This case is about an Australian distributor of pasta – San Remo Macaroni Co – which imported pasta products from an independent manufacturer in Italy.
In 1985 a Swiss company – Bigalle – was established by the Australian distributor which going forward purchased the pasta from the independent manufacturer in Italy and resold it to the Australian distributor at a mark-up which varied from 40% to 50%.
Following an audit, an assessment was issued by the tax authorities, where the prices paid by the Australian distributor to the Swiss company was adjusted based on the price paid to the Italian manufacturer.
Judgement of the Federal Court
The Court upheld the assessment issued by the tax authorities.
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61 Be that as it may, the real substance of the argument was that Mr Read improperly formed the view that the arrangement with Bigalle was merely a reinvoicing arrangement and then “manipulated” the information he obtained as to pasta prices to arrive at a result that was consistent with the approach that an arm’s length price was the price at which the manufacturers sold pasta to Bigalle.
62 Whatever the expression “good faith” as used in Hickman may mean there is absolutely nothing in the material before me which would suggest that Mr Read in any way acted other than in good faith in the way he approached the task before him. It was clearly open to Mr Read on the material before him to form the view as he did that San Remo and Bigalle were not dealing with each other at arm’s length, even if San Remo had no direct financial interest in Bigalle. The fact that Bigalle appeared to be owned and controlled by an accountant, the circumstances of its incorporation, the fact that no attempt was made to renegotiate prices as the Swiss franc appreciated and that what may have been some of the profit to Bigalle was repatriated to San Remo by way of loan all pointed to this conclusion. These facts pointed also to the conclusion that really all that was happening was a reinvoicing arrangement.
63 If the conclusion was open that San Remo and Bigalle were not dealing with each other at arm’s length, as I think it was, then the best evidence of an arm’s length price would be the price at which the manufacturer sold pasta to Bigalle. There was nothing before Mr Read to suggest that the manufacturers would have been not prepared to sell pasta to San Remo at that price.
64 The suggestion that Mr Read in some way manipulated the figures available to him to reach the conclusion he did poses the question why he should do so. There is nothing in the file to suggest any reason why he would have done so and none has been proffered by San Remo. It was open to San Remo if they wished to call Mr Read to do so. They did not. No doubt the failure of the Commissioner to call him might permit me, as I have already indicated, more easily to draw any available inference, but it does not permit me to make the inference itself. There is no material from which I could infer any action on Mr Read’s part to manipulate figures to arrive at an arm’s length price.
65 To say, as San Remo does, that Mr Read had a desire to treat Bigalle as a re-invoicing vehicle notwithstanding what is said to be an admission that the evidence failed to support that suspicion, is simply incorrect. What the file clearly shows is merely that Mr Read was unable to establish any ownership connection between Bigalle and San Remo. The fact that there was no evidence of any ownership connection does not mean that it was not open to Mr Read to conclude that the dealings between Bigalle and San Remo were not at arm’s length. What the relevant statutory provisions is concerned with is not whether the two parties to the international transaction were unrelated to each other, but whether their dealing was an arm’s length dealing: cf The Trustee for the Estate of the late AW Furse No 5 Will Trust v Federal Commissioner of Taxation (1991) 91 ATC 4007, Barnsdall v Federal Commissioner of Taxation (1988) 88 ATC 4565.
66 It was open, in any case, to Mr Read to infer from the facts already known to him, including the loans back from Bigalle to San Remo, that there was some connection between Bigalle and San Remo beyond the normal vendor, purchaser relationship, whatever that connection may have been.
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