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The Full Court of the Federal Court has dismissed the Commissioner’s appeal from a decision of the Federal Court at first instance, which upheld the taxpayer’s appeals against objection decisions made by the Commissioner in relation to assessments issued to the taxpayer under Div 13 of ITAA 1936.

The taxpayer carried on the business of manufacturing and selling industrial chemicals known as polyacrylamides in Australia, predominantly to end users in the mining, paper and sewage treatment industries. It purchased the products from manufacturing subsidiaries of its French parent that were resident in France, the United States of America and the Peoples’ Republic of China (the suppliers).

On appeal, the Commissioner argued that the evidence which had been led by the taxpayer at trial did not warrant the trial judge’s conclusion that the transactions upon which the taxpayer relied were, in fact, comparable; that the trial judge should not have accepted evidence that the French supplier had made losses on its sales to the taxpayer; and that the concept of “arm’s length consideration” in s 136AD(3) required an examination of transactions “between independent parties dealing at arm’s length” (s 136AA) and those words, viewed in their full context, required, indeed forbade any other consideration but, comparable transactions in which the purchasers shared each and every quality of the taxpayer bearing on price save for the solitary fact of its having been under the control of SNF France. So viewed, the only comparables lawfully permitted by s 136AD(3) were those in which the putative purchasers were themselves making losses; the failure of the taxpayer to search for and recruit comparable purchasers of that kind meant that it had proved nothing of value and that failure, in turn, was fatal where the taxpayer admittedly bore the onus of proof.

The Full Court found that there were some errors in the process by which the trial judge approached his findings of fact about comparable transactions for the purposes of Div 13, but this did not lead to a different conclusion from that at which the trial judge arrived.

The attack on the trial judge’s acceptance of the evidence about losses incurred by the French supplier failed, altogether foreclosed by established principles governing appellate review of such findings. The Commissioner’s contention that the only comparables which could lawfully be examined under s 136AD(3) were those sharing the same characteristics as the taxpayer (apart from its non-independence from the group) also failed for this is not, to put the matter bluntly, what s 136AD(3) says.

FCT v SNF (Australia) Pty Ltd [2011] FCAFC 74 (Federal Court; Ryan, Jessup & Perram JJ; 1 June 2011).