Commissioner of Inland Revenue v Motorcorp Holdings Limited & Ors [2005] NZCA 33 (7 March 2005)

Last Updated: 20 April 2005

IN THE COURT OF APPEAL OF NEW ZEALAND

CA17/04

BETWEEN THE COMMISSIONER OF INLAND REVENUE
Appellant

AND MOTORCORP HOLDINGS LTD
First Respondent

AND BMW NEW ZEALAND LTD
Second Respondent

AND CONTINENTAL VEHICLE DISTRIBUTORS LTD
Third Respondent

AND GERMAN MOTOR DISTRIBUTORS LTD
Fourth Respondent

AND DAIMLER CHRYSLER NEW ZEALAND LTD
Fifth Respondent

AND EUROPEAN MOTOR DISTRIBUTORS NEW ZEALAND LTD
Sixth Respondent

AND SCHOFIELD AND CO LTD
Seventh Respondent

AND HYUNDAI AUTOMOTIVE NEW ZEALAND LTD
Eighth Respondent

AND SCANDINAVIAN VEHICLE DISTRIBUTORS LTD
Ninth Respondent

Hearing: 15 February 2005

Court: McGrath, Hammond and William Young JJ

Counsel: J H Coleman and G R Withers for Appellant
M P Reed QC and P Morten for First, Third, Fourth, Fifth, Sixth, Seventh and Eight Respondents
J R F Fardell QC and J Long for Second Respondent

Judgment: 7 March 2005

JUDGMENT OF THE COURT

A The appeal is allowed. Counsel to settle the form of any consequential directions or orders. Leave reserved to apply, by memoranda, in the event same cannot be settled.
B The cross-appeals are dismissed.
C The Commissioner will have costs in the High Court on the 3B scale, together with reasonable disbursements, if necessary as fixed by the Registrar of the High Court.
D In this Court, the Commissioner will have costs of $10,000, together with reasonable disbursements, if necessary as fixed by the Registrar of this Court.
E Both awards of costs and disbursements are against all the respondents, jointly and severally.

REASONS

McGrath J [1] - [4]

Hammond J [5] - [77]

William Young J [78] - [88]

McGRATH J

[1]	I adopt the statement of background facts set out in the judgment of Hammond J. I also agree with Hammond J, for the reasons he gives, that the warranty arrangements between the appellants and the overseas manufacturers of the motor vehicles they import, are not in the nature of insurance, and do not give rise to contracts of insurance, in terms of the definition of "Insurance" in s 2 of the Goods and Services Tax Act 1985.
[2]	I have however also concluded that s 5(13) of the Act, on its terms, does not apply, so that the appeal should be allowed for the reasons given by William Young J in his judgment.
[3]	I agree with Hammond J, for the reasons he gives, which are closely similar to those of William Young J, that the cross appeal should be dismissed.
[4]	I have considered submissions made at the hearing by the respondents in relation to costs should the appeal be successful but see no reason why costs in this Court or in the High Court should not follow the normal course, in the terms set out in Hammond J’s judgment.

HAMMOND J

Table of Contents

Para No.

Introduction [5]
Procedural history [8]
Background facts [13]
The GST chain [14]
The proceedings in the High Court
The issues and outcome [15]
Suzuki side-stepped? [18]
The relevant legislation [20]
The High Court reasoning [24]
The CIR’s submissions in this Court [26]
The respondents’ submissions in this Court [31]
Mr Reed’s contextual argument [35]
The classification problem [42]
Insurance contracts? [44]
Contracts of guarantee? [58]
Section 5(13) and liability for GST [62]
The first cross-appeal: composite supplies [67]
The second cross-appeal: the splitting of the supply
of repair services [71]
Conclusion [74]

Introduction

[5] This appeal (and cross appeal) concern the imposition of Goods and Service Tax (GST) on certain warranty payments in relation to imported cars.

[6]

The respondent companies ("the car companies") all purchase cars for import into New Zealand from overseas manufacturers. The car companies all receive warranties from the manufacturers. The car companies then on-sell the cars to dealers, and in turn provide their own warranties to the eventual purchasers. When repairs fall to be carried out on the cars under the latter warranty, the car companies claim either the full cost, or a portion of it, from the overseas manufacturers pursuant to their warranty from the manufacturer.

[7]

The subject matter of these proceedings is the applicability of GST to payments which were received from these overseas manufacturers pursuant to such warranties, prior to a legislative change on 1 August 2002. From 1 August 2002, a change in the relevant legislation has meant that such payments are exempt from GST. In that sense these proceedings are "historic", although the proceedings are still of distinct moment to the Commissioner and the car companies.

Procedural history

[8]	The appeal and cross-appeals have their genesis in two separately filed sets of proceedings. The first proceeding sought a declaration in terms of the Declaratory Judgment Act 1908. The second sought to challenge assessments which had been made by the Commissioner of Inland Revenue (CIR). Both proceedings were effectively "consolidated" in the High Court. One judgment was issued by Venning J dealing with both sets of proceedings.
[9]	By agreement of the parties, as confirmed by Minute in the pre-trial procedures, three questions were settled for determination by the High Court.
[10]	Those questions were recorded by Venning J as follows:

[6] The three questions identified as determinative of the issues between the parties are:

(1) Where a manufacturer makes a payment to a distributor by way of reimbursement of a claim for the costs of parts and labour are those payments made pursuant to a contract of insurance as that term is understood and applied for the purposes of the GST Act, such that the payments are outside the GST Act?
(2) If not, do the reimbursement payments made by the manufacturers on warranty claims constitute a composite inbound supply of parts and labour which would be GST exempt?
(3) In the alternative to (2) can the supply be broken into component parts so that GST is payable only on that portion which relates to the supply of labour (as distinct from parts)?

[11]	The Auckland proceedings which were effectively consolidated before Venning J were M 1175/01, M 102/01, CP 687/01 to CP 693/01.
[12]	The judgment of Venning J was delivered on 11 December 2003.

Background facts

[13]	The relevant background to this case was set out succinctly by Venning J in the High Court:

[7] There are four parties involved in the sale of a new car to a consumer in New Zealand. First the overseas manufacturer. Second, the New Zealand importer and distributor (the plaintiffs in this case). Next there are the individual dealers throughout New Zealand. Finally there is the end purchaser, the consumer.
[8] Every new car is sold with a warranty. The plaintiff importers pay an amount for the warranty as part of the overall purchase price of the car. The terms of the warranty vary from manufacturer to manufacturer. The manufacturers either require the plaintiffs to provide a warranty to the ultimate purchaser, or in cases where the manufacturers provide the warranty direct, the plaintiffs are required to meet the manufacturer's obligations in New Zealand under the warranty.
[9] The plaintiffs as the importer and distributor often provide warranties that are more extensive than the warranty provided by the manufacturer. For example, the manufacturer's warranty may be limited to 12 months, but the warranty provided by the plaintiffs to the purchaser through their dealership network may be for 24 or in some cases 36 months.
[10] When a claim is made under warranty the customer takes the car to one of the dealerships. The car is repaired by the dealer at no charge to the customer. The dealer then makes a claim on the plaintiff for the labour, parts and any outwork used to effect the repair. If the claim falls within the warranty issued by the plaintiff, or the manufacturer, then the plaintiff credits or reimburses the dealer for the labour parts and outwork.
[11] If the claim is covered by the manufacturer's warranty the plaintiff then, in turn, makes a claim under that warranty on the overseas manufacturer. On acceptance of the claim the overseas manufacturer issues a credit or reimbursement for the appropriate amount for parts and labour to the plaintiffs.
[12] The various credits/payments made through the process are not identical. For example, the credits/payments made by the manufacturer to the plaintiff for labour are based on a time unit allowance fixed by the manufacturer for the replacement of the particular part in question. The payment by the manufacturer to the plaintiff for the particular labour cost claimed under the warranty is limited to a rate calculated on the basis of that unit allowance. The actual labour cost charged by the dealer may be substantially more. Depending on the arrangements between the plaintiffs and their own dealers within New Zealand the plaintiff, or the dealer, or in some cases the plaintiffs and the dealers jointly, bear the additional labour cost over and above the labour rate applied to the manufacturer's unit allowance.

The GST chain

[14]	GST is payable at various stages in this chain of transactions:
•	The respondent importers pay GST when the new cars are imported. This transaction is GST neutral, as they are entitled to claim a full refund by way of input credit;
•	When the distributor sells the vehicle to the dealer, the sales price includes GST, which is returned by the respondents as an output tax. The dealer will then claim an input credit for the GST;
•	When the vehicles are sold by the dealer to the end customer, GST is included in the purchase price and returned by the dealer as an output tax;
•	When work is carried out under warranty, the end purchaser does not pay anything. However, the dealer charges GST on the labour and parts involved when billing the distributor - this is in turn paid to the IRD. The distributor will then, when making payment (or issuing a credit note), claim an input credit for the GST component.

The proceedings in the High Court

The issues and outcome

[15]	The issue before the High Court was: when the respondents seek reimbursement from the manufacturers under the manufacturers’ warranties, must the respondents return GST output tax on these claims and the related reimbursements from the manufacturers?
[16]	In the High Court, the respondents advanced three main arguments in support of their contention that they were not required to pay the GST:

1. That the reimbursement payments were made under a contract of "insurance" (as defined in the Goods and Services Tax Act 1985) and that they were therefore not subject to GST.
2. In the alternative, the reimbursement payments made by the manufacturers constituted a composite inbound supply of parts and labour, and were therefore GST exempt.
3. Again in the alternative, the supply could be broken into component parts so that GST was payable only on that portion which relates to the supply of labour (as distinct from parts).

[17]	Venning J found in favour of the respondents on the first issue (which is now the subject of the appeal by the CIR) and against the respondents in respect of the latter two issues (which are now the subject of a cross-appeal).

Suzuki side-stepped?

[18]	This is not the first time that this subject area has fallen for consideration by this Court. Indeed the CIR’s position before Venning J in the High Court was that this Court’s decision in Suzuki NZ Ltd v CIR (2001) 20 NZTC 17,096 applied in this case, with the result that GST would also be payable by the car companies in the circumstances in issue in this case.
[19]	It is convenient to set out here Venning J’s summary of the Suzuki case and the argument which was raised, which, if correct, would lead to a different result in the instant cases:

[19] The Suzuki case also concerned the treatment of reimbursement payments made by an overseas car manufacturer to the New Zealand importer. The arrangements between SMC, SNZ and SNZ's dealers were similar to the arrangements between the plaintiffs and the manufacturers and the dealers in the present case. The appellant Suzuki New Zealand Limited (SNZ) argued that GST was not due in respect of the payments made to it by its parent company in Japan Suzuki Motor Company Limited (SMC) pursuant to warranties on new vehicles sold by SMC to SNZ because the payments were for financial compensation rather than for consideration for the supply of any service. SNZ also argued the payments were for the setting up of a repair system. Alternatively SNZ argued that even if the payments were for repair services they would have been zero rated under s 11 (2)(e) of the GST Act because they were supplies to a person outside New Zealand at the time the services were performed and were not supplied directly in connection with movable property in New Zealand. The Commissioner argued first that the reimbursement payments were made in consideration of the supply of repair services by SNZ. Alternatively the Commissioner argued that the payments were made in consideration of SNZ's supply of repair services through its network of dealers to purchasers of Suzuki vehicles.
[20] In the High Court McGechan J found that the payment by SMC to SNZ was made to both discharge SMC's warranty obligations but also "in respect of the SNZ repair services rendered". He found the SNZ repair services brought about the SMC payment and came within the definition of "consideration" within the GST Act. SNZ appealed.
[21] The Court of Appeal rejected the appellant's arguments. The Court concluded that on a proper construction of the documents, SMC and SNZ had agreed that SMC's obligation under the manufacturer's warranty would be performed for it by SNZ with SNZ being reimbursed by SMC on an agreed and limited basis. SNZ was to undertake repair services which would otherwise fall upon SMC and in return SNZ would be paid by an offsetting mechanism for the repairs. The Court rejected the appellant's argument that the payments were merely financial compensation for the supply of defective vehicles by SMC in the first place or were a series of payments for the setting up of a repair arrangement. The Court concluded that SNZ was simultaneously discharging its obligations to SMC and to the purchasers of faulty vehicles. It found that the performance of an obligation under one contract could also satisfy the performance of an obligation under another and accepted that a supply could simultaneously occur for GST purposes under both contracts.
[22] This Court is of course bound by decisions of the Court of Appeal on point. Counsel for the plaintiffs submit that the argument raised before this Court was not raised before the Court of Appeal in Suzuki and it is therefore open for this Court to rule on the argument that the manufacturer's payments are made under a contract of insurance so that the payments are exempt from GST. Mr Ruffin accepted that the current argument had not been raised before the Court of Appeal in the Suzuki case and it was open for the plaintiffs to pursue it. However, he submitted that the Court's interpretation of the documentation in Suzuki was equally applicable to the documents in the present case and accordingly the payments were properly subject to GST. In particular he emphasised the need to consider all three tiers of the documentation.
[23] As the argument that the payments were pursuant to an insurance contract was not argued or considered by the Court of Appeal in Suzuki, it is open for this Court to rule on that issue, in light of the documentation and the argument before it in this case.

The relevant legislation

[20]	It is convenient here to set out here the relevant legislation.
[21]	The term "insurance" is defined in s 2 of the Goods and Services Tax Act 1985 as follows:

"Insurance" means insurance or guarantee against loss, damage, injury, or risk of any kind whatever, whether pursuant to any contract or any enactment; and includes reinsurance; and "contract of insurance" includes a policy of insurance, an insurance cover, and a renewal of a contract of insurance.

[22]	Section 5(13) of that Act relevantly provided:

(13) For the purpose of this Act, except for subsection (13B) and section 20(3), if a registered person receives a payment under a contract of insurance, whether or not the person is a party to the contract, the payment is, to the extent that it relates to a loss incurred in the course or furtherance of the registered person’s taxable activity, deemed to be consideration received for a supply of services performed by the registered person -
(a) on the day the registered person receives the payment; and

(b) in the course or furtherance of the registered person’s taxable activity:

Provided that this subsection shall not apply in respect of any ... payment received pursuant to a contract of insurance where -

(a) The supply of that contract of insurance is not a supply charged with tax pursuant to section 8(1) of this Act; or
(b) That payment is in respect of an entitlement for any loss of earnings (being earnings within the meaning of the Accident Compensation Act 1982 or the Accident Rehabilitation and Compensation Insurance Act 1992 or the Accident Insurance Act 1998) [or the Injury Prevention, Rehabilitation, and Compensation Act 2001].

[23]	Section 8 (ss 1 and 2) relevantly provided:

Imposition of goods and services tax on supply -
(1) Subject to this Act, a tax, to be known as goods and services tax, shall be charged in accordance with the provisions of this Act at the rate of [12.5 percent] on the supply (but not including an exempt supply) in New Zealand of goods and services, on or after the 1^st day of October 1986, by a registered person in the course or furtherance of a taxable activity carried on by that person, by reference to the value of that supply.
(2) For the purposes of this Act, goods and services shall be deemed to be supplied in New Zealand if the supplier is resident in New Zealand, and shall be deemed to be supplied outside New Zealand if the supplier is [a non-resident].
...

The High Court reasoning

[24]	Venning J concluded that the arrangements between the various plaintiffs and their respective manufacturers did amount to insurance contracts in the sense comprehended by the GST Act. He said:

[66] In the present case it is of significance that the definition of insurance in the GST Act is a broad one. The evidence is that the consideration paid by the plaintiffs includes an element, or component, known as the warranty payment, or warranty cost. Prior to the change of the Customs legislation in May 1998 the warranty payment was separately identified and charged. It was separately identified and charged for duty purposes as that component of the purchase price of the car was exempt from duty. Since the change to the Customs legislation however, there is no need for the warranty payment to be separately identified for that purpose. However, the warranty payment is still paid. The total price paid on the importation of a new car includes a sum for the warranty payment.
[67] Under the distribution agreements/arrangements between the manufacturers and the plaintiffs, on the importation of the car and in exchange for the purchase price (which includes the warranty payment) the plaintiffs receive:

•	the car;
•	obligations, particularly to meet the manufacturer's warranty within New Zealand; and
•	rights including the right to be reimbursed for warranty claims made under the manufacturer's warranty.

[68] The arrangement has other features similar to that of an insurance contract. It is by no means certain that the plaintiffs will be called upon to meet the cost of repairs during the manufacturer's warranty period. The cars may not require repair. The possibility of a claim being made against the plaintiffs is just that, a possibility. That was recognised by both the Court of Appeal and the Privy Council in the CIR v Mitsubishi Motors case (12,354).

[25]	And further:

[75] In summary, the position is that pursuant to the arrangements between the manufacturer and plaintiff, the plaintiff is required to meet the obligations under the manufacturer's warranty within the territory. On purchasing the car the plaintiff pays the manufacturer a sum, fixed by the manufacturer, known as the warranty payment. The warranty payment is included as part of the total sum paid for the vehicle. In exchange for the warranty payment, the manufacturer agrees to reimburse the plaintiffs for warranty claims made under the manufacturer's warranty and met by the plaintiffs under its principal obligation to do so in the territory. There is no upper limit on the number or value of the warranty claims that may be made in respect of one vehicle. There may be no claim made at all, as the plaintiffs may not be called upon to meet the manufacturer's obligations under the warranty in respect of one particular vehicle.
[76] I am drawn to conclude that the arrangement between the plaintiff and manufacturer is that the plaintiffs purchase future reimbursement of their obligations to satisfy the manufacturer's warranty obligations in New Zealand by the warranty payment, and thus "cover" their potential liability or risk under that obligation. I conclude that the reimbursement payments made by the overseas manufacturers are payments made under contracts of insurance for the purposes of the GST Act. That follows from the application of the definition in the GST Act. The transaction also generally has the features of an insurance arrangement.

The CIR’s submissions in this Court

[26]	The Commissioner maintains that the situation in this case is identical to that in the Suzuki case, where this Court held that the act of repairing the cars discharged the manufacturer’s obligation to the importer at the same time as it discharged the importer’s obligations to the customer.
[27]	There were two lines of reasoning available to this Court in Suzuki in coming to that conclusion.
[28]	The first route (and what was relied upon in Suzuki) was that the manufacturers’ payments to the importers were in respect of taxable supplies, namely the repair services performed by the importer and supplied to the manufacturer. The Commissioner maintained that this is also so in the instant case. Mr Coleman submitted that Venning J had erred in not focusing on the relevant supplier.
[29]	An alternative approach noted in Suzuki was that the payment by the manufacturer was consideration for the supply of the repair services to the customer. The CIR’s argument is that the repair services are supplied to the customers under the customers’ warranty contract and the payment received from the manufacturers is consideration for that supply. The car is repaired by the dealers, who are acting as the agents of the respondent importers. It is the car companies, therefore, who are making the supply of the repair services in terms of s 60(1) of the GST Act 1985.
[30]	Mr Coleman argued that the relevant transactions in this case did not amount to insurance contracts. He submitted that a warranty given by a seller of goods is not insurance. Warranties and guarantees are "distinct and separate to insurance contracts". He further submitted that the essence of insurance is that "risk" is transferred. There was no such transfer of risk in the present case. The warranty is as to the quality of the goods, and exists to protect customers from the possibility that they will not get what they expected from the transaction. Mr Coleman suggested that the common law distinctions between "insurance", "guarantees" and "warranties" were maintained by Parliament in the GST Act. He stressed that construing the contractual relationships as being "insurance" rather than "warranties" would involve "substituting substance for form". He noted that the form of the contracts are warranties, and that this Court in CIR v Gulf Harbour Development Limited (2004) 21 NZTC 18,915 has recently confirmed the proposition that the nature of transactions for GST purposes is to be determined by their form, and not their substance.

The respondents’ submissions in this Court

[31]	The car companies filed written submissions. By arrangement between counsel, in the oral arguments, Mr Fardell QC dealt with the technical aspects of the insurance issues; Mr Reed QC advanced a contextual argument. I will explain what I mean by that shorthand expression in the next section of this judgment.
[32]	In their written submissions both counsel stressed (as indeed Venning J had done) the statutory definition in s 2 of the GST Act. Counsel submitted that the CIR’s submissions as to the common law distinctions are not supported by particular authority, and missed the essential point which is said to be whether the payments made in the instant case fit within the extended statutory definition of "insurance". Counsel submitted that Venning J had not extended the definition of "insurance" to cover the separately defined term "warranty". Mr Fardell emphasised that there is overlap at common law between the concepts of "insurance", "guarantee" and "warranty".
[33]	As to Suzuki, counsel submitted that case is distinguishable both on its facts and because the insurance argument was not raised in that case. It was said that the actual focus of Venning J at trial was properly on the reimbursement payment "made by the manufacturer to the importer, and the obligation that the reimbursement payment discharges". It is said that the Suzuki case is "in every respect a different case to this one".
[34]	At its heart, the argument for the car companies is that the manufacturer’s payments are not in respect of taxable supplies by them but are instead, in some sense, compensation (or indemnity) for loss.

Mr Reed’s contextual argument

[35]	I interject these observations at this section of the judgment because they relate to some submissions Mr Reed made to us orally as to how we should approach the classification problem in this case, having regard to the purposes of the GST legislation and the way matters have in fact fallen in relation to car companies in New Zealand.
[36]	Mr Reed’s concerns went like this. It is important to bear in mind the general purpose of the GST legislation. This is a value-added tax which, in the ultimate result, falls on the ultimate consumer. Putting it at its simplest, in cases like the present, the tax has "spilled down" the chain of persons to the ultimate consumer (the car buyer) with the car distributor being taxed "along the way". To return (in the warranty process) an element of tax "up the chain" to the car distributor, is to add an element of "double taxation".
[37]	This kind of concern was advanced to this Court in the Suzuki case. The argument was rejected.
[38]	The issue was subsequently taken up in Parliament. The Commentary to the Taxation (Relief, Refunds and Miscellaneous Provisions) Bill as reported from the Finance and Expenditure Committee on 27 May 2002 proposed that the legislation be amended to correct what was seen to be an anomaly. The Select Committee specifically referred to the Suzuki case and said:

GST treatment of warranty payments from offshore warrantors
The bill amends provisions relating to the GST treatment of warranty payments made by an offshore warrantor. This issue arose when the Suzuki case clarified the current law relating to warranty payments. In that case, the overseas company (Suzuki) sold a number of new motor vehicles to Suzuki New Zealand, which then imported the vehicles into the country for sale. A warranty agreement covering the value of anticipated warranty repairs was included as part of the sale price of the vehicles and attracted GST on importation into New Zealand. When the vehicles required repairs under warranty, Suzuki provided payment to Suzuki New Zealand for the actual cost of the repairs. The Court of Appeal found that the warranty payments from Suzuki to Suzuki New Zealand were for services provided in New Zealand, and therefore attracted GST at the standard rate. This decision results in a double impost of GST, where GST is paid for the initial warranty agreement and again on the actual warranty payment.
The bill zero-rates supplies of goods and services under a warranty agreement when the importer provides a service of remedying a defect under warranty to the non-registered offshore warrantor, which pays consideration for the service. These amendments are limited to warranties that were included in the cost of the initial good and have therefore attracted GST at the time of import. This ensures such payments do not attract a double impost of GST.
A number of submitters argued these provisions should apply retrospectively back to the introduction of GST on 1 October 1986. The majority disagrees, and does not recommend retrospectivity in this instance. As a general rule, we note that retrospective legislation is inappropriate unless it does not contravene the rational and legitimate expectation of all parties. We note retrospective changes would reverse the judgment of the Court of Appeal in the Suzuki case as it applied to parties involved in the litigation. Where a fault in the legislation results in an incorrect outcome, it is usual to correct the faults prospectively. While taxpayers may have had a perception that GST is not payable on warranty payments, this was an incorrect view of the legislation. We also note there was no detailed policy consideration on the payment of GST on warranties, unlike retrospective changes in the Taxation (Taxpayer Assessment and Miscellaneous Provisions) Act 2001, where there had been substantial consultation prior to the introduction of GST on the appropriate treatment of the particular transactions. National and ACT members recommend that the changes to the GST treatment of warranty payments from offshore warrantors should be made retrospective, to be consistent with the purpose of the new legislation and the treatment of in-bound tourism operators in a previous bill.
We recommend broadening the scope of these provisions, to ensure that they cover other warranty arrangements. For example, we note that the offshore warrantor may not provide the payment to the importer, but may directly pay a third-party repairer for repair services provided to the eventual purchaser of the product. Such an arrangement would not be covered by the provisions as currently drafted, and would still be subject to a double impost of GST. We also note the provision of replacement parts or goods should be zero-rated as an essential element of the warranty. The appropriate provisions would zero-rate payments given by a non-resident warrantor to a registered business for the supply of goods or services under a warranty agreement, if the non-resident warrantor is unable to recover any GST cost associated with the consideration payment and the warranty had previously attracted GST on import.
We note many warranty arrangements require the warranty holder to provide some payment for the repair cost. Such additional payments will not have previously attracted GST, and therefore should not be zero-rated. However, in such agreements any payment by the warrantor should still be zero-rated. We recommend the definition of ‘‘warranty’’ provided in clause 84(3) not contain the words ‘‘without further cost to the recipient’’, as such a definition would exclude such arrangements. We also recommend amending the bill to insert the definition of ‘‘warranty’’ into section 2 of the Goods and Services Tax Act 1985 (at 9-11, internal citations omitted).

[39]	The legislation was then in fact amended in the manner suggested, but the amendment was not made retrospective.
[40]	It is easy to see why the car companies should feel aggrieved that, Parliament having been persuaded that there was, at least in a broad sense, some element of unfairness to them, that the past had not been righted too. The task of this Court, however, is to adjudicate upon the law as it stood, at the relevant time.
[41]	In the result, these submissions, although important to tax practitioners in understanding how the law reached the position in which it now stands (and we have recorded them for that reason) have to be set to one side in resolving the particular case before us.

The classification problem

[42]	Section 2 of the GST statute uses the terms "insurance or guarantee". The terms are disjunctive, and in my view must bear their ordinary commercial meanings, given the overall context of the statutory definition in which they are employed. It would therefore be incorrect to conflate the two concepts into some amorphous third concept of, "reimbursement".
[43]	I will first consider whether the transactions are insurance contracts, and then whether they could be said to be guarantees.

Insurance contracts?

[44]	There is no "intrinsic" definition as to when an insurance contract exists. Megarry VC thought the task of identifying the elements of such a contract to be one of "considerable difficulty" (Medical Defence Union Ltd v Department of Trade [1980] Ch 82) and he declined to assay the task ("It may be that it is a concept which it is better to describe than to attempt to define" (at 95)). To like effect, Templeman J, as he then was, having noted that there was no statutory definition in the instance before him, thought it "undesirable that there should be [an all embracing definition], because definitions tend sometimes to obscure and occasionally to exclude that which ought to be included" (Department of Trade and Industry v St Christopher Motorists’ Association Ltd [1974] 1 WLR 99 at 101).
[45]	Given the lack of an intrinsic definition of insurance at common law, as a general approach, when courts have been asked to determine whether a transaction did or did not amount to an insurance contract, the appropriate approach has been seen as being to look at the transaction as a whole, in its commercial context.
[46]	Much reference was made in the High Court, and again in the submissions to us, of the well-known observation by Channel J in Prudential Insurance Company v Inland Revenue Commissioners [1904] 2 KB 658:

It must be a contract whereby for some consideration, usually but not necessarily for periodical payments called premiums, you secure to yourself some benefit, usually but not necessarily the payment of a sum of money, upon the happening of some event. Then the next thing that is necessary is that the event should be one which involves some amount of uncertainty. There must be either uncertainty whether the event will ever happen or not, or if the event is one which must happen at some time there must be uncertainty as to the time at which it will happen. The remaining essential is that which was referred to by the Attorney-General when he said the insurance must be against something. A contract which would otherwise be a mere wager may become an insurance by reason of the assured having an interest in the subject matter - that is to say, the uncertain event which is necessary to make the contract amount to an insurance must be an event which is prima facie adverse to the interest of the assured. The insurance is to provide for the payment of a sum of money to meet a loss or detriment which will or may be suffered upon the happening of the event (at 663).

[47]	There is some danger that a statement of that kind will acquire an over-sanctified status. And check-lists, whilst useful, are not conclusive. The important consideration is always the features of the particular transaction, as a whole.
[48]	These general observations need also to be borne in mind. The aim of insurance is to shift risk from one person (the insured) to another (the insurers). There must be an element of uncertainty as to the risk, which may or may not happen, or an event which is certain to happen but at a time which cannot be predicted, and the insured must have an insurable interest in the subject matter. As with any contract, each party must provide consideration, which in this instance will usually be a premium taken in the form of money. But like consideration in the general law of contract, consideration can take almost any form as long as there is (in the well-known words of Lush J), "some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered, or undertaken by the other" (Curry v Misa (1875) LR Exch 153 at 162). The consideration supplied by the insurers is the promise to provide a benefit in exchange for the premium. The insured must have a legal right to the benefit where the claim falls within the terms of the agreement, and the benefit must have some value (Department of Trade and Industry v St Christopher Motorists’ Association Ltd, above).
[49]	For my part I again stress the importance of looking at the contract or transaction as a whole before determining whether or not it amounts to an "insurance contract". The short point here is that an agreement or arrangement may have elements which, in some ways, make it resemble an insurance contract - but when seen as a whole, it is clear that it is not. The context is extremely important. As one commentator has said, "Insurance contracts are best seen (and defined, if at all) according to the angle or line of approach, that is, the context or issue before the court" (M A Clarke, The Law of Insurance Contracts 3 ed 1997 at 2).
[50]	The assertion that the transactions in issue in this case amount to "insurance contracts" was always a long bow; in my view, the arrow falls short and wide of the mark by some distance.
[51]	Having regard to what I have identified as the appropriate approach to this kind of question, I say this for these reasons.
[52]	First, it is of very great significance that the transactions are expressed to be "warranty" transactions. The appellants seek to say that they are not what they are expressed to be. That is always a difficult burden, and it is made even heavier when, as Mr Coleman rightly pointed out, this Court has stressed that in approaching matters of this kind regard is to be had to the form of the transaction.
[53]	Second, the arrangements in fact operate exactly as one would expect warranty claims to operate. We were taken through the various methods of "claiming back" used with respect to these companies, and they are warranty claim type procedures; they are not the sort of procedures found in insurance claims.
[54]	Thirdly, the fact that in some respects there are apparent similarities to an insurance regime does not make these transactions insurance contracts. At the most general level, there is in one sense "indemnification", to use a term to which counsel resorted. "Compensation" was another term counsel used. But that is as far as the comparison goes.
[55]	Fourthly, features which one would expect to see in an insurance contract are distinctly absent. For instance, no policy was issued. Lord Cozens-Hardy MR in Hampton v Toxtieth Co-operative Provident Society Limited [1915] 1 Ch 721 at 732 thought that to be a distinct concern. Even if His Lordship was merely treating that point as an evidentiary factor (as opposed to a fundamental requirement), it is telling in the present instant. Likewise, in the case of an insurance contract a premium would normally be distinctly identified. At one time, distinct sums for warranty cover were identified in respect of the car companies (some instances were drawn to our attention in argument, as for instance in the case of Jaguar) but today there is simply a "rolled-up" price of the car from the importers. Then too, in an insurance context there is normally evidence of a "fund" to which appropriations are made to meet future claims. Our attention was not drawn to any mechanisms of that kind in relation to these companies. The ability to meet warranty claims on the part of the motor companies is dependent upon their solvency. And it is difficulty to see how, in an economic sense, there is a relevant transfer of risk.
[56]	In the result, it appears to me to be an abuse both of every-day, and commercial, language to call these documents, in their various forms, instruments evidencing insurance contracts.
[57]	The situations presently before us do not differ materially from that in the Suzuki case. There are the same three tiers of obligations. In Suzuki this Court held that the payments from the manufacturer to the importer were subject to GST, and that conclusion could be arrived at by one of two routes. Just as in Suzuki, for instance, BMW AG in this case does not perform the actual repairs it is obliged to make under the particular warranty. The parties operate in a manner whereby the manufacturer’s contractual obligations are satisfied by the importer or by its agent effecting the repairs. As was observed by the Bench during the course of argument, there could just as easily be a third party performing the manufacturer’s obligations. Once the importer effects the repairs, BMW New Zealand is entitled to the funds it receives - absent the physical act of repair BMW New Zealand would be paid nothing, just as any third party performing the repair for the manufacturer would be entitled to the money once the repair was satisfactorily done. The payments are consideration for the repair services.

Contracts of guarantee?

[58]	Because Venning J found that the relevant transactions amounted to insurance contracts, he did not find it necessary to address whether these transactions could be said to amount to "guarantees" within the GST Act.
[59]	In this Court, Mr Reed maintained (if necessary) that the relevant instruments were guarantees.
[60]	There can be some functional concordance between the effect of a guarantee and that of an insurance contract. Insurers promise to indemnify (or "stand behind") the insured against loss, and guarantors may also "stand behind" a loss, or failure to discharge a debt. However the critical difference is that, in insurance, the primary liability is on the insurers, whereas in a contract of guarantee the primary liability is on the original debtor. A guarantee is a binding promise of one person to be answerable for the debt or obligation of another, if that other defaults. What is distinctive about a contract of guarantee is the secondary obligation which is assumed by the guarantor or "surety", as the person is sometimes called. It is this double tier of obligations, one primary and the other secondary, which above all marks out a guarantee.
[61]	That is not what occurred in the transactions before us. To take, for instance, the case of BMW, the provisions relating to financial settlement between the importer and BMW are simply that "BMW will compensate the importer for his expenditure for warranty and goodwill settlement works ...". In other words, BMW is not guaranteeing that somebody else will pay; it has assumed the primary liability.

Section 5(13) and liability for GST

[62]	Given the views I have expressed, it is not necessary for me to go further - the appeal must succeed - but I deal with this matter briefly, for completeness.
[63]	Venning J concluded that if s 5(13) of the GST Act did not apply, then a payment by an insurance company was not taxable.
[64]	Counsel for the Commissioner submitted that Venning J’s reasoning was wrong even if (contrary to the view I have taken) the manufacturers are insurance companies and the relevant contracts are contracts of insurance.
[65]	The Commissioner submits that s 5(13) must be viewed in its context: that is, as a subsection of s 5, which defines supply and identifies a number of situations where money changes hands and deems those situations to constitute supplies, thereby removing any doubt. In the Commissioner’s submission, s 5(13) deals with indemnity payments by insurers, thereby rendering the recipient of the cash liable for GST output tax on the transaction. Further, the CIR submits that it is "equally clear" that where a service is paid for under an insurance contract (for instance a glazier fixing a broken window), GST is payable on that payment in the usual way.
[66]	I agree that payments from an insurance company are not automatically exempt if s 5(13) does not apply. Or, to put it another way, any payment that is in respect of a supply will be taxable in the hands of the recipient even if the payer is an insurance company. Here, the payments are in respect of supplies and are taxable in the hands of the recipient.

The first cross-appeal: composite supplies

[67]	The respondents (the cross-appellants) argue that the requisite repairs were a composite supply consisting of labour and replacement of parts, and that the price departure could be seen as either a refund on the purchase price, or a sale of parts by the overseas manufacturer - both of which are outside the Act.
[68]	Venning J accepted that the GST Act contemplated composite supplies, but, focusing on the actual transactions, he concluded that it was a mischaracterisation of the contracts in question to construe the payments from the overseas manufacturer as being a partial refund of the purchase price.
[69]	Before us the Commissioner supported the Judge’s analysis.
[70]	In my view, there is no contractual justification for this reduction of the purchase-price argument which was rejected in Suzuki. The dealer owns and resells the parts to customers or uses those parts, which it owns, in the repair work. To put it another way, I agree that there is no basis for saying the sale is direct from the manufacturer.

The second cross-appeal: the splitting of the supply of repair services

[71]	Venning J rejected the notion that the supply could be split into component parts, such that only the labour portion attracted GST.
[72]	Recently, in CIR v Gulf Harbour Development Limited (supra) this Court held (admittedly on the facts of that case) that a particular supply could not be "pulled apart" and dissected into its underlying component parts.
[73]	In this instance, the manufacturer’s contract warranted the goods and agreed to repair the cars free of charge. I agree with Mr Coleman that there is no contractual justification for going behind the plain wording of the agreements. It is true that the cost of services is calculated by reference to the labour time and price of the parts, but that does not change the character of the supply.

Conclusion

[74]	The Commissioner’s argument with respect to the insurance contract point must succeed, and the appeal should be allowed.
[75]	The cross-appeals fail.
[76]	As to costs in the High Court, Venning J thought that costs should follow the event. He suggested scale 3B. I agree. The Commissioner should have costs on the 3B scale in the High Court together with reasonable disbursements, if necessary as fixed by the Registrar in that Court, against the respondents (jointly and severally).
[77]	In this Court, the Commissioner should have costs of $10,000 against the respondents (jointly and severally) together with reasonable disbursements, if necessary as fixed by the Registrar of this Court.

WILLIAM YOUNG J

[78]	I see the s 5(13) issue as a red herring.
[79]	It is agreed on both sides that the subsection does not literally apply; albeit that this is for different reasons. The Commissioner maintains that the subsection does not apply as the warranty arrangements are not by way of insurance or guarantee. The car companies maintain that the subsection does not apply because the circumstances are covered by the proviso to s 5(13).
[80]	In those circumstances, s 5 should be applied as if 5(13) did not exist.
[81]	With s 5(13) out of play, the key question is whether there is a supply for the purpose of s 5(1). This issue depends upon whether the payments (or credits) as between the manufacturers and the car companies are to be categorised as:

(a) Compensation for loss (being the discharge of obligations to indemnify in relation to the underlying warranties); or
(b) Payment for taxable supplies made by the car companies.

[82]	The arrangements in the present case are sufficiently similar to those considered in Suzuki for it to follow that the car companies must be regarded as having made taxable supplies to the manufacturers. Mr Fardell, for BMW New Zealand Limited, accepted that, in the absence of the s 5(13) argument, Suzuki was indistinguishable. This was not accepted by the other respondents but Mr Morten’s attempts to distinguish the arrangements affecting his clients from those which were involved in Suzuki were unpersuasive.
[83]	In those circumstances, I am satisfied that the appeal must be allowed.
[84]	I recognise that this approach is not in accordance with the way in which the issues in the case were identified by the parties, see [10] above. Those issues were predicated on the assumption that if the key arrangements between the manufacturers and car companies were in the nature of contracts of insurance, this was decisive of the case in favour of the car companies. That is certainly the way in which Venning J addressed the case in his judgment. However, in this Court Mr Coleman for the Commissioner advanced the argument which I have accepted. Although counsel for the car companies were understandably troubled by the raising of a new argument on appeal, they did not seek to argue that the way in which the issues were identified in the High Court precluded consideration of the argument. Nor were they able to point to the sort of prejudice which would justify us declining to hear a new legal argument.
[85]	Underpinning the arguments advanced in support of the cross-appeal is the contention that GST is not payable on replacement parts imported into New Zealand. Mr Coleman said that this contention is not based on any provision in the Act but rather on the practice of the Customs authorities. I am not sure that this is right. My impression is that the "transaction value" of such a part, assessed in accordance with the Second Schedule to the Customs and Excise Act 1996 would be zero dollars. I say that this is only my impression because the Second Schedule was not discussed in any detail in front of us and, in the absence of detailed discussion, it would not be right to express a concluded view.
[86]	Both the arguments advanced in support of the cross-appeal seem to me to fail on the facts. The car companies and their downstream distributors did not separately identify "replacement parts" either as and when they were imported into New Zealand or in their spare parts inventories. Rather, as I understand it, customs GST was paid on the FOB value of the parts as they were imported. This means that the argument rests on ideas of economic equivalence. The car companies say that the transactions which take place when the manufacturers honour warranty claims made by the car companies should be treated notionally as the manufacturers supplying replacement parts and should thus be treated as non-taxable. But, this argument – despite its repackaging – seems to me to be fundamentally the same as that which was rejected by this Court in Suzuki.
[87]	I am by no means unsympathetic to the position of the car companies. There is a real sense in which there is a double impost of GST on the chains of transaction which ultimately produce what in substance is a single supply to the end-user of a car which works over the period covered by the warranty in question. The reality, however, is that the issues of principle which determine this case were settled by Suzuki. The correctness of Suzuki was not directly in issue before us and given the subsequent legislative changes, it is hardly a prime candidate for reconsideration in this Court.
[88]	Accordingly I would dismiss the cross-appeal.

Solicitors:
Crown Law, Wellington for Appellant
Gellert Ivanson, Auckland for First, Third, Fourth, Fifth, Sixth, Seventh and Eighth Respondents
Lee Salmon Long, Auckland for Second Respondent