Avon Products Pty Ltd v Commissioner of Taxation [2006] HCATrans 198 (13 April 2006)

--

Avon Products Pty Ltd v Commissioner of Taxation [2006] HCATrans 198 (13 April 2006)

Last Updated: 4 July 2006

[2006] HCATrans 198

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S541 of 2005

B e t w e e n -

AVON PRODUCTS PTY LIMITED

Appellant

and

COMMISSIONER OF TAXATION

Respondent

GLEESON CJ
GUMMOW J
KIRBY J
HAYNE J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON THURSDAY, 13 APRIL 2006, AT 10.02 AM

Copyright in the High Court of Australia

MR S.J. GAGELER, SC: If the Court pleases, I appear with MR M. RICHMOND for the appellant. (instructed by Ernst & Young)

MR B.J. SHAW, QC: If the Court pleases, I appear with MR D.B. McGOVERN, SC and MR A.J. O’BRIEN for the respondent Commissioner. (instructed by Australian Government Solicitor)

GLEESON CJ: Yes, Mr Gageler.

MR GAGELER: Your Honours, there are ultimately two propositions that we need to make good. The first proposition is that the test for passing on within the meaning of “credit ground 1” of the Sales Tax Assessment Act 1992 is relevantly or at least sufficiently for relevant purposes that stated in a summary form in paragraph 1(b) of our written submissions, and that captured more fully in the judgment of Justice Conti in volume 2 of the appeal book at page 869, paragraph 49.

The second proposition is that applying that test on the evidence before the primary judge, the appellant has discharged its onus under section 14ZZ0 of the Taxation Administration Act 1954 of proving that it did not pass on the aggregate overpayment of some $3.6 million in the prices that it charged its retail customers during the relevant period from 1 March 1993 to 31 August 1998, which is all I suppose an elaborate way of saying I need to win on the law and I need to win on the facts.

Your Honours, can I start with the law and take your Honours immediately to the Sales Tax Assessment Act 1992 which your Honours, I hope, have in a slim white folder. That is in its current form. There has been no amendment to any of the provisions that I propose to take your Honours to – when I say it is in its current form, your Honours ought be aware that it has never been repealed. It has simply ceased to have any new operation on and from 1 July 2000 by virtue of an Act called A New Tax System (End of Sales Tax) Act 1999.

GLEESON CJ: Did the GST take it over?

MR GAGELER: Yes. It took over in respect of all transactions occurring from 1 July 2000. Your Honours, to show how the overpayment arose it is necessary to take your Honours very briefly to sections 16, 20, 34 and table 1 of Schedule 1 and then separately to show your Honours how the credit entitlement arose and how the present case came to be constituted it is sufficient to go to sections 51, 60 and table 3 of Schedule 1. So, your Honours, starting – and I will be very brief about this – with section 16, your Honours will see that it provided in subsection (1) that:

Table 1 sets out all the assessable dealings that can be subject to sales tax.

It then provided in subsection (2) that if no exemption applied then the assessable dealing was a “taxable dealing”, “the person specified in column 3” - that is column 3 of table 1 - was “liable to the tax” and the tax became “payable at the time of the dealing, as specified in column 4”. It provided in subsection 3:

To calculate the amount of the tax –

it was necessary to –

determine the taxable value of the dealing under Division 3 of –

Part 3 and if no exemption was applicable to multiply the taxable value by the rate applicable under what is there referred to as the “Exemptions and Classifications Act”. It was the Sales Tax (Exemptions and Classifications Act) 1992.

Section 34, which is within Division 3 of Part 3, simply and relevantly provided in subsection (1) that:

The general rules for calculating the taxable value are set out in Table 1.

Going then to table 1 which your Honours will find at pages 120 and following of the print, your Honours will see that it set out a range of assessable dealings, each of them designated by an AD number, “AD” meaning assessable dealing. The general policy of this Act, like the general policy of the Sales Tax Acts of the 1930s was to levy a tax on all goods after they were imported into Australia or produced in Australia and before they reached the consumer.

That was ordinarily, but not universally, as your Honours will see, done by levying the tax on the last wholesale sale. Your Honours do not need to have very much of that background, but if your Honours wanted to look at it, the best discussion for present purposes is probably that contained in the High Court’s judgment in Brayson Motors Proprietary Limited v The Federal Commissioner of Taxation [1985] HCA 20; (1985) 156 CLR 651 at 656 to 658.

Your Honours, the assessable dealings applicable to the appellant fell within the assessable dealings designated AD2d in the case of goods manufactured in Australia - the language of the schedule is “Australian goods” – and AD12d, in the case of “Imported goods”.

Your Honours will note in each case, looking at AD2d or AD12d, that the assessable dealing was described as an indirect marketing sale as defined by section 20, the relevant part of section 20 being paragraph (a) and translating it, an indirect marketing sale was a retail sale that was made through an agent not an employee, an agent. Looking again at AD2d or AD12d, the person liable, your Honours will see, was the seller. The time of dealing was the time of sale and the normal taxable value was the notional wholesale selling price. That turn was defined in a footnote at the end of the schedule. Your Honours will see it at page 125, note 2 where it is said:

In Table 1 . . .

Notional wholesale selling price means the price (excluding sales tax) for which the taxpayer could reasonably have been expected to sell the goods by wholesale under an arm’s length transaction.

So you have sales that are by definition retail sales and the inquiry to determine the normal taxable value that is mandated by Schedule 1 is a hypothetical inquiry, an objective inquiry but hypothetical, and one that is particular to the taxpayer.

GLEESON CJ: Because this scheme of a sales tax is that it falls in the last sale by wholesale.

MR GAGELER: Exactly, and you get some sales that do not quite fit within that category and you have to do the best you can.

The way in which the overpayment of $3.6 million over the relevant period arose in the present case was in relation to the choice of the method of calculation of that notional wholesale selling price. If your Honours go to volume 2 of the appeal book within the judgment of Justice Hill at first instance at page 823, his Honour adequately summarises the position in paragraph 6. Until 1 December 1995 the appellant calculated the notional wholesale selling price on the basis of its cost plus 35 per cent. Then from 1 December 1995 it calculated its notional wholesale selling price on the basis of its cost plus 15 per cent. Then subsequently it was determined by the respondent in the form of a private binding ruling – nothing turns on that but it is something for which provision is made in section 77 of the Act – that the notional wholesale selling price was and should always have been cost plus 11.63 per cent.

So the appellant had been paying wrongly on cost plus 35 per cent or cost plus 15 per cent when it should have been paying on cost plus 11.63 per cent. I do not want to spend any time on it, but your Honours will see the form of that ruling in volume 2 at pages 728 to 743 and your Honours will see that it is supported by detailed calculations of the costs specific to the appellant, at the bottom line appearing at page 743.

That private binding ruling then gave rise to an agreement as to the existence of the overpayment and to the method of calculation of the overpayment that your Honours will see noted in the present respondent’s statement of facts, issues and contentions in the appeal book at pages 5 to 6, paragraphs 1 and 2.

Your Honours, then turning to the credit entitlement, your Honours go to section 51 of the 1992 Act and it provided relevantly in subsection (1) that:

Tables 3 and 3A set out the situations in which a claimant was entitled to a credit –

Subsection (4) provided for the making of a claim to a credit and section 60 provided for objection and subsequent review under the Taxation Administration Act in a case where the Commissioner decided to disallow a credit and that was this case and that is the way in which the matter came before the Court.

Going to table 3, your Honours will see it at page 130. The relevant ground is the first of the grounds. Your Honours will see this table follows the pattern of the earlier table. The “Summary of the ground” is “Tax overpaid”. The “Details of ground” are that the:

Claimant has paid an amount as tax that was not legally payable -

and the “Amount of credit” is:

The amount overpaid, to the extent that the claimant has not passed it on -

Your Honours, looking to CR1 and concentrating for a moment on its language two things are clear and we think uncontroversial. The first is that the question that it raises is confined to asking whether the amount overpaid has been passed on, not whether sales tax in some more general sense has been passed on but the amount overpaid.

KIRBY J: I suppose we must infer from this structure and language that the Parliament contemplated that some amounts would, in a sense, be quarantined and some not, but as I think I said on the special leave hearing, an economist might approach this in a different way and just say of course it is always passed on but it is not passed on as a lump sum or as an identified amount and that is the hypothesis of this scheme, otherwise you could never ever recover an overpaid tax, on the economist’s theory as distinct from the lawyer’s theory.

MR GAGELER: We do not have any economic evidence here, your Honour, but I think the economist might be on my side on this but I will come to that in just a moment.

GLEESON CJ: Other than by definition why is it that we assume that a sales tax is an indirect tax in the sense that it is passed onto the consumer and that income tax is not passed on?

MR GAGELER: Your Honour, I am sure an economist would say it is all a question of degree and generally - - -

GLEESON CJ: Income tax is regarded by most business people as a cost of doing business?

MR GAGELER: Yes. Where you have a tax that occurs on a commercial transaction, particularly a commercial transaction that is somewhere between the time of manufacture or importation and a point at which the goods or now I suppose the services reach the consumer, there is an expectation that, at least in some cases, the price will reflect the amount of tax.

GLEESON CJ: This tax fell equally on your client and all your client’s competitors, did it not?

MR GAGELER: Yes.

GLEESON CJ: So it was part of the cost structure of everybody who was in this industry?

MR GAGELER: Yes, that is exactly right. Your Honours, the other thing I wanted to say - - -

KIRBY J: And you surely start out in front by the fact that this is an overpaid tax?

MR GAGELER: Yes.

KIRBY J: Prime facie, you would expect that if it is an overpaid tax you are going to get it back?

MR GAGELER: Exactly and, your Honours, the other thing I just wanted to say, I think uncontroversially about the language, is that the answer to the question is one that by the use of the language to the extent contemplates that it may be one of degree. It may not be the case that the entire amount of an overpayment is passed on, it may be simply that some part of the overpayment is passed on and some part is not.

HAYNE J: But are you treating overpayment there as attaching to a particular transaction or to a series of transactions and - - -

MR GAGELER: That is another good point, your Honour. It is a transaction-based tax so that for each sale there was an overpayment. We have aggregated them for $3.6 million, but the overpayment arose by virtue of the incorrect notional wholesale selling price being used for each retail sale that fell within AD2d or AD12d as the case may be.

Your Honours, if one moves simply from the language to the evident legislative purpose of the qualification that one sees in CR1, there is, in our submission, not much doubt that it is to deny a windfall benefit to a claimant who has not borne the economic burden of the overpayment but has in fact transferred the economic burden of the overpayment to someone else. When I use the language of “windfall benefit” I am borrowing the words of Justice Brennan in Mutual Pools & Staff Pty Ltd v The Commonwealth [1994] HCA 9; 179 CLR 155 at 177 where his Honour was referring to a relevantly similar provision in the Swimming Pools Tax Refund Act 1992. Your Honours do not have that. I just wanted to give your Honours a reference to that use of language.

Your Honours, making the same point in language perhaps closer to the statutory language, the evident purpose, in our submission, is to ensure that a claimant who has overpaid tax who in the ordinary course would be the seller should obtain a credit only if and to the extent that the claimant has not passed on the economic burden of the tax in the ordinary case to a buyer and in the ordinary case in the price.

So to come to the proposition for which we contend this is the proposition law, it is in that ordinary case which the present is where the passing on of an overpayment, if it has occurred at all, has occurred in the price. The question of the existence and the extent of the passing on of the overpayment really comes down to asking what would the price have been if the overpayment had not occurred.

If the price would have been lower than it in fact was, then the buyer has paid more as a result of the overpayment and the economic burden of the overpayment has to that extent been passed on to the buyer. If the price would have been the same, as it in fact was, then it is the seller and not the buyer who has borne the economic burden of the overpayment and the seller has borne the economic burden of the overpayment in the form of receiving a lesser gross profit or perhaps, depending on the circumstances, incurring a greater loss on the sale than would otherwise be the case. Your Honours, that is the very simple legal proposition for which we contend.

HAYNE J: Does that proposition depend upon certain assumptions about the payment mechanisms for which the Act provides? Does it in particular make assumptions, which for the moment I do not understand, about when a person pays sales tax in relation to when that person sells the goods on which the tax is levied?

MR GAGELER: I think it does not, your Honour.

HAYNE J: Because what is the system for which the Act provided in relation to payment of tax compared with the time at which the taxpayer sells the goods on which tax is levied?

MR GAGELER: Your Honour, the system for which the Act provided, as your Honour will have recalled from table 1, was that liability arose at the time of sale and payment was required to occur in respect of the previous months sales – in respect of liability in respect of the previous months sales in the following month I think, of either the 21st or the 28th of the following month. There is a section that deals with it in the Act. I will have to turn it up, your Honour. Section 61, your Honour.

HAYNE J: But that was how it applied to Avon?

MR GAGELER: Yes.

HAYNE J: The tax applied to very many types of transaction.

MR GAGELER: Yes, it applied in the same way to all assessable dealings. I should not be quite so categorical. The scheme of the Act was that liability arose generally at the time of the assessable dealing but specifically at the time that is shown in table 1 and the payment or the remitter occurred in the following month. The taxable dealings within a month were aggregated and there was a return followed by payment in the following month.

GUMMOW J: There was a system for quarterly payments, was there not, to cut down on the paperwork?

MR GAGELER: There were variations, yes. But going back to your Honour’s question, no, I do not think it turns on the precise method of payment, but there is nothing in the precise method of payment in the Sales Tax Act that undermines the proposition.

GUMMOW J: This system of overpayment recovery, or credit, I should say, has that been treated as a statutory exhaustion of what otherwise might be a common law remedy?

MR GAGELER: The answer is yes. There was a decision of the Full Court of the Federal Court in a case called Chippendale Printing. I remember Justice Lehane was on the Court. I am sorry, I cannot give your Honour the reference to it. Your Honours, the test that we propound we think is that which best fits the purpose of the provision. It best fits the underlying notion of looking at who bears the economic burden of the test, it gives the provision a commercially realistic operation in a world where most businesses sell at a profit, and it accords pretty much, we think, with the approach taken to analogous provisions in the United States and the United Kingdom.

Without going to it, your Honours, we say that the error in the approach of the majority in the Full Court was to say, as they really quite clearly did in the appeal book page 852, paragraph 4 that an overpayment is passed on simply where goods are sold at a profit, that is, at a price that exceeds costs inclusive of sales tax. That is simply to apply the wrong test and that is a wrong test that pervades the majority judgment in the Full Court.

KIRBY J: Could you remind me of the provision of the Act which imposes on you the obligation of showing that you have not passed it on?

MR GAGELER: Section 14ZZO of the Taxation Administration Act 1953. It is just the general burden of proof provision in any Part IVC proceedings. Your Honours, moving if I can very briefly and conscious of the time to the case law, I said that our approach was supported by the United States and United Kingdom case law. It is pretty fully dealt with in our written submissions, all of it useful, none of it definitive and all of it dealing with just slightly differently worded statutory language. But can I take your Honours very briefly to one or two of the cases and just one in the United States. It is the case of Worthington Pump & Machinery Corp v United States 122 F Supp 843. If your Honours have our folder of statutory materials and decisions of foreign courts, your Honours will find this behind tab 13.

KIRBY J: So that we can look at these with the light of your opposition, how would you express the correct approach, so that we can look at these authorities and see whether they sustain your proposition?

MR GAGELER: Yes, your Honour, the proposition is that where the question is, “Has the tax been passed on in the price?” the resolution of that question turns on whether the price would have been different if the tax had not been overpaid.

KIRBY J: That is not a black and white question. You could have a partial passing on or a total passing on or a nil passing on.

MR GAGELER: That is right. Another way of putting the same thing is, “Would the gross profit of the seller have been affected if the overpayment of tax had not been passed on?”, the same question.

HAYNE J: Does not the test you propound make an assumption which may or may not be true about price setting by the particular taxpayer or taxpayers in general?

MR GAGELER: No, it requires a very close examination of the method of price setting by the particular taxpayer and, depending on the facts, possibly by other taxpayers.

HAYNE J: So in this case I understand at least some goods had their price fixed as a particular price point for a particular kind of product.

MR GAGELER: Yes.

HAYNE J: “Perfume we can sell at 49.99. That is what we are going to charge.” That is regardless of cost, anything.

MR GAGELER: Yes, that is right. Exactly.

HAYNE J: How does the – you will come ultimately to that.

MR GAGELER: I will come to that. I am leaving myself about 20 minutes to deal with that.

HAYNE J: Yes.

MR GAGELER: Your Honours, Worthington Pump, tab 13, dealing with an overpayment of an excise tax and dealing with the provision that your Honours will see at the bottom of page 845, a federal statutory provision that had been there since 1942 it appears and is recreated in slightly different forms in many statutes since, it provided that:

“No overpayment of tax under this chapter shall be credited or refunded . . . unless the person who paid the tax establishes . . . (1) that he has not included the tax in the price of the article with respect to which it was imposed, or collected the amount of tax from the vendee, or (2) that he has repaid the amount of the tax to the ultimate purchaser –

or has the ultimate purchaser’s consent. At the top of page 846 the Court of Claims, your Honours will see, summarises the effect of the statute by saying:

The statute provides then that the plaintiff must either show that he himself has borne the burden of the tax or that he has repaid or obtained the consent of the “ultimate purchaser.”

At page 847 there is a very useful discussion that is too long to read but may I pick the eyes out of it. At the top of page 847, left-hand column:

To find out who bore the burden of tax involves a determination of fact.

Then there is a quotation and it is said:

Before considering the factual elements entering into the determination it may be helpful to make a few observations on general principles involved in cases of this kind.

At the outset it must be noted that under ordinary competitive conditions no tax can be passed on completely since a rise in price has the tendency of reducing the volume of business. It is for this reason that the problem of determining the tax burden is so difficult since it involves in most cases a question of degree.

This is the important part:

Secondly, the fact that a firm is making a profit or loss does not in itself determine whether or not it has passed on the tax. The only test is whether the seller has made a profit less than or sustained a loss greater than had the tax not been imposed on him.

That is simply another way of putting our proposition. At the bottom of the page your Honours will see it is said:

Three variables enter into changes in profit or loss: the tax, all other costs, and the price the seller obtains for his article. How these variables fluctuate with the imposition or removal of the tax and comparisons with the same factors of other producers and the market as a whole are of particular significance on the question of burden.

Then Chief Judge Jones went on to deal with those factors and how they had been dealt with by the courts in a very useful discussion.

As we read subsequent cases in the United States, they have added to the factors. In some cases they list them but the basic inquiry, the basic test, has not been departed from as that stated in Worthington Pump. If I can go very briefly to the United Kingdom position which now has to be understood against the background of the European position. At tab 22 your Honours have a recent decision of the House of Lords. The circumstances of that decision are just far too complicated to go into. There is simply one reference that I wanted to take your Honours to in paragraph [25] of the speech of Lord Walker. It is said:

Passing-on is recognised . . . as a possible defence to a restitutionary claim.

Then there is a reference to Roxborough and it goes on:

But the ECJ has recognised that it is consistent with EC law for a national system of law to restrict the right of recovery of overpaid tax in circumstances where it is established that the burden of the tax has actually been passed on by the trader to others (normally his customers) so that reimbursement would amount to double recovery by, and unjust enrichment of, the trader. The ECJ first recognised this defence in Hans Just . . . and the line of authority continues down to Weber’s Wine World –

and there is a reference to some paragraphs in the opinion of the Advocate General and in the judgment of the ECJ itself. Your Honours have Weber’s Wine World behind tab 23 and it is, we think, instructive – again, I do not have time to read it – to have regard to paragraphs 45, 46, 47 and 48 of the opinion of the Advocate General, particularly paragraph 48 where it is said:

For example, the trader may choose to curtail any increase in his retail prices and maintain his volume of sales by limiting his profit margin to absorb all or part of the tax.

It is said that in those circumstances passing on would occur. In the judgment of the court your Honours might note paragraph 93 and following, but particularly paragraphs 94 and 96.

The only other case that I wanted to go to very briefly is that which your Honours find behind tab 14. It is a very recent case, Baines & Ernst Ltd v Customs & Excise Commissioners [2006] BVC 28. It concerned the application of section 80 of the Value Added Tax Act 1994. That is set out at paragraph [5]. Your Honours will see that section 80(3) provided:

‘It shall be a defence, in relation to a claim under this section, that repayment of an amount would unjustly enrich the claimant’

The way in which that terminology - - -

GUMMOW J: Where are you reading from?

MR GAGELER: Page 31, paragraph [5].

GUMMOW J: Thank you.

MR GAGELER: Your Honours have, I think, behind tab 2 the full text of section 80. The way in which that reference to unjust enrichment has been approached, it appears, in the United Kingdom is to say the passing on is an element of unjust enrichment in the sense that, unless the tax is being passed on, it cannot be an unjust enrichment to get it back, but even if the tax has been passed on, it appears there may be other reasons why the taxpayer would be unjustly enriched by getting it back. That appears from paragraphs [10] and [14] in particular within this judgment. This was a case in which it was found that the tax overpaid had not been passed on and for that reason there could be no unjust enrichment.

If your Honours go to paragraph [81], page 52, your Honours will see what the case involved. What it involved was a case where the service provider provided services at a fee of 17.65 per cent of a certain number and it was said to be including VAT – this is an appeal from a tribunal – and your Honours will see in the third sentence of paragraph [81] it is said:

The contracts in use from 1996 to late 1999 and from 2001 onwards . . . expressly referred to VAT, the latter referring to a percentage (or flat rate sum) ‘including VAT’. The contracts for the intervening period made no reference to VAT. The Tribunal, in all cases, decided that B & E ‘charged’ VAT on its fees and did not simply ‘account’ for its fees . . .

[82] It is an entirely different question whether the burden of the VAT has been borne by B & E or by the client. If it were the case, as B & E alleged before the Tribunal, that the fee would have been 17.625 per cent (or £29) even if the supplies had been treated as exempt from the beginning, then B & E would have borne the charge or, to put it another way, the charge would not have been passed on. This is so even though it can be said that VAT has been both ‘charged’ and ‘accounted for’.

Really, our point followed through in the reasoning of the court at paragraph [95].

Your Honours, can I come to the facts, and I hope I have left myself enough time. The question is: do we discharge our onus of proof if the correct test is applied? For that purpose one needs to go to the evidence. It is somewhat easier to go to the evidence than it is to go to the judgments. The various judgments do no more than summarise the effect of the affidavit of Mr Stevens, which will your Honours will find at volume 1, page 34.

GLEESON CJ: Are you setting out to demonstrate that the price would have been no different?

MR GAGELER: Exactly. The price would have been no different. What your Honours will see at page 35, paragraph 6 is that the appellant sold products in a series of 18 separate marketing campaigns, each of approximately three weeks duration in each calendar year. Those campaigns are described more fully in paragraphs 53 and following.

GLEESON CJ: Does this mean that a monopolist who sold at what the traffic would bear never passes on the tax?

MR GAGELER: Not necessarily. If the monopolist would have sold – the question is would the monopolist have sold at the same price if the overpayment had not occurred? That is the question.

KIRBY J: Even a monopolist has to have an approach to how it fixes its - - -

MR GAGELER: A monopolist will generally have an approach to setting costs and a monopolist is more likely perhaps to take a cost plus profit approach.

GLEESON CJ: Well, a monopolist more likely will charge what the traffic will bear.

MR GAGELER: Yes. It would be a factual inquiry, your Honour. I am not sure that anything in particular turns on it being a monopoly, but it is perhaps more likely, I think, that a - - -

GLEESON CJ: I was just trying to think of an example where it would be pretty clear that the price would not be any different.

MR GAGELER: Would not be any different? It would be pretty clear that the price would not be any different if the approach to setting the price by the particular taxpayer was to say these are my costs and I add a particular profit margin on to those costs and the costs include sales tax. That would be a very clear-cut case. Cost plus pricing would be a very clear case.

HAYNE J: You assume price setting is always cost plus?

MR GAGELER: No, you do not.

HAYNE J: But your answer seems to assume that price setting is always cost plus.

MR GAGELER: No, no. All I am seeking to say in answer to his Honour’s question is that cost plus price setting would be a fairly clear example of a case in which there would be a passing on of an overpayment if one of those costs included tax overpaid.

KIRBY J: If your client had been so foolish as to include in its invoice the tax and identified that as a separate amount and it never varied, it was there on every invoice, then you would not have much of an argument.

MR GAGELER: I would have a harder argument. I would actually have the Baines & Ernst argument, your Honour. I would have the Baines & Ernst argument where they said, “Well, even though we said it was inclusive of GST, we would have charged the same price anyway”, but it would be a harder case. Factually, it would be a harder case, but I have factually a much easier case because the pricing was to market.

Your Honours will see in paragraph 13 of the affidavit it is said that there were “two categories of products”, what were described as “CFT products” which comprised about 60 per cent of the sales, “non CFT products” comprising about 40 per cent of the sales. Then in respect of the CFT products your Honours will see it is said, paragraph 20, that regular prices were set to market.

It is said in paragraph 37 that approximately 85 per cent to 95 per cent of sales of CFT products were “at discounted prices”. The discounting of the prices of CFT products is addressed, in particular, at paragraphs 32 through to 36 where the point is made that basically prices were discounted to drive sales volumes so as to achieve an overall aggregate gross-profit margin, that is across the whole range of products, for particular transactions.

In respect of non-CFT products, your Honours will see at paragraph 39 that prices were also set to market and in respect of the discounting of CFT products, it is useful to look at the document that is referred to in paragraph 34 of the affidavit, that is CJS14 which is said to be:

summary documents showing for a sample of Avon products the regular price and the discount offered –

during a range of campaigns. Your Honours see that document at page 376 and it is instructive to look at the third row, “Bubble Bath 450 ml” – and I raise that because it was the example that has been referred to throughout in the evidence –and your Honours will see it was sold at a regular price of $9.95 and that over the years, if you follow it through, it was discounted to price points at $7.95, $6.95 and $6.50.

Compare that with the document called the product profile sheet, which you find back at page 201, for 450 ml bubble bath where your Honours see about line 21 the price which is the regular price of $9.95, you will see a cost reference of $2.25. If you go over the page to page 202 you will see how the costs of $2.25 were made up, and I am sorry, it is a very poor print, but if you look at about line 26 you will see that one of the cost components accounted for in the system was sales tax and of the $2.25 about 48.9 cents for one of the lines was cost component of sales tax we now know to be incorrect.

Your Honours, in the light of that, if your Honours were to go to paragraph 68 of the affidavit, a paragraph upon which Mr Stevens was not challenged, it is said at page 57:

Effective 1 December 1995, the sales tax uplift factor for the calculation of the taxable value was changed from 35% to 15%. During this period, Avon did not change the prices of its products to reflect this decrease –

and he refers to CJS14, the document that I have taken your Honours to –

which contains summary documents for a sample of Avon products in campaigns 9 to 18 of 1995, and the campaign years for 1996 and 1997, including the regular price at which the product was sold and the discount offered.

What he was saying is that when sales tax - our method of calculating sales tax changed from cost plus 35 per cent to cost plus 15 per cent. We did not change the regular prices and we did not change the discount offered. The question then becomes, “What would you expect of the regular price and the discounts offered if the calculation had been all along, not cost plus 35 per cent or cost plus 15 per cent, but simply cost plus 11.63 per cent, that which it should always have been?”, and our respectful submission is that
the inference from all the objective evidence is that prices would not have changed. If they did not change from 35 to 15, it is most unlikely that they would change from 35 to 11.63, particularly when your Honours have regard to the cost differential which your Honours will see as an annexure to Justice Conti’s judgment, volume 2, page 884.

GUMMOW J: Paragraph?

MR GAGELER: It is an annexure to his judgment where you will see that the difference in cost for the bubble bath which your Honours have been looking at was a difference of 8.4 cents, so would it really have made a difference to the price points if the cost had changed by 8.4 cents, no, because cost had nothing to do with the method of pricing but, no, anyway, because the cost is so trivial that it is hard to see how it would make any difference anyway, which is really, we think, the point that the majority got right in paragraph 18 of the majority’s judgment in the Full Court at page 857, a point we mercilessly exploit in our written submissions in reply at paragraph 11. If the Court pleases.

GLEESON CJ: Thank you, Mr Gageler. Yes, Mr Shaw.

MR SHAW: If the Court pleases. The first thing we would submit is that if one looks at the Full Court judgment at page 852 in paragraph 3, the majority say that “pass on” is not “a technical expression”, they are simply ordinary English words. In our submission, what one is asked to do by table 3, credit ground 1, is to look at whatever the particular facts are and ask whether those facts show that the claimant has not passed on part or all of some overpaid amount.

GLEESON CJ: But the problem is not the meaning of the words, the problem is how you go about applying them to the facts of a case like this.

MR SHAW: The question is, your Honour, has the overpaid amount been passed from one person to another in the chain of sellers. In our submission, the test which my learned friends propose simply ignores the words.

KIRBY J: Yes, but your test does not seem to leave much scope for a person who has overpaid tax.

MR SHAW: I will come to that, your Honour. Sometimes it does and sometimes it does not. It depends what happened.

KIRBY J: There seems to be an artificiality at the heart of the legislation which is that the sales tax is not a component in all but a super-monopolist cost structure and charging because it is obviously a thing that those who are sitting in the board rooms working out the prices have in their mind as a fact that it is part of the cost structure of the company.

MR SHAW: It depends how costs are fixed. Sometimes they are fixed just by reference to market.

KIRBY J: It still is – you cannot completely ignore it. It just seems common sense that it is - - -

MR SHAW: If one could contrast, perhaps, the English provision. The English provision requires the commissioners, when there is a claim for overpaid tax, to demonstrate that the refund, if it was made, would unjustly enrich the claimant. That is not the test here. The question is, has it been passed on.

KIRBY J: It is just hard to know how you can quarantine it completely from the cost structure of the business.

MR SHAW: Your Honour, one is given the words.

KIRBY J: That is right but you are saying that they are not a turn of art.

MR SHAW: They are not.

KIRBY J: Unless they are given a certain term of art meaning - - -

MR SHAW: No. They are given their ordinary English meaning, your Honour, and the meaning that the Full Court says, they looked in the dictionary and it says that “pass on” means to extend or hand anything to the next member of a series. Why can you not ask that question?

KIRBY J: Yes, but unless you give it some limited meaning you are never going to get your money back and that obviously flies in the face - - -

MR SHAW: Your Honour, in our submission, that is not so and I will come to that.

KIRBY J: All right. I will contain my curiosity.

MR SHAW: But for the moment our submission is they are ordinary English words with no technical legal meaning and what one asks is, you look at the facts and you ask on those facts has this amount which has been overpaid been handed on to the next member of a series, or not? It is as simple as that.

KIRBY J: It is like much legislation. Parliament, and I can just see the press releases and the speeches, says “We give it all back to you but you have to prove that you have not passed it on”.

MR SHAW: Your Honour has a fertile imagination, but no speech - - -

KIRBY J: No. I just know how these things operate.

MR SHAW: Your Honour, take this example. A wants to sell something to B for $100. B says, “I will not pay you $100 unless you explain to me how the price has been made up”. So A explains that his price which is $100 is made up partially by his buying of things, $65, sales tax of $10 and a profit margin of $25. B then checks whether those are the right figures and he thinks they are right so he agrees to pay $100 for whatever the article is. Turns out that they were both wrong and sales tax should only have been $2. Each of A and B would think that in those circumstances that A had passed on the overpaid amount to B, but according to my learned friend, if A could demonstrate that had he known it was not $10 but $2, what he would have said to B is “There is $2 sales tax and my profit margin is not $25, it is $32” then the overpaid amount had not been passed on despite the fact that all the parties to the transaction thought it had.

In our submission, that is an absurd result. Passed on cannot surely be construed in such a way as to defeat what is an obvious example of passing on and in any case what one is dealing with here is not – although my learned friend has referred to the sales tax as being based on individual transactions as indeed it is – but Avon has approached their claim by treating, as it were, all their sales as one sale. They have a basket of sales and they deal with them in a global sort of way. The evidence shows that Avon’s products were sold each year in a series of sales campaigns - there are 18 sales campaigns in each year - and for each of the sales campaigns Avon adopted a desired overall profit margin from the result of the campaign and if it looked as if, as the campaign went on, that the desired profit margin might not be achieved they sought to achieve it by what is called tweaking the prices so that they can achieve the desired overall profit margin on sales campaign. That is explained by Justice Hill at pages 829 to 839 and by the Full Court at 856.

KIRBY J: That is the heart of your case, is it not? You say that they had this price strategy, that they had to have a certain amount and therefore - - -

MR SHAW: And the profit margin was a margin over costs including sales tax and, what is more, there is not any suggestion that Avon was unsuccessful in its endeavours.

KIRBY J: Where is the actual evidence that supports that? Is that adequately indicated in your written submissions, that strategy because - - -

MR SHAW: First of all, there are Justice Hill’s findings and - - -

GUMMOW J: Which particular paragraph in Justice Hill’s reasons, Mr Shaw?

MR SHAW: First of all, your Honour, at page 839 in paragraph 63, line 30 his Honour said:

However despite this, and despite the fact that the applicant did set its regular prices without much regard to cost, the fact is that the applicant targeted a profit margin for each sales campaign. It follows that the overall campaign objective and the extent of discounting was set to achieve an overall profit margin, that is to say an overall margin over cost including sales tax.

He explains at page 824 in paragraph 8 the sales campaigns and how there was heavy discounting, and then he goes on to explain it in the ensuing paragraphs.

GLEESON CJ: Did the evidence show how Avon decided what products they would produce and sell? Was it, for example, products that would return a certain profit margin?

MR SHAW: The evidence does show that, your Honour. The appeal book looks formidable but in fact there are a number of exhibits, most of which do not have anything much to do with it, but there was only one affidavit. That affidavit was Mr Steven’s affidavit, which is at page 34 and runs through to page 59, and there was some cross-examination of Mr Stevens and that commences at page 14 and runs through to - - -

KIRBY J: Is there anything in that live viva voce exciting part of the case?

MR SHAW: At page 26 at line 38 Mr Stevens was asked:

The process of discounting would involve, firstly, or at least there is the consideration of the margin that Avon wished to make on the sale of the product? --- Not so much the specific products. It’s what the role of that product plays in the campaign. Certainly margin is the important part of the entire campaign.

Then going onto page 27, he is asked at line 11:

The overall sales campaign for any particular three-week period involved a consideration of a desired percentage margin that Avon wished to obtain from that campaign, is that right? --- The overall campaign, yes.

GLEESON CJ: I was wondering whether there was specific evidence that Avon, for example, would have eliminated bubble bath from their range if they could not earn a certain profit margin on it.

MR SHAW: There is, your Honour, yes, and that appears at page 46 in paragraph 42. He is there dealing with a proposed non-CFT product and he says:

If the attainable retail price and estimated maximum cost gave rise to a profit margin which was above the minimum acceptable level, the non CFT product was considered for inclusion in the campaign. However, as with CFT products, if the costs gave rise to an unacceptably low profit margin it could be screened out and not sold by Avon at all.

So there is, your Honour.

GLEESON CJ: Sometimes the expression that is used is that products have to justify their existence in the range.

MR SHAW: Yes, they do. What is more, it is submitted that that evidence suggests that if what happened was there was a decrease in one of the costs, including sales tax, when you apply to the smaller amount of costs the desired profit margin, depending how big it is, it ought to affect the price and send it down. That is what his Honour Justice Hill meant when he said in paragraph 43 at page 833 at line 11:

Put another way, [Avon’s] submission is that there will be no passing on of the overpaid sales tax if the buyer is no worse off as a result of the overpayment and the seller has made no windfall gain. It is said that that is the present case. With respect to the submission I do not think that the question can be answered so simply or, for that matter, that the evidence enables a conclusion favourable to the applicant even if the question is posed in that way.

Now, if I might give some examples of cases where the taxpayer could recover, for example, if a taxpayer prices his goods by reference to prevailing market prices and his competitors are charging sales tax at, say, 10 per cent and that is right but the taxpayer thinks the sales tax rate is 20 per cent and remits sales tax on that basis but prices his product by reference to what the market is showing he can get by looking at the competing products so that he is absorbing the additional 10 per cent himself, he could recover because it has not been passed on. You might have a case where somebody says when he is charging his prices because of some event, “I am only going to charge you 10 per cent sales tax when in fact sales tax is 20, but I am doing that to get your custom”.

GLEESON CJ: I suppose you would approach the construction of the legislation and the table on the basis that the assumption is that in the ordinary case, if nothing more appears, sales tax will be passed on, which is, as I understand it, the point of sales tax.

MR SHAW: Exactly, yes, and if that happens, then you cannot recover it.

KIRBY J: Too bad, even though you have overpaid it. That seems to defy the - - -

MR SHAW: No, if you have passed it on; that is the point.

GLEESON CJ: Sales tax is a tax that is meant to be borne by the consumer.

MR SHAW: Yes, so mostly it will be passed on; sometimes it will not.

KIRBY J: So it is just your bad luck if you have overpaid it then.

MR SHAW: If you have overpaid it and passed it on.

GLEESON CJ: If you have overpaid it and passed it on, you have suffered no bad luck.

MR SHAW: Exactly. Now, if I could say something - - -

KIRBY J: It hardly gives a sanction – well, I suppose it is not really a sanction – a vision.

MR SHAW: If I could say something about the authorities that my learned friend has referred to, that is to say the UK authorities and the US authorities, in our submission, they are really of no present relevance because the terms of the statutes are entirely different to our statue. Our statute refers to passing on and none of the other statutes do.

KIRBY J: You can say that clearly about the British statute, but what is the language in the United States case?

MR SHAW: Well, I can come to that in a moment, your Honour, but the second thing we would say is in the Full Court my learned friend relied on two US authorities. The first of them was Worthington Pump, which he has referred to today. The second of them was Tenneco. Tenneco has evaporated, as one can well understand it might, because as we point out in our outline of submissions, if it is relevant at all, it seems to assist us. But Tenneco is a decision in 1989, I think it was, Worthington was a decision in 1954, and Tenneco relies on Worthington for some propositions. So that, insofar as one is looking for what the actual law is in the United States, one should be looking at Tenneco and not at Worthington Pump by itself.

These are, I acknowledge, dangerous waters. By that I mean it is difficult to understand the US authorities and what they mean without having a complete understanding of the relevant law. But my learned friend is just, in our submission, wrong about Worthington Pump. If one looks at his outline, one sees that at page 10 in paragraphs 37 to 39, or 40 on page 11, he submits, as he submitted today, that Worthington Pump was concerned with the predecessor of the provision which is set out in paragraph 37. If one looks at Worthington Pump which is at tab 13 of my learned friend’s bundle at page 845, it is set out that what happened was that the plaintiff had sold some goods to a company called Delta and at the top of page 845 in the first column it explains that:

Delta was new in the air conditioning business and in order to attract customers adopted the policy of meeting or underbidding the lowest price of its competitors.

Then there was some specific evidence about the 1948 year, and then the provision which was an earlier provision which was in question is set out at the bottom of that page and it says:

“No overpayment of tax under this chapter shall be credited or refunded (otherwise than under sub-section (a)), in pursuance of a court decision or otherwise, unless the person who paid the tax establishes . . . (1) that he has not included the tax in the price of the article with respect to which it was imposed, or collected the amount of the tax from the vendee, or (2) that he has repaid the amount of the tax to the ultimate purchaser of the article, or unless he files with the Commissioner written consent of such ultimate purchaser to the allowance of the credit or refund.”

Then if one goes to page 846 at the top of column 1, the Court says:

The statute provides then that the plaintiff must either show that he himself has borne the burden of the tax or that he has repaid or obtained the consent of the “ultimate purchaser.” The pleadings admit that the plaintiff did not itself bear the burden of the tax but was completely reimbursed by Delta. Nor has there been any allegation or proof that plaintiff has reimbursed anyone. Plaintiff’s right to recover depends, therefore, on its being able to show that it filed with the Commissioner the “written consent of such ultimate purchaser to the allowances of the credit or refund.”

Then, going down in that column, the next paragraph but one:

The main question to be decided is, therefore, whether or not Delta is an “ultimate purchaser” within the meaning of section 3443.

So that one is not concerned with the first part of the section, one is concerned with the second part. It was conceded the first part could not be satisfied but it was said that the second part could because there was a certificate filed from Delta who was said to be the ultimate purchaser. Then in the next column in the – I suppose you call it the second paragraph – the judgment says:

The court does not believe that Delta’s installation services, extensive though they were, amounted to the use of plaintiff’s units “in the manufacture of other articles and not for resale in the form in which purchased.” But under our interpretation of the statute it always remains open for the plaintiff to show that it has the consent of the person who actually bore the tax.

They construe the words “ultimate purchaser” as being a reference to the person who ultimately bore the tax and what they then do is go on to see whether or not it could be said that Delta was the person who had ultimately borne the tax. The case was made unusual because of the marketing strategy which Delta had adopted in order to get business that it was just new in because that tactic led to its making a loss. It is in those circumstances that the court said at page 847:

At the outset it must be noted that under ordinary competitive conditions no tax can be passed on completely since a rise in price has the tendency of reducing the volume of business. It is for this reason that the problem of determining the tax burden is so difficult since it involves in most cases a question of degree. Secondly, the fact that a firm is making a profit or loss does not in itself determine whether or not it has passed on the tax. The only test is whether the seller has made a profit less than or sustained a loss greater than had the tax not been imposed on him. Nevertheless, the fact that a loss has occurred shows that the seller was unable to recover the total costs which he incurred in connection with the particular transaction. The tax may be deemed to have been absorbed to the extent that the loss is attributed to the tax, rather than to the other costs of the transaction.

Then the court goes on to say some of the loss was due to inefficiency and not to tax. The court went on to say that some allowance was proper in 1948 but not in 1947 because “the proof” was “insufficient”.

In our submission, when one sees the circumstances in which that question arose it, first of all, is of little assistance here and, secondly, the passage that my learned friend referred to does not bear the meaning which he submits it does. It will be seen, if one looks at the judgment of the majority in the Full Court that they thought that Worthington Pump was not much help. At page 854, paragraph 11, Justices Ryan and Merkel say:

Of the two United States authorities relied on by the appellant, we derive no assistance in resolving the present appeal from Worthington Pump & Machinery Corp v United States (1954) 122 F.Supp. 843. In that case, in the year in which a credit or refund was allowed, the vendor made a loss, albeit a loss greater than the amount of excise tax paid. Another important distinction between that case and the present is that the vendor’s prices for its goods remained unchanged after the overpayment of excise tax from what they had been before the overpayment occurred. That permitted the Chief Judge to draw the inference, which he did for the 1948 fiscal year, that the vendor had not intended to pass the overpaid tax on to the purchasers of the unit. The drawing of that inference seems to have been based on an implicit finding that the vendor, Delta, had been aware of the amount by which excise tax had been overpaid but nevertheless made a deliberate choice not to pass on that amount. By contrast, in the present case, it is not possible to identify a fixed price for each item of Avon’s goods which prevailed at all relevant times before and after the sales tax changes. Rather, Avon’s techniques of adjusting or “tweaking” prices in response to a number of market forces subject only to the requirement that the price for any item not fall below its cost to Avon (including sales tax), meant that no inference could be drawn one way or the other as to whether any overpayment of sales tax occurring from time to time had been “passed on”.

So, in our submission, when one looks at Worthington Pump, first of all, we would submit, it is really not much assistance to anybody because it is concerned with statutory provisions which are in terms quite different from terms of our statute. Secondly, the court there gave to that statute a meaning which it would be surprising, it is submitted, to find this Court giving those words. In other words, the meaning they gave to “ultimate purchaser” as being the person who ultimately bore the tax seems to an Australian lawyer a very strange construction of the words. But we would go on to say, insofar as the case has any relevance - and in our submission it has little, and the other US cases have little relevance - they do suggest that our test is correct and in particular we refer to what we have said about Tenneco in our submissions at - - -

HEYDON J: Paragraph 38.

MR SHAW: Yes. Tenneco helps us. As to the UK authorities the statutory position there is entirely different because what is in question is establishing the revenue having the onus of establishing that if there was a refund it would give an unjust enrichment to a person who has overpaid tax, so a question arises there which simply does not arise on the words here. In any case, if one looks at, for example, the National Westminster Bank Case, which is tab 17 of my learned friend’s bundle at page 1082 in paragraphs [31] and [36] and at the Marks & Spencer Case 2002 STC 16 at pages 42H to 43H and that is at tab 21, it will be seen, it is submitted, that under that law it is pretty easy to prove passing on, much more difficult to prove unjust enrichment.

GUMMOW J: The last stage we were referred to in the Marks & Spencer litigation was 2005 UKHL 53.

MR SHAW: Yes.

GUMMOW J: Do we know what the sequel was in the European court?

MR SHAW: I do not, your Honour. No.

GUMMOW J: I do not think what we have been given is the last stage in this saga.

MR SHAW: My learned friend says that that is as far as it has gone so far.

HAYNE J: Stay tuned.

MR SHAW: I believe him.

GUMMOW J: It is only 10 or 12 years old, is it not? They do things very fast in Europe.

MR SHAW: But, your Honour, I do not really know the answer to your Honour’s question. So that what we submit is that both Justice Hill and the majority in the Full Court were correct in their approach to the construction of the words and correct in their approach to the interpretation they gave to the facts and correct in their approach to the interpretation they gave to the facts because it is perfectly plain, it is submitted, that all the sales that Avon made were made in the course of sales campaigns and the prices in the sales
campaigns were fixed in order to produce a desired profit margin overall, a desired profit margin over costs, costs including sales tax.

If that is so, it is submitted that treating the matter in the way that Avon has, looking at the matter in the global way, it is perfectly clear that the sales tax has been passed on, the overpaid sales tax, and the sales tax has been passed on because what they did was set their prices and move their prices in order to achieve a margin over costs including sales tax. Indeed, there seems to be good ground for thinking that Justice Hill was right when he doubted that the applicant had even proved that the facts satisfied its own test. If the Court pleases.

GLEESON CJ: Yes, Mr Gageler.

MR GAGELER: Your Honours, it seems that on the teacakes aspect of the Marks & Spencer’s Case proceedings have come to a close.

HAYNE J: They are finally stale.

MR GAGELER: Your Honours pick that up, I think, from Marks & Spencer in the House of Lords, tab 22, paragraph [37](1). At least the factual evaluation of the passing on defence in the teacakes context has come to a close.

KIRBY J: What do you say about the fact that the purpose of sales tax is that it be passed on and that by the structure of your costing it was passed on and therefore you cannot get it back? That was not something - - -

MR GAGELER: That involves two questions. One is the question of law. The other is the question of fact. As to the question of law, your Honours have to stand back from the broad and unassailable proposition that an indirect tax is in the general case intended to enter into the price of the goods, undeniably so, and one has to ask, “In the particular case, did the overpayment of that indirect tax enter into the price of the goods?”

KIRBY J: I appreciate that.

MR GAGELER: What we are putting is entirely consistent with the broad proposition, but the question is, in respect of this particular overpayment, did it make a difference to the price?

KIRBY J: And your particular cost structure, the fact that you were looking for the add on of profit?

MR GAGELER: Yes. The particular cost structure comes down to this, your Honour, that there is a finding by the trial judge – page 827, paragraph 23 – that we never adopted cost plus pricing. We never said, in respect of 450 ml bubble bath, we seek to obtain a profit of X per cent on cost, therefore we set our price at whatever we calculate cost plus some acceptable profit margin. That was never done.

KIRBY J: The profit is the counterpart to the cost and the cost includes the sales tax.

MR GAGELER: Yes, but, your Honour, the ultimate question is: would 450 ml bubble bath have been sold at $6.50 as it was in a particular campaign, or at some other lower price, had we properly recognised that our costs on 450 ml bubble bath were 8 cents different? That is really what the question comes down to.

HAYNE J: But you seek to answer a question of fact presented by the Act, has the price been passed on, by asking a different and hypothetical question. Why do you ask a hypothetical question in addressing a question that is posed as it is in the Act?

MR GAGELER: Your Honour, our learned friend says it is a little bit of layman’s language, you just use the ordinary English words. That goes nowhere. The ordinary English words have to be interpreted in their context and with a view to their purpose and then they have to be applied in their context with a view to their purpose. The reality is that the difference between the majority and the minority judgment in the Full Court comes down to applying a different yardstick. It is a different understanding of what passing on involves.

Our learned friend basically says – and he has shied away from the rather more direct way in which the Full Court stated their approach, but they said – and really their approach comes down to this – if you sell at a gross profit, then you have passed on the sales tax. In a broad sense, that might be right. If you are asking, “Have you passed on the overpayment?” the answer really turns, in our respectful submission, on what the price would have been. Simply to say you sold at a profit would mean that everybody has passed on the sales tax if they are selling - - -

KIRBY J: Well, Mr Shaw is not all that shocked at that proposition because he says the whole point of sales tax is that it is passed on to the ultimate consumer, and that was not something that I had fully appreciated before.

MR GAGELER: Your Honour, the whole point of sales tax – and I can fully appreciate this – a point of sales tax is that it ought enter into the price at which goods are sold and passed on - - -

KIRBY J: Yes, but you have to overcome the basic problem that your pricing structure was to secure the level of profit over and above the costs, and the costs included the cost of sales tax, and that was what you would have done if had been the smaller amount and the correct amount and that is what you did when it was the bigger amount.

MR GAGELER: The system – and, without going back to it, your Honour really needs to look carefully at the affidavit of Mr Stevens, paragraphs 34 to 36, and the cross-examination of Mr Stevens, particularly at the top of page 31 of the appeal book – the system was never to say the price of any particular product was going to be a function of the cost of that particular product. The system was always to seek to achieve what was described as an overall gross profit margin across the whole range of products for a particular campaign. That was set as a goal and it may or may not have been reached.

The discounting of particular products – if you take the $9.95 which was the regular price of 450 ml bubble bath, and the various pricing points at which it was discounted to in a particular campaign was driven by the desire to increase sales of that product. Obviously the lower the price, the greater the quantity of sales. The greater the quantity of sales at the lower price for the high margin products leading to the greater profit in a particular campaign. That is what they were looking at. There was never a desire to earn some particular level of profit on a particular product.

KIRBY J: Is it fair to say a way of checking whether it was passed on is to ask, “Did you absorb it?”

MR GAGELER: That is the perfect way of putting it, your Honour, yes, “Do you absorb it?” Here, in our respectful submission, the proper inference, given the way in which the appellant set its prices, was that it absorbed the increase in cost due to its overpayment. That is, it would not have charged its customers a lower price if it had realised that it was overpaying sales tax by some 8 cents. It would have chosen the same price points, particularly in the light of the unchallenged evidence that when it changed the way in which it paid sales tax from looking at cost plus 35 per cent to cost plus 15 per cent, it made no changes to its regular prices or its discounted prices. Why would one infer that if it had properly paid sales tax at cost plus 11.63 per cent it would have changed its prices? It simply would not. If the Court pleases.

GLEESON CJ: Thank you, Mr Gageler. We will reserve our decision in this matter and we will adjourn and commence the next case at 12 noon.

AT 11.40 AM THE MATTER WAS ADJOURNED