Judgment summary
This appeal concerned whether Cobar Management Pty Ltd (C.M.P.L.), an Australian resident, received arm's length consideration from its Swiss parent Glencore International A.G. (G.I.A.G.) for the sale of copper concentrate in the 2007 to 2009 income years, under Div. 13 of Pt. III of the Income Tax Assessment Act 1936 (Cth.) and Subdiv. 815-A of the Income Tax Assessment Act 1997 (Cth.) (para 1).
In February 2007, C.M.P.L. and G.I.A.G. amended their long-standing supply agreement, switching from a mix of benchmark and spot market treatment and refining charges (T.C.R.C.s) to a 'price sharing' formula fixing T.C.R.C.s at 23% of the copper price for three years, and expanding G.I.A.G.'s quotational period optionality with back pricing (paras 28-33).
The primary judge found in favour of the taxpayer on all issues, holding that the consideration paid fell within the arm's length range, preferring the evidence of the taxpayer's expert Mr Wilson over the Commissioner's expert Mr Ingelbinck (paras 105, 115).
The Full Court (Middleton and Steward JJ, with Thawley J agreeing in the result but differing on reasoning regarding Subdiv. 815-A) dismissed the Commissioner's appeal on the price sharing and quotational period optionality issues but allowed the appeal in part in relation to the 2009 freight allowance, where the taxpayer failed to discharge its onus of proof (para 239).
Background
C.M.P.L. owned and operated the CSA copper mine near Cobar, New South Wales, a relatively small but high cost underground mine (paras 17-19). From 1999, C.M.P.L. sold all of its copper concentrate production to G.I.A.G., its ultimate parent, under a series of offtake agreements that evolved over time (paras 20-27).
Following the closure of the Port Kembla smelter in 2003, the agreements were amended in 2004 and 2005 to give G.I.A.G. greater flexibility in choosing quotational periods, including 'back pricing' (paras 21, 26).
In February 2007, amid unprecedented volatility in copper prices in 2006, the parties amended the agreement to adopt a price sharing formula fixing T.C.R.C.s at 23% of the copper price for the 2007 to 2009 contractual years, and to expand quotational period optionality to a shipment-by-shipment basis (paras 28-32).
The Commissioner issued amended assessments to Glencore Investment Pty Ltd, the provisional head company of the relevant consolidated group, contending the price paid by G.I.A.G. was below arm's length consideration (para 1).
Core dispute
The central issue was whether the consideration received by C.M.P.L. for its copper concentrate in the 2007 to 2009 years was less than the arm's length consideration under Div. 13 of the 1936 Act, and whether profits that might have been expected to accrue to C.M.P.L. but for non-arm's length conditions had not accrued, under Subdiv. 815-A of the 1997 Act and Art. 9 of the Swiss Treaty (paras 2-15).
A key legal question was whether the Commissioner or the Court could substitute a different pricing methodology (such as reliance on benchmark T.C.R.C.s) for the price sharing and quotational period optionality terms actually adopted by the parties, or whether this would constitute an impermissible reconstruction of the transaction (paras 108-109, 151-163).
The Commissioner contended that C.M.P.L., if independent, would never have agreed to the February 2007 amendments given the pre-existing terms, which the Commissioner treated as themselves representing an arm's length benchmark (paras 118-119, 165-166). The taxpayer contended the 23% price sharing rate and the quotational period optionality clause fell within a range of outcomes that independent parties dealing at arm's length might reasonably have adopted, given the volatility of copper prices and T.C.R.C.s and the mine's high cost status (paras 42-54, 194-213).
A separate and narrower dispute concerned whether the freight allowance for 2009, calculated by reference to shipping costs to India, was an arm's length allowance (paras 33, 94, 232-238).
Court findings
The Full Court held that both Div. 13 and Subdiv. 815-A permitted the Commissioner, as a matter of legal capacity, to substitute a different pricing formula or methodology from that actually adopted by the parties, where that formula formed part of the consideration or price calculation, but this did not mean any such substitution was reliable or correct on the facts (paras 154-160).
The Court found that the relevant statutory test asks what consideration 'might reasonably be expected' to have been paid between independent parties, not what independent parties 'would' have agreed to, and that there may be a range of arm's length outcomes rather than a single correct price (paras 182-186).
On the price sharing issue, the Court held that it was open for the taxpayer's expert, Mr Wilson, to give evidence that adopting a 23% price sharing rate was a commercially rational choice for a high cost mine seeking certainty amid volatile copper prices and T.C.R.C.s, and that this fell within an arm's length range supported by the Brook Hunt data and comparable contracts (paras 194-214). The Court rejected the Commissioner's contention that only retention of the pre-existing benchmark/spot formula could be arm's length (para 213).
On quotational period optionality, the Court upheld the primary judge's rejection of Mr Ingelbinck's opinion that a quid pro quo was required, noting that his opinion was based on decisions shown to be factually incorrect (para 226-229) and that valuation of the benefit could only be done with impermissible hindsight (para 227-230).
On the freight allowance for 2009, the Court held that the taxpayer had failed to discharge its onus, since it led no evidence explaining why shipping costs to India were used as the basis for the freight allowance when only a small proportion of shipments in prior years had gone to India (paras 233-238).
Justice Thawley agreed with the outcome but provided separate reasoning on the operation of Div. 13 and Subdiv. 815-A, differing from Middleton and Steward JJ on whether the distinction between clauses that 'define price' and other clauses was the correct basis for determining what could be substituted (paras 259-270, 296-299).
Outcome
The appeal was allowed in part. The taxpayer succeeded on all issues except the freight allowance issue for the 2009 year, on which the Commissioner succeeded (para 239, 247). The Court ordered the parties to confer on orders for final relief within seven days, or file written submissions limited to 10 pages if agreement could not be reached.
Tp method highlighted
The dispute centred on the appropriate methodology for calculating treatment and refining charges (T.C.R.C.s) for copper concentrate. Historically, T.C.R.C.s were determined using a combination of benchmark pricing (based on annual industry benchmarks set by major participants) and spot market pricing. From February 2007, the parties adopted a 'price sharing' formula, fixing combined T.C.R.C.s at 23% of the relevant copper price for three years, a rate the taxpayer's expert placed at the mid-point of an industry 'normal range' of 21-26% reported by Brook Hunt (paras 19(d), 29, 43-50).
The agreement also included a 'quotational period optionality with back pricing' clause, allowing the buyer (G.I.A.G.) to select from several quotational periods on a shipment-by-shipment basis, which experts agreed was a recognised feature of comparable arm's length contracts, though its value was said to be very difficult, if not impossible, to quantify precisely (paras 51-54, 112-113).
The Court held that price sharing and quotational period optionality with back pricing were legitimate, recognised methodologies used by independent parties in the copper concentrate market, and that reliance on comparable contracts (used as 'reference points' rather than strict comparables) supported the view that the terms adopted fell within an arm's length range (paras 91, 99, 193, 213).
Major issues / areas of contention
- Whether the consideration received by C.M.P.L. for copper concentrate sold to G.I.A.G. in the 2007 to 2009 years was less than the arm's length consideration under Div. 13 of the 1936 Act
- Whether profits which might have been expected to accrue to C.M.P.L. but for non-arm's length conditions had not accrued, under Subdiv. 815-A of the 1997 Act and Art. 9 of the Swiss Treaty
- Whether the Commissioner or the Court could substitute a different pricing methodology for the price sharing and quotational period optionality terms actually adopted by the parties, without impermissibly reconstructing the transaction
- Whether the 23% price sharing rate adopted in February 2007 fell within a range of outcomes that independent parties dealing at arm's length might reasonably have adopted
- Whether the quotational period optionality with back pricing clause required a quid pro quo in favour of C.M.P.L. to be arm's length
- Whether the 2009 freight allowance, calculated by reference to shipping costs to India, was an arm's length allowance
- The proper role and degree of deference owed by an appellate court reviewing factual findings in a transfer pricing case
- The extent to which a hypothetical arm's length party should be 'depersonalised' from the actual taxpayer's characteristics, including its appetite for risk