. ALLEN
..............................................
Presiding Member
CATCHWORDS
SALES TAX – Exemptions. Definition of computer program. Whether information stored on EEPROMs in certain electronic goods constituted tax-advantaged computer programs. Existence of algorithmic or logical relationship. Definition not negated by simplicity of set of instructions.

Sales Tax Assessment Act 1992 (Cth) - ss 5, 14(1), 45
Copyright Act 1968 (Cth) - s 10(1)
Data Access Corporation v Powerflex Services Pty Ltd [1999] FCA 329; (1999) 166 ALR 228
K Mart v Commissioner of Taxation (1998) 88 FCR 336

REASONS FOR DECISION

Mr M D Allen, Senior Member

Ms C Prime, Member

1. By Application lodged with the Tribunal on 9 May 2000 the Applicant sought review of an objection decision by the Respondent made the 9th day of March 2000.
2. The said Application for review was made pursuant to section 14ZZ(a)(i) of the Taxation Administration Act 1958. The said objection decision affirmed a prior determination pursuant to section 60 of the Sales Tax Assessment Act 1992 to disallow in whole a claim by the Applicant for a credit under section 51 and credit ground CR1 of Table 3 to the Act.
3. The Applicant, TEAC Australia Pty Ltd, is an importer and wholesaler of electrical and electronic goods. The Applicant claims entitlement to a credit on the basis that it overpaid sales tax on certain electronic goods sold by it by wholesale during the period 1 January 1993 to 9 May 1995. In paying sales tax on the full taxable value of the goods, the Applicant claims that it overpaid because during the relevant period, the goods contained "tax-advantaged computer programs" which were exempt by virtue of section 45 of the Sales Tax Assessment Act.
4. At all relevant times, that is to say, from 1 January 1993 until amendments to the Sales Tax Assessment Act took effect from 9 May 1995, section 45 of the said Act read:

"Section 45 - Goods incorporating tax-advantaged computer programs

(1) This section applies if a tax-advantaged computer program is embodied in (or in part of) the goods that are the subject of the taxable dealing.

(2) The exempt part is so much of the taxable value as is attributable to the computer program."

Section 14 of the said Act sets out the meaning of "tax-advantaged computer programs" as follows:

"(1) Any computer program that is not embodied in a permanent microchip is a tax-advantaged computer program."

The amendments to the subsection by Act No 94 of 1995, which took affect from 9 May 1995, removed the word "permanent" from subsection 14(1) above.
5. Section 5 of the Sales Tax Assessment Act defined "computer program" as having the same meaning as in the Copyright Act 1968.
6. The goods in question were electrical equipment of the nature of television sets and video cassette recorder/players. The said goods contained tuner sub-systems which in turn consisted of a microprocessor and an Electrically Erasable Programmable Read Only Memory Chip, termed an EEPROM, together with a tuner module. EEPROMs are an accepted type of non-permanent microchip.
7. The tuner sub-system is used to tune the goods to a television channel selected by the user. The method was described from the owners manual as follows:

"Step 1: Turn power on.

Step 2: Select the band (VHF low, VHF high, UHF) by pressing and holding the SEARCH key.

Step 3: Select channel by pressing the SEARCH button; usually this will tune to channel; sometimes manual tuning adjustments are required.

Step 4: Press the STORE key.

Step 5: Press the PROGRAM UP (+) DOWN (-) keys to select the desired program number.

Step 6: Press STORE again."

The last step causes the relevant information to be stored in the EEPROM in the form of a digital "16-bit words".
8. Once a channel has been stored in this manner then the TV may be tuned to that channel by pressing the appropriate button, eg if button No 1 is selected for the SBS channel then each time the 1 is pressed then the SBS channel will be selected. The way this occurs is summarised from the Applicant's submissions as follows:

(a) the user selects the channel by pressing a button on the front panel or remote control;

(b) the microprocessor interrogates the EEPROM for information corresponding to the channel button pressed;

(c) the EEPROM responds by sending the requested information, the 16-bit word corresponding to the particular slot, one bit at a time.

(d) the microprocessor examines the first two bits of the 16-bit word:

(i) if they are 00 the microprocessor sets the tuner to the VHF low band.

(ii)if they are 01 the microprocessor sets the tuner to the VHF high band

(iii) if they are 10 the microprocessor sets the tuner to the UHF band

(iv) if they are 11, the "skip function" occurs, whereby the microprocessor interrogates the 16-bit word in the next slot, and the procedure is repeated from step (c).

(e) if the first two bits are 00, 01 or 10, then the microprocessor examines the remaining 14 bits that were received from the EEPROM which identify the particular frequency within the chosen band to tune to.

(f) the microprocessor translates the 14 bits into a pulse width modulation digital waveform and sends it to the tuner. It is converted to the corresponding analogue voltage on route.

9. In essence, the question to be decided in this matter is whether the 16-bit words embodied in the EEPROMs in question, taken either individually or as a group, constitute a "computer program" for the purposes of the definition in the Copyright Act 1968, and are therefore "tax-advantaged computer programs" as outlined above. Section 10(1) of the said act defines "computer program" as:

"an expression in any language, code or notation, of a set of instructions (whether with of without related information) intended, either directly or indirectly after either or both of the following:

(a) conversion to another language, code or notation;

(b) reproduction in a different material form;

to cause a device having digital processing capabilities to perform a particular function."

10. The definition has been considered in a number of previous decisions. Most notably by the High Court in Data Access Corporation v Powerflex Services Pty Ltd [1999] FCA 329; (1999) 166 ALR 228 (Data Access) and Autodesk Inc v Dyason [No 2] [1993] HCA 6; (1993) 176 CLR 300, and by the Federal Court in K Mart v Commissioner of Taxation (1998) 88 FCR 336 (KMart). In all of those cases, as here, there is little consensus between experts in computer science as to the ordinary or technical meaning of "computer program", or indeed, how the elements of the legal definition should be interpreted. For example, put to the Applicant's expert Dr Jayasooriah in cross-examination:

17. The instruction which has the effect of selecting the VHF band one, when the information is read from the EEPROM is 00, is an instruction that is contained in the microprocessor?

A. No. The short answer is no.

And put to the Respondent's expert Dr Wallace in examination in chief:

17. As a matter of computer science is it correct or appropriate to say that the contents of the EEPROM is a instruction or set of instructions intended to cause a device, namely the microprocessor, to perform a particular function or not?

A. I think not.

On the question of whether a telephone number stored in the EEPROM of a telephone could constitute a computer program, Dr Wallace answered "no", while Dr Bergman said:

"Within the definition of the Act, and certainly within the definition of the Copyright Act."

Asked whether the information contained in the EEPROM constitutes "a set of instructions", the Applicant's expert Dr Bergman answered:
"I believe that it does yes."

While given the same proposition the Respondent's expert Dr Rosenburg answered:

"No. I wouldn't agree with that."

11. A degree of consensus, however, was achieved under cross-examination in relation to a number of simple propositions relating to the ordinary meaning of the term "computer program". Summarised from the Applicant's final submissions, these included that:

1. The small size of an EEPROM does not preclude it containing a computer program;
2. A computer program can be very simple;
3. Instructions within a computer program can be very simple;
4. A single, simple command can constitute a computer program (as a matter of computer science);
5. Whether or not information constitutes an instruction turns on how it is interpreted;
6. Within the parameters of this particular system, the meaning of the 16-bit word is not arbitrary;
7. In order for an EEPROM to contain a computer program, it is not necessary for it to contain program code which is directly executed by the microprocessor;
8. Computer programs may also be categorised as data.
   

12. The truth of these propositions was claimed by the Applicant as concessions by the Respondent in support of their case. We do not accept they are concessions, but rather, matters of interpretation, especially as to how the legal definition of "computer program" relates to, and indeed is at odds with, its ordinary meaning. On their own, these propositions are not persuasive in determining whether the 16-bit words in question are computer programs. The particular facts in this case must be applied to the law.
13. Much use was made in submissions and evidence of analogies, in great part to assist the Tribunal in understanding the technical nature of the evidence. Examples used ranged from chalk-boards, hand-signals for doors being partly opened or closed, and photocopying machines. We agree with the Applicant that ultimately such references tended to confuse the dispute in issue.
14. Also confusing in this case is the extensive presentation of circuit diagrams and discussion of various components in them. Consideration of these diagrams does not assist analysis of the points in question.
15. The key elements of the legal definition were identified by O'Connor J in KMart at 340 as follows:

"(a) an expression (in any language, code or notation)

(b) of a set of instructions (whether with or without related information)

(c) intended to cause

(d) a device (having digital processing capabilities) to perform a particular function"

This is a useful breakdown as it separates the main issues of contention, or otherwise, in this matter.
16. The parties agree that the individual 16-bit words stored in the EEPROM are "an expression (in any language, code or notation)". In this case the 16-bit words are stored and expressed in binary notation, such that each individual bit is designated a 0 or 1.
17. It is also common ground that the microprocessor in the tuning system is "a device (having digital processing capabilities) that performs a particular function". The agreed function is the setting of the tuner to a particular channel, with its respective band and frequency information.
Do the individual 16-bit words constitute a set of instructions?
18. Many of the submissions in this case turned on this element of the definition of "computer program". While the experts concede that in common usage a single command or instruction is often termed a "computer program", it is recognised that to satisfy the legal definition a "set of instructions" is required.
19. This element was considered in detail by the High Court in Data Access. In this case the High Court considered whether a number of "reserved words" used in the "Dataflex" language such as "PRINT" and "TYPE" constituted computer programs. It was held that each "reserved word" was a single instruction and not a "set of instructions" even though at a lower level of operation they may be seen as such. As detailed in the Applicant's final submissions, the court held that:

(a) an "instruction" is a "command" (at [57]) that is referable to the physical capabilities of the computer (at [60]);

(b) a "set" is constituted by "instructions that are related to one another rather than being a mere collection" (at [53]);

(c) for there to be a "set of instructions" there must be an "interrelationship of the instructions with one another which is an expression of a logical or algorithmic relationship between an identifiable function [which is desired to be preformed] and the physical capabilities of the computer [or microprocessor]" (at [73]; see also [58], [62] and [70]).

20. It is arguable that the first two bits read by the microprocessor could constitute a command. In Data Access, the reserve words were found to be single commands that opened a "pre-packaged set" of sequences of the logical operations which the computer was capable of performing. The first two bits of the 16-bit words could similarly be seen to set off a "pre-packaged set" of sequences in the microprocessor in the goods in question, the effect of which is setting the tuner to a particular band.
21. The Respondent would take this analysis further in their submission that each 16-bit word represents at most a single instruction, ie both the two and subsequent 14 bits are a single command that sets off a "pre-packaged set" of instructions in the microprocessor, similar to the reserved words in Data Access. On the evidence, however, we are satisfied that a distinction should be drawn between the two parts of the 16-bit words because of the operation of the skip function. When the microprocessor reads the first two bits as "11", the subsequent 14 bits are not processed and the microprocessor interrogates the next slot in the EEPROM. In this sense the first two bits are separate and distinct. The use of the subsequent 14 bits is dependant on the first two, and therefore, there is a logical or algorithmic relationship between them. This was conceded by Dr Wallace under cross-examination:

17. Do any of the 16-bit words contained in the EEPROMs the subject of this proceeding constitute or contain an algorithm?
1. Only to the essentially trivial extent that some of the words can be read as meaning, ignore me I am a blank line and others may be interpreted as containing two slightly simpler operations, one band selection, the other, well it isn't really an operation, it's just a number.
   

The fact that the algorithm is trivial does not in our view prevent it from constituting a set of instructions.
22. It follows that the first two bits of the 16-bit word could be characterised as an instruction, and the remaining 14 bits another instruction. There is a logical or algorithmic connection between them, leading to the conclusion that the two parts of the 16-bit word constitute a "set of instructions" in accordance with the test as set down in Data Access.
23. In regard to the 14 bits there was fundamental disagreement between the experts as to the complexity of the operation performed in converting this binary representation of frequency into an analogue voltage in the tuner. The Applicant's expert, Dr Jayasooriah, found in measurements that he performed on the circuit that there was something more than a direct digital to analogue, and therefore linear, conversion taking place, although both he and Dr Bergman conceded that they would expect such a operation to be implemented in a linear way.
24. The Respondent argues that the relationship is linear, and as such, it should be categorised as passive data, much as the audio data was in KMart. According to Dr Wallace in evidence in chief:

"As far as the relevant issues are concerned now, the only serious one, is that I do dispute the assertion that the 14 bit part of an EEPROM word is manipulated or interpreted or has something done to it other than simply being copied into the register of the digital to analogue converter. I can see no evidence of that".

25. It seems to us that the design intent of this type of system is likely to be, but not necessarily, a straight linear conversion of the information from digital to analogue. However, it was not established either that any non-linearity measured in this case could be ascribed to the output of the 14 bits as distinct from the circuitry, or that it could not be. This point is not necessary to the line of argument, and since it was not established, it serves only to confuse. We do not accept that the 14 bits are analogous to the passive audio data in KMart, but rather, on the weight of opinion from Dr Wallace and Professor Bergman, we see it as having an instructional function.
Are the 16-bit words intended to cause the microprocessor to perform the tuning function?
26. At this point there is a further divergence in the opinion of the parties, and it relates specifically to element (c) of the definition as summarised by O'Connor J in KMart, the requirement of the definition that there be an intended causal relationship between the "set of instructions" and the function to be performed.
27. This element was considered by the High Court in the Data Access case. At page 56 it was opined:

"For an item to be a computer program, it must not only be an "expression....of a set of instructions", but the expression of that set of instructions must also be designed to achieve a particular purpose. That is to say, it must be "intended...to cause a device having digital information processing capabilities to perform a particular function."

Then at 85:

"In order for an item in a particular language to be a computer program, it must intend to express, either directly or indirectly, an algorithmic or logical relationship between the function desired to be performed and the physical capabilities of the 'device having digital information processing capabilities'."

28. In regard to these requirements the Respondent submits that there is no "algorithmic or logical relationship between the functions desired to be performed and the physical capabilities of the microprocessor" because a fixed program in the microprocessor interprets the bits. Essentially the argument is that the "computer program" that sets the tuning information is in the microprocessor, and the 16-bit words stored in the EEPROM can be seen as no more than data that the program assigns meaning to, then stores for later retrieval. Data, as referred to in the Data Access case, "is that part of the computer program that is not in any sense referable to the computers physical capabilities".
29. The Applicant puts the countering argument that at some level, all computer programs must be referable to an interpreter program, in order to give them meaning. Since the function of setting the tuning information is not possible without reference to, and interpretation of, the stored information, it can be seen to cause the microprocessor to perform the desired function, and therefore express an algorithmic or logical relationship with that function. The Applicant submits that there is a logical relationship between the functions desired to be performed and the 16-bit words stored in the EEPROM, and that these 16-bit words are instructions rather than "passive data", and that the microprocessor, in effect, takes instructions from the EEPROM.
30. We agree with the Applicant's approach. The physical capability in question is setting band and tuning information. The microprocessor retrieves instructions in the form of 16-bit words from the EEPROM, which are interpreted and thereby cause the function in question. The meaning of the 16-bit words is not arbitrary or passive as they have been assigned meaning by the interpreter program within the context of the particular system. They constitute a very simple set of instructions. However, the definition is not negated by this fact.
31. The logical extreme of this argument is that in almost all cases where EEPROMs are used to store user settings, they could be considered computer programs for the purposes of the definition in the Copyright Act. As much is revealed in Dr Wallace's concession under cross-examination as to whether a number stored in an EEPROM in a mobile phone is a set of instructions intended to cause the micro-processor in the phone to call that number when retrieved:

"Dr Wallace: Yes, I believe that is literally true."

This may be the case, but as this was only an analogy, and not a matter in issue, the question does not need to be determined here.
32. Having satisfied all the elements of the definition, it follows that the individual 16-bit words are computer programs for the purposes of the Copyright Act. This being the case it is not necessary to consider whether, taken together, the entirety of the 16-bit words could also be described as such. Accordingly, we find that the EEPROMS in the goods in question contained tax-advantaged computer programs during the period in question. The decision under review is SET ASIDE and this matter remitted to the Respondent with the direction that the Applicant is entitled to a credit pursuant to Section 51 and Credit Ground CR1 to Table 3 of the Sales Tax Assessment Act 1992 (as amended).

I certify that the 32 preceding paragraphs are a true copy of the reasons for the decision herein of:

Senior Member M D Allen

Ms C Prime, Member

Signed: .....................................................................................

Associate

Date/s of Hearing 13 - 15 May 2002 and 27 June 2002

Date of Decision 28 October 2002

Counsel for the Applicant Mr S Gageler SC and Mr Leeming

Solicitor for the Applicant Firmstone and Feil Solicitors

Counsel for the Respondent Mr G Nettle QC and Ms Davies

Solicitor for the Respondent Australian Government Solicitor