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High Court of Australia |
H C of A
14 June 1943
Starke J.
Ham K.C., Fullagar K.C. and Dean, for the appellant.
Eager K.C. and Fraser, for the respondent.
June 14
Starke J
. delivered the following written judgment:—Appeal by the United Aircraft Corporation against an assessment to income tax for the financial year or year of tax 1940-1941 based on the year of income 1939-1940. Admissions of fact were made by the parties. The following is a summary of the material facts.
The appellant is a company incorporated in the State of Delaware and has its principal place of business in the State of Connecticut in the United States of America. It carries on business in America as the manufacturer and seller of aircraft engines, spare and replacement parts.
The Commonwealth Aircraft Corporation Pty. Ltd. (which I shall refer to as the Australian company) was incorporated in the State of Victoria and carries on business in Australia as a manufacturer of aircraft.
In April of 1937 the appellant and the Australian company entered into a written agreement which was later amended or modified in some respects. The substance of the agreement was that the appellant licensed the Australian company to manufacture, sell and dispose of certain aircraft engines, spare and replacement parts within Australia and New Zealand for a specified period, which might be extended at the option of the Australian company. This included the right to prohibit, subject to the provisions of the agreement, the sale, lease and use by the appellant as well as by others and also the right to use within Australia and New Zealand any and all designs relating to the engines mentioned covered by letters patent or registered designs owned or controlled by the appellant within Australia and New Zealand. And it was agreed that the validity of letters patent owned or controlled by the appellant should not be disputed, but there was no representation or warranty of the rights granted or of the validity of any letters patent. The agreement also provided for the delivery to the Australian company within the City of New York of drawings and specifications of the engines and manufacturing equipment, including patterns, dies, machines, tools, jigs, fixtures, gauges, &c. And also to furnish to the Australian company any and all standard or special manufacturing equipment as might be reasonably necessary for use in the manufacture of the engines to be delivered f.o.b. Port of New York at such prices and on such terms as the parties might agree from time to time. Further, the Australian company might at its own expense send a limited number of technicians to visit the factory of the appellant in America for the purpose of observing or studying the methods employed by the appellant in the manufacture and assembly of the engines. In addition the appellant agreed to give the Australian company information and advice as might be reasonably required to enable it to manufacture those parts of the engines manufactured by the appellant and use its best endeavours to send or loan for employment at the factory of the Australian company one engineer at least familiar with the manufacture, assembly and testing of the engines for a period of at least one year. The Australian company was to bear and pay all salary and expense of any such engineer.
The Australian company in consideration of the rights granted agreed to make various payments to the appellant in New York funds. All payments under the agreement were to be made to the credit of the appellant's account with the National City Bank in New York in New York funds current at the time of payment. These payments included an aggregate sum of 50,000 dollars distinct and apart from royalties. As and for royalties the Australian company agreed to pay to the appellant on engines and parts manufactured by the Australian company for each engine 500 dollars and for all extra or spare parts 7½ per cent of the appellant's list price current at the time of manufacture. Provision was made for sub-licences by the Australian company, but subject to its responsibility to the appellant for royalties. The agreement, it was provided, should be interpreted in accordance with the plain English meaning of its terms and the construction thereof should be governed by the laws of the State of Connecticut in the United States of America.
The agreement was operated by the parties: the appellant furnished drawings, specifications and information to the Australian company in America and also delivered to it material pursuant to the agreement f.o.b. Port of New York. Some information and advice was also sent direct to the Australian company in Australia. In addition the appellant loaned one of its engineers to the Australian company, which used his services in Australia and paid him according to the terms of the agreement. The appellant had no letters patent for any invention in Australia. Accordingly the Australian company did not exercise any rights in respect to any industrial or other property of the appellant owned or situate in Australia, but it availed itself of the valuable drawings, specifications, information, experience and material supplied to it by the appellant according to the terms of the agreement. Payments under the agreement were made to the appellant in New York, and, in particular, dollar payments were made to the appellant in New York during the income year of royalties due under the agreement at a cost to the Australian company in Australian currency of £5,092 in round figures. The Commissioner has assessed the appellant to income tax in respect of this sum of £5,092: See Act, s. 20.
The Income Tax Assessment Act 1936-1940, s. 25 (1), provides that"the assessable income of a taxpayer shall include— (a) where the taxpayer is a resident—
the gross income derived directly or indirectly from all sources whether in or out of Australia; and
(b) where the taxpayer is a non-resident—the gross income derived directly or indirectly from all sources in Australia,
which is not exempt income."And in s. 6 "resident" or "resident of Australia" means—"a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia."
The appellant is plainly a non-resident, for it carries on no business in Australia and has none of the other attributes required to bring it within the term "resident." Therefore the only arguable question is whether the sum of £5,092 is assessable income derived, directly or indirectly, from a source in Australia. The words "directly or indirectly" are related to the word "derived" and not to the word "sources." The income must arise from a source or sources within Australia, which is equivalent to requiring that the income shall arise or accrue from business operations carried on in Australia. The income must result directly or indirectly from the operations carried on in Australia by the taxpayer, and not from operations carried on by some other person or company.
In the present case the agreement was made in America; the appellant carried on no business operations in, and had no industrial or other property in, Australia. All the information and material was supplied in or from America. All the technicians were sent by the Australian company for instruction except an engineer who was loaned to the Australian company and became, for the time being, its officer: See Donovan v. Laing, Wharton, and Down Construction Syndicate Ltd.[1] ; Century Insurance Co. Ltd. v. Northern Ireland Road Transport Board[2] . All payments under the agreement were made in America in dollars. In fact, and I so find, the income in respect of which the appellant was assessed was not derived directly or indirectly from any source in Australia, or, in other words, directly or indirectly from any business operations carried on by the appellant in Australia.
It is unnecessary to traverse again in detail the many cases dealing with the relevant sections of the Income Tax Assessment Act, but the interpretation I have given to the Act accords, I think, with the principles expounded in the following cases:— Lovell & Christmas Ltd. v. Commissioner of Taxes[3] ; (Commissioner of Taxes v. British Australian Wool Realization Association Ltd.[4] ; Studebaker Corporation of Australasia Ltd. v. Commissioner of Taxation (N.S.W.)[5] ; Federal Commissioner of Taxation v. W. Angliss & Co. Pty. Ltd.[6] ; Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation[7] ; Commissioner of Taxation (N.S.W.) v. Premier Automatic Ticket Issuers Ltd.[8] ; Commissioner of Taxation (N.S.W.) v. Hillsdon Watts Ltd.[9] .
The assessment under appeal is quashed and the Commissioner must pay the costs of the appeal.
Appeal dismissed with costs.
Solicitor for the appellant, H. F. E. Whitlam, Crown Solicitor for the Commonwealth.
Solicitors for the respondent, Blake & Riggall.
H C of A
6 December 1943
Latham C.J., Rich and Williams JJ.
Ham K.C., Fullagar K.C. and Dean, for the appellant.
Eager K.C. and Fraser, for the respondent.
June 14
Starke J
. delivered the following written judgment:—Appeal by the United Aircraft Corporation against an assessment to income tax for the financial year or year of tax 1940-1941 based on the year of income 1939-1940. Admissions of fact were made by the parties. The following is a summary of the material facts.
The appellant is a company incorporated in the State of Delaware and has its principal place of business in the State of Connecticut in the United States of America. It carries on business in America as the manufacturer and seller of aircraft engines, spare and replacement parts.
The Commonwealth Aircraft Corporation Pty. Ltd. (which I shall refer to as the Australian company) was incorporated in the State of Victoria and carries on business in Australia as a manufacturer of aircraft.
In April of 1937 the appellant and the Australian company entered into a written agreement which was later amended or modified in some respects. The substance of the agreement was that the appellant licensed the Australian company to manufacture, sell and dispose of certain aircraft engines, spare and replacement parts within Australia and New Zealand for a specified period, which might be extended at the option of the Australian company. This included the right to prohibit, subject to the provisions of the agreement, the sale, lease and use by the appellant as well as by others and also the right to use within Australia and New Zealand any and all designs relating to the engines mentioned covered by letters patent or registered designs owned or controlled by the appellant within Australia and New Zealand. And it was agreed that the validity of letters patent owned or controlled by the appellant should not be disputed, but there was no representation or warranty of the rights granted or of the validity of any letters patent. The agreement also provided for the delivery to the Australian company within the City of New York of drawings and specifications of the engines and manufacturing equipment, including patterns, dies, machines, tools, jigs, fixtures, gauges, &c. And also to furnish to the Australian company any and all standard or special manufacturing equipment as might be reasonably necessary for use in the manufacture of the engines to be delivered f.o.b. Port of New York at such prices and on such terms as the parties might agree from time to time. Further, the Australian company might at its own expense send a limited number of technicians to visit the factory of the appellant in America for the purpose of observing or studying the methods employed by the appellant in the manufacture and assembly of the engines. In addition the appellant agreed to give the Australian company information and advice as might be reasonably required to enable it to manufacture those parts of the engines manufactured by the appellant and use its best endeavours to send or loan for employment at the factory of the Australian company one engineer at least familiar with the manufacture, assembly and testing of the engines for a period of at least one year. The Australian company was to bear and pay all salary and expense of any such engineer.
The Australian company in consideration of the rights granted agreed to make various payments to the appellant in New York funds. All payments under the agreement were to be made to the credit of the appellant's account with the National City Bank in New York in New York funds current at the time of payment. These payments included an aggregate sum of 50,000 dollars distinct and apart from royalties. As and for royalties the Australian company agreed to pay to the appellant on engines and parts manufactured by the Australian company for each engine 500 dollars and for all extra or spare parts 7½ per cent of the appellant's list price current at the time of manufacture. Provision was made for sub-licences by the Australian company, but subject to its responsibility to the appellant for royalties. The agreement, it was provided, should be interpreted in accordance with the plain English meaning of its terms and the construction thereof should be governed by the laws of the State of Connecticut in the United States of America.
The agreement was operated by the parties: the appellant furnished drawings, specifications and information to the Australian company in America and also delivered to it material pursuant to the agreement f.o.b. Port of New York. Some information and advice was also sent direct to the Australian company in Australia. In addition the appellant loaned one of its engineers to the Australian company, which used his services in Australia and paid him according to the terms of the agreement. The appellant had no letters patent for any invention in Australia. Accordingly the Australian company did not exercise any rights in respect to any industrial or other property of the appellant owned or situate in Australia, but it availed itself of the valuable drawings, specifications, information, experience and material supplied to it by the appellant according to the terms of the agreement. Payments under the agreement were made to the appellant in New York, and, in particular, dollar payments were made to the appellant in New York during the income year of royalties due under the agreement at a cost to the Australian company in Australian currency of £5,092 in round figures. The Commissioner has assessed the appellant to income tax in respect of this sum of £5,092: See Act, s. 20.
The Income Tax Assessment Act 1936-1940, s. 25 (1), provides that"the assessable income of a taxpayer shall include— (a) where the taxpayer is a resident—
the gross income derived directly or indirectly from all sources whether in or out of Australia; and
(b) where the taxpayer is a non-resident—the gross income derived directly or indirectly from all sources in Australia,
which is not exempt income."And in s. 6 "resident" or "resident of Australia" means—"a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia."
The appellant is plainly a non-resident, for it carries on no business in Australia and has none of the other attributes required to bring it within the term "resident." Therefore the only arguable question is whether the sum of £5,092 is assessable income derived, directly or indirectly, from a source in Australia. The words "directly or indirectly" are related to the word "derived" and not to the word "sources." The income must arise from a source or sources within Australia, which is equivalent to requiring that the income shall arise or accrue from business operations carried on in Australia. The income must result directly or indirectly from the operations carried on in Australia by the taxpayer, and not from operations carried on by some other person or company.
In the present case the agreement was made in America; the appellant carried on no business operations in, and had no industrial or other property in, Australia. All the information and material was supplied in or from America. All the technicians were sent by the Australian company for instruction except an engineer who was loaned to the Australian company and became, for the time being, its officer: See Donovan v. Laing, Wharton, and Down Construction Syndicate Ltd.[10] ; Century Insurance Co. Ltd. v. Northern Ireland Road Transport Board[11] . All payments under the agreement were made in America in dollars. In fact, and I so find, the income in respect of which the appellant was assessed was not derived directly or indirectly from any source in Australia, or, in other words, directly or indirectly from any business operations carried on by the appellant in Australia.
It is unnecessary to traverse again in detail the many cases dealing with the relevant sections of the Income Tax Assessment Act, but the interpretation I have given to the Act accords, I think, with the principles expounded in the following cases:— Lovell & Christmas Ltd. v. Commissioner of Taxes[12] ; (Commissioner of Taxes v. British Australian Wool Realization Association Ltd.[13] ; Studebaker Corporation of Australasia Ltd. v. Commissioner of Taxation (N.S.W.)[14] ; Federal Commissioner of Taxation v. W. Angliss & Co. Pty. Ltd.[15] ; Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation[16] ; Commissioner of Taxation (N.S.W.) v. Premier Automatic Ticket Issuers Ltd.[17] ; Commissioner of Taxation (N.S.W.) v. Hillsdon Watts Ltd.[18] .
The assessment under appeal is quashed and the Commissioner must pay the costs of the appeal.
Appeal dismissed with costs.
Solicitor for the appellant, H. F. E. Whitlam, Crown Solicitor for the Commonwealth.
Solicitors for the respondent, Blake & Riggall.
2. [1942] UKHL 2; (1942) A.C. 509.
5. [1921] HCA 13; (1921) 29 C.L.R. 225.
6. [1931] HCA 32; (1931) 46 C.L.R. 417.
7. [1933] HCA 51; (1933) 50 C.L.R. 268.
8. [1933] HCA 55; (1933) 50 C.L.R. 304.
9. [1937] HCA 13; (1937) 57 C.L.R. 36.
11. [1942] UKHL 2; (1942) A.C. 509.
14. [1921] HCA 13; (1921) 29 C.L.R. 225.
15. [1931] HCA 32; (1931) 46 C.L.R. 417.
16. [1933] HCA 51; (1933) 50 C.L.R. 268.
17. [1933] HCA 55; (1933) 50 C.L.R. 304.
18. [1937] HCA 13; (1937) 57 C.L.R. 36.
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