Judgments

Decision Information

Spur Oil Ltd. v. The Queen

Collection Judgments
Date 1980-02-22
Report citation [1981] 1 F.C. 461
File numbers T-3595-76
Subjects Income Tax

Decision Content

T-3595-76
Spur Oil Ltd. (formerly Murphy Oil Quebec Ltd.) (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Gibson J.—Calgary, October 22, 23, 24 and 25, 1979; Ottawa, February 22, 1980.
Income tax — Income calculation — Associated companies — Deductions — Artificial transactions — Plaintiff entered into an agreement with an off-shore Bermuda corporation to purchase crude oil at $0.27 per barrel more than what plaintiff had been paying previous supplier — Bermuda corporation also entered into a subcharter of affreightment with plaintiff, and a crude oil sales agreement with plaintiffs previous supplier — All acts of management and control of Bermuda corporation were exercised elsewhere than in Bermuda — Defendant alleged that plaintiff and Bermuda corporation were not dealing at arm's length — Whether above three agreements were artificial transactions — Appeal from Minis ter's disallowance of increased expenses dismissed — Income Tax Act, R.S.C. 1952, c. 148, s. 137.
Appeal by Spur Oil Ltd. from its 1970 income tax assess ment wherein expenses consisting of $0.27 U.S. per barrel times the number of barrels of crude oil purchased from Tepwin Company Limited, an off-shore Bermuda corporation acquired by Murphy Oil Company Ltd., plaintiff's parent company, were disallowed. The $0.27 represents the difference between the price per barrel charged by Murphy Oil Trading Company, a wholly owned subsidiary of Murphy Oil Corpora tion (also Murphy Oil Company Ltd.'s parent company), pur suant to a 1968 agreement, and the price per barrel charged by Tepwin, pursuant to a 1970 sales agreement. In addition to the sales agreement, Tepwin entered into a subcharter of affreight- ment with Spur Oil Ltd., and a crude oil sales agreement with Murphy Oil Trading Company. All acts of control and man agement of Tepwin were done elsewhere than in Bermuda. Tepwin paid most of its 1970 net profits to its parent company as tax-free dividends. The Minister alleges that Spur Oil Ltd. carried on business through Tepwin in order to artificially increase the expenses of Spur Oil Ltd. while enabling the resulting cash flow to be returned to the Canadian parent. It is further alleged that Spur Oil Ltd. and Tepwin were not dealing at arm's length and therefore purchases of crude oil from Tepwin made at a price in excess of the fair market value should be deemed to have been made at the fair market value. The issues are whether the following agreements were artificial transactions within section 137 of the Income Tax Act, R.S.C. 1952, c. 148: the subcharter of affreightment between Tepwin and Spur Oil Ltd.; the 1970 sales agreement between Spur Oil Ltd. and Tepwin; and the 1970 agreement whereunder Tepwin purchased crude oil at a purported fair market value from Murphy Oil Trading Company.
Held, the appeal is dismissed. Such a determination must be based on either (1) the residence of Tepwin and what it did at the material times; or (2) the validity or not of the 1968 agreement between Spur Oil Ltd. and Murphy Oil Trading Company or (3) both bases. The following categories of artifi cial transactions have been considered by the courts: some transactions that are not at arm's length, in which case prima facie, the conclusion is that such transactions are artificial; and some transactions that are entered into by off-shore corpora tions where the management and control is elsewhere than in such off-shore locations, in which case prima fade, the conclu sion is that the transactions entered into by such off-shore corporations are artificial. The evidence established that the management and control of the off-shore corporation Tepwin was not in Bermuda. And instead of evidence being adduced to rebut the prima facie conclusion arising from that fact, the evidence adduced established conclusively that the management and control of Tepwin was divided between the United States and Canada and Tepwin was therefore resident in those loca tions and not in Bermuda at all material times. The evidence also conclusively established that Murphy Oil Trading Com pany prior to and up to February 1, 1979, did in fact sell crude oil to Spur Oil Ltd. under the so-called contract between them; and this contract document was never formally or informally abrogated. It was, therefore at all material times a valid and subsisting contract. The three transactions are artificial within the meaning of section 137(1). Accordingly, by direct applica tion of Part I of the Income Tax Act, the finding is that the excess cost of petroleum products sold, in computing the net income from the 1970 taxation year of Spur Oil Ltd. is not an allowable expense.
Snook v. London & West Riding Investments, Ltd. [1967] 1 All E.R. 518, referred to. Minister of National Revenue v. Leon [1977] 1 F.C. 249, referred to. Minister of Na tional Revenue v. Cameron [1974] S.C.R.1062, referred to. Mendels v. The Queen [1978] C.T.C. 404, referred to. Massey Ferguson Ltd. v. The Queen [1977] 1 F.C. 760, referred to. Seramco Ltd. Superannuation Fund Trustees v. Income Tax Commissioner [1976] S.T.C. 100, referred to. R. v. Alberta and Southern Gas Co. Ltd. [1978] 1 F.C. 454, referred to. Produits LDG Products Inc. v. The Queen [1976] C.T.C. 591; referred to. Harris v. Minister of National Revenue [1966] S.C.R. 489, referred to. Smythe v. Minister of National Revenue [1970] S.C.R. 64, referred to. Salomon v. A. Salomon and Co., Ltd. [1897] A.C. (H.L.) 22, referred to. Pioneer Laundry & Dry Cleaners, Ltd. v. Minister of National Revenue [1940] A.C. (P.C.) 127, referred to. The Commissioners of Inland Revenue v. His Grace the Duke of Westminster [1936] A.C. (H.L.) 1, referred to. W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1979] 1 W.L.R. 974, referred to. De Beers Consolidated Mines, Ltd. v. Howe [1906] A.C. (H.L.) 455, referred to. Swedish Central Railway Co., Ltd. v. Thompson [1925] A.C. (H.L.) 495, referred to. Egyptian Delta Land and Investment Co., Ltd. v. Todd [1929] A.C. (H.L.) 1, referred to. Koitaki Para Rubber Estates Ltd. v. The Federal Commissioner of Taxation (1940-41) 64 C.L.R. 15, referred to. British Columbia Electric Railway Co., Ltd. v. The King [1946] A.C. (P.C.) 527, referred to. H. L. Bolton (Engineering) Co. Ltd. v. T. J. Graham & Sons Ltd. [1957] 1 Q.B. 159, referred to. The Lady Gwendolen [1965] 1 Lloyd's Rep. 335, referred to.
INCOME tax appeal.
COUNSEL:
F. R. Matthews, Q.C. and Murray A. Putnam, Q.C. for plaintiff.
L. P. Chambers, Q.C. and C. Pearson for defendant.
SOLICITORS:
MacKimmie, Matthews, Calgary, for plain tiff.
Deputy Attorney General of Canada for defendant.
The following are the reasons for judgment rendered in English by
GIBSON J.: This is an appeal by Spur Oil Ltd. (formerly "Murphy Oil Quebec Ltd.") from an assessment for income tax for its taxation year 1970.
By that assessment, the Minister of National Revenue (1) disallowed $1,622,728.55 of expenses claimed by Spur Oil Ltd. (then called Murphy Oil Quebec Ltd.) as a deduction from its income for the 1970 taxation year and categorized by the Minister as the "cost of petroleum products sold"; and (2) as a consequence thereof, increased Spur Oil Ltd.'s claim for capital cost allowance to $609,444 and for exploration and development costs to $88,356 being in each case the maximum amount of such expenses allowable to Spur Oil Ltd. for the taxation year 1970; so that (3) Spur Oil Ltd. was assessed as having a revised taxable income of $1,528,641.55 in respect of which $622,- 555.96 of income tax was levied and $158,751.76 interest was charged.
The $1,622,728.55 expenses disallowed is approximately the equivalent of $0.27 U.S. per barrel of crude oil times the number of barrels of crude oil allegedly purchased by Spur Oil Ltd. in the year 1970 from an off-shore Bermuda corpora tion by the name of Tepwin Company Limited. The $0.27 U.S. per barrel of crude oil is sometimes referred to in evidence as "the Tepwin charge" and represents the difference between $1.9876 U.S. per barrel being the price stated as being charged (see Exhibit 1, Document 21.1 dated August 2, 1968) to Spur Oil Ltd. by Murphy Oil Trading Company of El Dorado, Arkansas, and $2.25 U.S. per barrel being the price stated to be charged to Spur Oil Ltd. by Tepwin Company Limited (Bermuda). (See Exhibit 1, Document 44 dated February 1,
1970.) The sum constituting this differential is in the cost of affreightment of the crude oil in 1970 not in the cost of the crude oil itself which remained stable in 1970.
(The $2.25 U.S. price per barrel, which was the price in the taxation year 1970, when compared with the current world price of a barrel of crude oil points up the delay in final settlement of tax liability in this case, which is so frequent also in many other cases.)
(In any event, notwithstanding the result of the determination of the issues in dispute in this appeal, the subject assessment for income tax, all the parties agree, is incorrect in failing to give credit to Spur Oil Ltd. for the amount represent ing the extent of the profit element for the crude oil that arrived on the ship MS Victoria in Decem- ber 1970. (See Exhibit 1, Document 193.) And accordingly, this assessment must be referred back for re-assessment to eliminate the profit element from this shipload of crude oil (Iranian Zakum) in computing the income of Spur Oil Ltd. for the taxation year 1970.)
In respect of the disputed matters of this assess ment the Minister's position (the defendant) is that the sum representing the differential between $1.9876 U.S. per barrel of crude oil and $2.25 U.S. per barrel of crude oil times the number of barrels purchased in 1970 is not a deductible expense of Spur Oil Ltd. in its taxation year 1970. This sum as stated is $1,622,728.55.
The Parties' Positions as Alleged in the Pleadings
A. The Minister of National Revenue (the defend ant) alleges that:
1. in December 1969, Murphy Oil Company Ltd. ("Murphy Calgary"), a Canadian incorpo rated Company which wholly owned Spur Oil Ltd. acquired Tepwin Company Limited, a Ber- muda Company;
2. by agreements dated February 1, 1970, Tepwin purported to subcharter and purchase crude oil at a fair market price from another company by the name of Murphy Oil Trading Company ("Murphy Trading"), a Delaware Company associated with Spur Oil Ltd.;
3. by agreement dated February 1, 1970 (see Exhibit 1, Document 44) Spur Oil Ltd. purport ed to purchase at a price greater than the fair market price, its crude oil requirements for the 1970 year from Tepwin;
4. Spur Oil Ltd. had formerly purchased most of its crude oil requirements at a fair market price directly from or through Murphy Trading pur suant to an agreement dated August 2, 1968 (see Exhibit 1, Document 21.1);
5. Tepwin earned a net profit in its 1970 taxa tion year of $1,556,458.43 and it paid to Murphy Calgary by way of tax-free dividends an amount of $1,554,245; and
6. the net profit purported to have been earned by Tepwin in 1970 was reflected by Spur Oil Ltd. as an increased cost of crude oil thereby reducing Spur Oil Ltd.'s income.
B. Spur Oil Ltd. (the plaintiff) alleges that:
1. the net income of Tepwin for its fiscal year ending December 31, 1970 which apparently has been utilized by the Minister as a basis for determining the amount of expenses disallowed to Spur Oil Ltd. is in fact the profits of Tepwin during such year which were substantially attributable to the difference between
(i) Tepwin's actual cost of affreightment under an agreement made as of February 1, 1970 with Murphy Trading for the transpor tation of 750,000 tons of crude oil from desig nated Persian Gulf or Venezuelan ports to a port designated by Tepwin on the northeast coast of the United States of America; and
(ii) the substantially higher rates prevailing on the said February 1, 1970 and at all ma terial times thereafter at which Tepwin or any other person, could have arranged affreight- ment of crude oil in the open market at the time of actual shipment of crude oil by Tepwin from such designated ports,
such favourable rates for affreightment of crude oil made available by Murphy Trading to Tepwin at no time having been offered to or otherwise made available to Spur Oil Ltd.;
2. all amounts claimed by Spur Oil Ltd. as the cost of petroleum products sold in computing its net income for its 1970 taxation year were amounts actually and properly incurred in the
said taxation year for such purposes including its purchases of crude oil from Tepwin made under the said crude oil purchase agreement dated February 1, 1970 (see Exhibit 1, Docu ment 44) at an aggregate cost to Spur Oil Ltd., which was not in excess of the aggregate fair market value at which like quantities and qual ity of crude oil could have been acquired by Spur Oil Ltd. on the open market to meet its requirements for the said processing contract.
Murphy Oil Corporation Organization Chart and Personnel List
For a better understanding of the facts, it is of assistance to set out the corporate organization chart of Murphy Oil Corporation (which is a public corporation listed on the New York Stock Exchange with headquarters at El Dorado, Arkan- sas) and personnel and their titles namely:
MURPHY OIL CORPORATION
CORPORATE ORGANIZATION CHART
1969, 1970, 1971
MURPHY OIL CORPORATION--U.S. Public
(Headquarters, Corporation
El Dorado, Arkansas.)
C.H. MURPHY, JR. Director 6 President
J.A. O'CONNOR, JR. Director 6 Chairman
of the Board
C.E. COWGER,Director 6 Sr. V.P.
PAUL C. BILLER, V.P. Supply 6 Trans
portation
L.R. BEASLEY, Treasurer
J.W. WATKINS, Secretary 6 General Counsel
E.H. HAIRE, Crude 0i1 Representative
R.A. CARNES, Cashier
H.Y. ROWE, Counsel
D.R. CARIG, Controller Department
C.T. SHIPP, Controller Department
K. WINER, Controller Department
100% 1 78% (Balance public owned)
MURPHY OIL TRADING COMPANY-U.S. MURPHY OIL COMPANY LTD. - CANADA
(becomes Murphy Oil Trading P.C. McDonald, Director 6 President
(Eastern) Company H.Q. London, W.R. SEUREN , Director 6 V.P. Marketing
England and Murphy Oil Trading (to March 20, 1969)
(Western) Company H.Q. El Dorado, C.H. MURPHY, JR„ Director
Arkansas about Feb 18,1970) J.G.K. STRATHY, Director
CHARLES E. CONGER, President J.A. O'CONNOR, JR., Director
PAUL C. BILGER, Vice President I B.H. MONZINGO, Director 8 Exec. V.P.
E.H. HAIRE, Vice President T.H. PRANCE, V.P. Prod. 6 Expl.
N. DI TOMASO, V.P. Marketing
(Officers of Murphy 011 Trading P.R. MATTHEWS, Director 6 Secretary
(Eastern) Company) J.A. GOULD, Treasurer 6 Asst-Secretary
I.G.M. IRWIN, Asst. Treasurer
E.T. YOUNG, Mgr.-Prod.& Expl. Acctg. 6 Asst. Secretary
1 100% J 100 î
TEPWIN COMPANY LIMITED - Bermuda 6(RUIRRP ow SPOI L OIL QUEBE C C . )TD. - Canada B.HAROLD MONZINGO, Director 6
President P.C. MCDONAID, Director 6 President
PAUL C. BILLER, Director 6 V.P. W.R. SEUREN, V.P. Marketing (to
A. GWINNELL, Director 6 V.P. Mar 20, 1969)
J.W. WATKINS,Oirector J . G , K . STRATT{Y, Director
C.T. COLLIS, Director H.B. MONZINGO, Director 6 Exec. V.P.
H.C.. BUTTERFIELD, Director T.H. PRANCE, V.P. Prod. 6 Expl.
.R.S.L. PEARMAN, Alternate Director N. DI TOMASO, Director 6 V.P.
for, Collis 6 Butterfield Marketing
E.H. 13H18!, V.P. P.R. MATTUTEWS,Oirector 6 Secretary
J.A. PECPMAN, Secretary J.A. GOULD, Director 6 Secretary
A.A. RIPLEY, Asst. Secretary I.G.M. IRWIN, Asst. Treasurer
L.R. BEASLEY, Treasurer E.T. YOUNG, Mgr, Prod. 6 Expl. Acctg.
B.D. RICHARDSON, Asst. Treasurer. A.N. MUTT, Mgr. Planning 6 Supply R.A. CARNES, Bank Signing Authority
2. PERSONNEL LIST (except those of Murphy Oil Trading (Western) Company, which was not given in evidence) 1969, 1970, 1971
BEASLEY, L.R. Murphy Oil Corporation,
El Dorado, Ark. USA Tepwin Company Limited
BILGER, P.C. Murphy Oil Corporation,
El Dorado, Ark. USA Tepwin Company Limited,
Murphy Oil Trading Company
BUTTERFIELD, H.C. Tepwin Company Limited Hamilton, Bermuda
CARNES, R.A. Murphy Oil Corporation,
El Dorado, Ark. USA Tepwin Company Limited
COLLIS, C.T. Tepwin Company Limited Hamilton, Bermuda
COWGER, C.E. Murphy Oil Corporation,
El Dorado, Ark. USA Murphy Oil Trading Company
CRAIG, D.R. Murphy Oil Corporation El Dorado, Ark. USA
DI TOMASO, N. Murphy Oil Company Ltd.,
Montreal, Quebec Murphy Oil Quebec Ltd.
FRANCE, T.H. Murphy Oil Company Ltd.,
Calgary, Alberta Murphy Oil Quebec Ltd.
GOULD, J.A. Murphy Oil Company Ltd.,
Calgary, Alberta Murphy Oil Quebec Ltd.
GRANT, A.W. Murphy Oil Quebec Ltd. Montreal, Quebec
GWINNELL, A. Tepwin Company Limited Hamilton, Bermuda
HAIRE, E.H. Murphy Oil Corporation,
El Dorado, Ark. USA Murphy Oil Trading Company,
• Tepwin Company Limited
IRWIN, I.G.M. Murphy Oil Company Ltd.,
Montreal, Quebec Murphy Oil Quebec Ltd.
MATTHEWS, F.R. Murphy Oil Company Ltd.,
Calgary, Alberta Murphy Oil Quebec Ltd.
MCDONALD, P.C. Murphy Oil Company Ltd.,
Calgary, Alberta Murphy Oil Quebec Ltd.
MONZINGO, H.B. Murphy Oil Company Ltd.,
Calgary, Alberta Murphy Oil Quebec Ltd.,
Tepwin Company Limited
MURPHY, C.H., JR. Murphy Oil Corporation,
El Dorado, Ark. USA Murphy Oil Company Ltd.
O'CONNOR, J.A., JR. Murphy Oil Corporation,
El Dorado, Ark. USA Murphy Oil Company Ltd.
PEARMAN, J.A. Tepwin Company Limited Hamilton, Bermuda
PEARMAN, R.S.L. Tepwin Company Limited Hamilton, Bermuda
RICHARDSON, B.D. Tepwin Company Limited El Dorado, Ark. USA
ROWE, H.Y. Murphy Oil Corporation El Dorado, Ark. USA
SEUREN, W.R. Murphy Oil Company Ltd.,
Calgary, Alberta Murphy Oil Quebec Ltd.
SHIPP, C.T. Murphy Oil Corporation El Dorado, Ark. USA
STRATHY, J.G.K. Murphy Oil Company Ltd.,
Toronto, Ontario Murphy Oil Quebec Ltd.
WATKINS, .i.w. Murphy Oil Corporation,
El Dorado, Ark. USA Tepwin Company Limited
YOUNG, E.T. Murphy Oil Company Ltd.,
Calgary, Alberta Murphy Oil Quebec Ltd.
WIMER, K. Murphy Oil Corporation El Dorado, Ark. USA
Facts
The plaintiff Spur Oil Ltd. (formerly Murphy Oil Quebec Ltd.) until February 1970 obtained its supply of crude oil from Murphy Oil Trading Company, a Delaware Corporation 100% owned by the parent Murphy Oil Corporation of El Dorado, Arkansas.
After February 1, 1970, there was a reorganiza tion of Murphy Oil Trading Company (the Dela- ware Corporation) carried out by J. W. Watkins, Secretary and General Counsel of Murphy Oil Corporation, El Dorado, Arkansas, as a result of which (1) Murphy Oil Trading Company became (a) Murphy Oil Trading (Eastern) Company with headquarters in London, England, and (b) Murphy Oil Trading (Western) Company with headquarters in El Dorado, Arkansas; and (2) at the same time, Tepwin Company Limited, Ber- muda was 100% acquired by Murphy Oil Canada Ltd. the latter of whose headquarters is at Cal- gary, Alberta. Tepwin Company Limited of Ber- muda was a so-called "shelf' corporation incorpo rated during the session of Parliament of Bermuda in 1969 by Bermuda lawyers, Conyers, Dill and Pearman. Mr. Watkins, Secretary and General Counsel of Murphy Oil Corporation, El Dorado, Arkansas, did all the negotiations and arrange ments for and bought this Bermuda Corporation for Murphy Oil Company Ltd. Canada.
Then as said in evidence by him, Mr. Watkins caused to have put into Tepwin the following assets: (1) a transportation arrangement, namely, a contract of affreightment between Murphy Oil Company Ltd. (the Delaware Corporation) and Associated Bulk Carriers Limited, Hamilton, Ber- muda (see Exhibit 1, Book 1, Document 12 dated March 28, 1968) which contract of affreightment had a 2 1 / 2 -year term to run, by causing to have entered into and executed what Mr. Watkins called a "subcharter of affreightment" between Tepwin and Spur Oil Ltd. (see Exhibit 1, Book 1, Document 42). Mr. Watkins stated that he did this because he did not want to ask Associated Bulk
Carriers Limited to assign the existing contract of affreightment to Tepwin; (2) by causing a crude oil sales agreement to be entered into and executed as of February 1, 1970 between Murphy Oil Trad ing Company and Tepwin Company Limited (see Exhibit 1, Book 1, Document 43); and (3) by causing to be entered into and executed a contract dated February 1, 1970 between Tepwin Company Limited and Spur Oil Ltd. for the delivery of crude oil. (See Exhibit 1, Book 1, Document 44.)
The effect of these three contracts was that from and after February 1, 1970, Spur Oil Ltd. paid for crude oil $2.25 U.S. per barrel instead of $1.9876 U.S. per barrel which Spur Oil Ltd. had heretofore paid. Spur Oil Ltd. had heretofore paid $1.9876 U.S. per barrel price by reason of the document dated August 2, 1968 (Exhibit 1, Book II, Docu ment 21.1).
As to this latter Exhibit 1, Document 21.1, Mr. Watkins' evidence was that when he caused said contracts, Exhibit 1, Documents 42, 43 and 44 to be entered into and executed between Tepwin and Spur Oil Ltd., he did not know of the existence of Document 21.1. And the position of Spur Oil Ltd. in this action is that Document 21.1 is not a contract and should be ignored.
Under Exhibit 1, Document 21.1, Murphy Oil Trading Company (the Delaware Corporation) did in fact sell crude oil to Spur Oil Ltd. at $1.9876 U.S. per barrel until February 1, 1970.
As to Exhibit 1, Document 21.1 also Mr. Mon- zingo, a Director and Executive Vice-President of Spur Oil Ltd. (and Director and Vice-President of Spur Oil Ltd.'s parent company, Murphy Oil Company Ltd., Canada, and Director and Presi dent of Tepwin Company Limited, Bermuda, the other subsidiary 100% owned by the said Canadian parent company) said in evidence that it was not a contract in that there was no obligation on Spur Oil Ltd. to do anything under that document; that in any event, Exhibit 1, Document 21.1 was in essence a memorandum of an inter-company trans action which established at the date of that docu ment a fair market value for crude oil delivered from the Persian Gulf to the pipeline at Portland, Maine for ongoing shipment by pipeline from Portland, Maine to Montreal, Quebec; and that
when the arrangement and delivery of crude oil under that document, Exhibit 1, Book 1, Docu ment 21.1, which had existed from August 2, 1968, was substituted for the arrangement or con tract for delivery of crude oil, Exhibit 1, Book 1, Document 44 dated February 1, 1970 between Spur Oil Ltd. and Tepwin, he (Mr. Monzingo) determined the price at February 1, 1970 in that contract at $2.25 U.S. per barrel as being a fair market price, having regard in the main to the then cost of affreightment.
During all the relevant periods the cost of crude oil remained relatively stable and so there is no allegation that there was any upward change in the price of crude oil that justified the changes purported to be effected by the execution of Docu ments 42, 43 and 44. It was the price of the freight element in essence that had changed. And such change in the freight element, it is alleged, justi fied the upward change in the Spur Oil Ltd. cost to $2.25 U.S. per barrel, the amount of which change was the sum representing the said differen tial, approximately $0.27 U.S. per barrel of crude oil.
Mr. Watkins said that he undertook this reor ganization of Murphy Oil Trading Company (the Delaware Corporation) (which as stated, was done by dividing it into Murphy Oil Trading (Eastern) Company and Murphy Oil Trading (Western) Company and by acquiring Tepwin Company Limited, Bermuda) after he had ascertained cer tain tax advantages in acquiring and utilizing an off-shore company, after receiving advice from a legal friend in New York.
Regarding how Tepwin Company Limited the Bermuda Company would operate and be managed, Mr. Monzingo in his discovery at page 437 was asked this question and gave this answer, which was put in evidence at this trial:
Q. MR. PEARSON: Referring you to the second page of Exhibit 37, in the paragraph in respect of Tepwin Com pany Ltd., was it contemplated at that time that the office at Hamilton, Bermuda, would be used by Tepwin for the administration of its affairs and the conduct of its operations?
A. I think the conduct anticipated at that time, the conduct of its operations would be carried on for El Dorado, Arkansas. It would be headquartered—at that point, it would be headquartered and have more or less an office
for carrying out the administrative matters necessary to comply with the legal requirements to end up in Bermuda.
As it turned out and as detailed in the evidence at this trial, all acts of control and management of the operations and decisions made in respect to and arrangements for all transactions entered into by Tepwin were done and made at El Dorado, Arkansas, Calgary, Alberta and Montreal, Quebec. Substantially, all of such acts of control and management that were done and made at El Dorado were done and made by two key figures, Mr. Paul Bilger, Vice-President, Supply and Transportation, Murphy Oil Corporation, El Dorado, Director and Vice-President, Tepwin Company Limited, Bermuda and Vice-President, Murphy Oil Trading (Eastern) Company, London, England and Vice-President Murphy Oil Trading (Western) Company, El Dorado, Arkansas, and by Mr. J. W. Watkins, Secretary and General Coun sel, Murphy Oil Corporation, El Dorado, Arkansas and Director, Tepwin Company Limited.
Mr. Bilger was in charge of acquiring all crude oil supplies and arrangements for transportation of it for all the companies in the Murphy Oil corpo ration organization; and Mr. Watkins was in charge of the legal matters for all the companies in the Murphy Oil corporate organization.
As to Tepwin Company Limited, specifically the solicitors and the Bermuda directors and officers of it in Bermuda acted as mere scribes for Mr. Watkins doing only what he instructed them to do. They exercised no control and management and made no decisions as to transactions.
Specifically, in reference to Tepwin as to the transaction for the procurement of crude oil supply and the transportation of it, they did nothing and did not even receive any instruction about these matters: Mr. Bilger looked after these matters. As to the financial matters of Murphy Oil Company Ltd. (which owned 100% of Spur Oil Ltd.) in Canada vis-à-vis Tepwin, Mr. J. A. Gould of Spur Oil Ltd. managed such. As to the overall management of financial matters, such was direct ed by the directors and officers of Murphy Oil Company Ltd. in El Dorado, Arkansas, (see Exhibit 1, Book III, Document 188, the money chart, as to how the funds were transferred be-
tween and among all the Murphy Corporations in the Murphy corporation organization). And as to other matters concerning Tepwin in Canada, the control at Calgary was that of Mr. Monzingo and of Mr. Gould, and at Montreal the control was that of Mr. Monzingo in the main and of some other persons under him.
In sum therefore, although Tepwin Company Limited, after February 1, 1970, was alleged to be in the business of purchasing, selling and deliver ing oil, none of its officers and directors in Ber- muda exercised any control over any such aspects of that business. Tepwin was supposed to purchase oil in the Middle East and have it transported to Portland, Maine. But in fact, Murphy Oil Trading Company (later Murphy Oil Trading (Western) Company) headquartered in El Dorado, Arkansas, after February 1, 1970, purchased the oil in the Middle East and delivered it to Portland, Maine for ongoing shipment by pipeline to Montreal and Tepwin did not.
Some evidentiary proof of this, and there are many other examples, are (1) the fact that in 1970 all invoices to Tepwin were from Murphy Oil Trading (Western) Company; and all bills of lading, evidence of title and negotiable, were made out to Murphy Oil Trading (Western) Company and not Tepwin; (2) the fact that regarding the so-called Tepwin charge (that is the differential between $2.25 and $1.9876) Spur Oil Ltd. always considered that it was not paying the sum repre senting this differential in the price it paid for delivered crude oil, but instead was paying $1.987. (See Exhibit 1, Book II, Document 158, which are bookkeeping entries where there is a notation that the parent company instructs to add $.272 and Spur Oil Ltd.'s accountants note in effect they will "bury it" "before going to bed"); (3) the fact that Tepwin did not incur the normal expenses that one would expect if Tepwin did actually control and manage an international business trading in crude oil. Instead, Tepwin only had charges and expenses for leasing a pro forma office in Bermuda. (See Exhibit 1, Book II, Document 141 being the finan cial statements for Tepwin Company Limited for the year ended December 31, 1970); (4) the fact that Mr. Watkins informed the solicitors in Ber- muda, Conyers, Dill and Pearman to write up Directors' Minutes declaring a dividend each time
a shipload of oil left the Persian Gulf for delivery at Portland, Maine, the dividend being approxi mately equal to the so-called $0.27 Tepwin charge times the number of gallons of crude oil in each shipload; (5) the fact that in Exhibit 1, Document 141 the firm of Peat, Marwick, chartered account ants of Bermuda recorded the true expenses of Tepwin; (6) the fact that in Document 17 in Separate Book dated August 31, 1973 the words reading "pertaining to the audit of Tepwin ...", established that no audit was done for Tepwin until after August 1973; (7) the fact that all the operations transactions and functions taken and done relating to the purchase and sale of crude oil in 1970 were managed and controlled at El Dorado; as to this, every telex sent to and from Esso, British Petroleum etc., was sent to and by Murphy Oil Trading Company, El Dorado, Arkansas; and (8) the fact that the total sum representing the total so-called Tepwin charge, the differential of $0.27 times the number of gallons of crude oil, except for a small amount for expenses, was passed to the Canadian parent company of Spur Oil Ltd., in Calgary by way of tax-free dividends. (See the records of declaration of divi dends on a shipload by shipload basis, Exhibit 1, Document 142, Directors' meeting and Documents 59, 67, 80, 90, 94, 97, 113 and 119, all of which were mentioned by Mr. Monzingo in his evidence.)
Expert evidence was called by the defendant as to whether or not what was contemplated in respect of operations and transactions by Tepwin Company Limited and Spur Oil Ltd., as set out in the contracts, Exhibit 1, Book 1, Documents 42, 43 and 44 was normal and what might be expected in the business world. One of such expert witnesses was Otto G. Glander. He is Chairman of Glander International Inc. of New York, N.Y. Ship Brokers. He has had substantial experience in international shipping and in the business of tanker and bunker brokers and agents, especially the business of brokering sea-going vessels and oil
cargoes and generally in other related businesses. Mr. Glander gave evidence in respect of the fol lowing four questions posed to him by counsel for
the defendant:
1. Whether the freight rates for the transportation of crude oil which were agreed by Associated Bulk Carriers Ltd. (as owner) and Murphy Oil Trading Company (as charterer) in their contract of March 28, 1968, (Exhibit 1, Book 1, Document 12) constituted 'fair market value'.
2. Whether the contract of February 1, 1970, (Exhibit 1, Book 1, Document 42) entered into between Murphy Oil Trading Company and Tepwin Company Limited was a contract which was typical of contracts of affreightment normally entered into in the course of the tanker chartering trade.
3. Whether the freight rates charged by Murphy Oil Trading Company to Tepwin Company Limited in the said contract of February 1, 1970, (Exhibit 1, Book 1, Document 44) constitut ed 'fair market value'.
4. Whether the freight element in the price of crude oil delivered C.I.F. Portland, Maine, charged to the Plaintiff by Tepwin Company Limited under their agreement of February 1, 1970, (Exhibit 1, Book 1, Document 43) constituted 'fair market value'.
Mr. Glander deposed in part as follows:
In order to answer these questions counsel of the Depart ment of Justice made available to me the pleadings in this action, the documents produced by both parties and the transcript of the examination for discovery of Mr. B.H. Monzingo on behalf of Spur Oil Ltd. I have read these materials, and have as well, consulted market records of Glander International Inc. and other information available in the trade.
In addition, Mr. Glander was present at this trial and heard all the evidence adduced by Spur Oil Ltd.
Hereunder is set out in some detail some of the verbatim evidence of Mr. Glander for a number of reasons, all of which are for the purpose of better understanding the issues in this appeal. For such purpose the evidence regarding the various types of contracts normally entered into in international trade for the transportation of crude oil, in the oil tanker market, in spot charter market, and the evidence regarding the spot market prices paid for crude oil, are especially helpful:
1. Did the freight rates for the transportation of crude oil which were agreed by Associated Bulk Carriers Ltd. (as owner) and Murphy Oil Trading Company (as charterer) in their con tract of March 23, 1968, constitute 'fair market value'?
The contract of March 23, 1968 between Associated Bulk Carriers Ltd. as "Owner" and Murphy Oil Trading Com pany as "Charterer" ...(Exhibit 1, Book 1, Document 12) is a contract which in the shipping trade is known as a "Con- tract of Affreightment". In the oil shipping business a con tract of affreightment is an agreement whereby an owner of tankers or other bulk carriers agrees to make available, on a voyage charter basis, as distinguished from a time or bare boat basis, a certain vessel within a restricted physical condi tion, such as length, beam, draft, etc., at certain time inter vals from designated loading ports to designated discharge ports, at a stated price per ton. Such price or rate is at the present time usually expressed as units above or below 100, or "Worldscale 100", while shipping contracts negotiated up to September 15, 1969, had their rates expressed as percent ages above or below a scale of rates which was known as "Intascale". Thus the contract of affreightment between Associated Bulk Carriers Ltd. and Murphy Oil Trading Company ... expresses the transportation fee at "Intascale less 62 1 / 2 %."
"Intascale" was a rate reference published by The Interna tional Tanker Freight Scale Association Limited, of London, England, up to September 15, 1969, while "Worldscale" has, since that date, been a rate reference published jointly by the International Tanker Nominal Freight Scale Association Limited and the Association of Ship Brokers and Agents (Worldscale), Inc. of New York, N.Y.
Both the Intascale and Worldscale rates are predicated on the daily operating costs of a 19,000 ton diesel tanker, making a round-trip voyage between designated loading and discharge ports, plus the costs of bunker fuel consumed for the round voyage, plus port charges incurred, such as agency fees, tugs, customs, overtime dues, etc. The basic assumption is that the vessel is paid to return to the original loading port in ballast, and that the total cost of the round voyage is divided by the total tons of cargo carried, expressed in long tons, resulting in a U.S. dollar figure which is published as the rate for that particular voyage. It was expressed in terms of "Intascale" for contracts negotiated up to September 15, 1969, and has been expressed in terms of "Worldscale" for contracts negotiated after that date. These rates thus relate the average costs of operating a vessel between two given ports. The "Intascale" rates were published annually; so were the "Worldscale" rates until two years ago, when fluctuating port charges and unpublished rates compelled semiannual revisions to these rates. The basic formula, however, remained unchanged until 1979, when wildly fluctuating bunker prices dictated a complete revision of the formula every six months commencing 1980.
The difference between "Intascale" and "Worldscale" rates lies basically in the difference between the daily operat ing costs of a vessel quoted in £ Sterling and US $1,800 a day and also in the computation of the lay-time of a vessel. The reason for the abandonment of "Intascale" and the
adoption of "Worldscale" was the desire to merge the "Inta- scale" rate structure with the American Tanker Rate Schedule (known as "A.T.R.S.") and to have one world-wide acceptable rate structure.
The London Tanker Brokers' Panel under contract to the Shell and BP oil companies, also publishes, on a monthly basis, "Average Freight Rate Assessments" ("AFRA"). These rates expressed in U.S. dollars, are calculations made over a monthly period running from the 16th of one month to the 15th of the following month and represent the weighted average cost of commercially chartered tonnage as employed in the international transport of oil during the calculation period, and such tonnage is divided into four categories, i.e. owned vessels, long-term chartered vessels, short-term char tered vessels and single-voyage charters (spot market). It is important to bear in mind that the period charters upon which the AFRA rates are based are those in existence in that monthly period, regardless to when they were negotiated or entered into. AFRA rates thus cannot be taken as a reflection of the current tanker market. AFRA rates are at best approximations to the cost of long-term chartered and owned tonnage.
There are many types of contracts for the transportation of oil that are entered into in the oil tanker market. These can generally be broken down into long-term, short-term and spot charters. A long-term charter is usually one in which the owner strives to pay off the cost of the vessel over a period of time, which, depending on market conditions, may vary from eight to twelve years. Thus a long-term charter will ordinar ily be of such duration, but may be any period over three years. A short-term charter, on the other hand, is one which generally does not exceed three years. Such charters are usually entered into as a result of short-term needs of charters which owners are prepared to meet as a result of their own needs. While long-term charter rates may as a general rule be expected to be lower than short-term charter rates, it is not uncommon that short-term charter rates may as a result of depressed market conditions be lower than long-term charter rates.
The third principal category of oil tanker charters is spot charters. This is a type of charter which is entered into as a result of immediate needs occasioned by such things as cargo sales, breakdown of chartered vessels, peak requirements in winter and many other factors. Such charters are usually entered into on a voyage-by-voyage basis, although some of them may be for as many as three voyages. Spot charter rates may therefore be expected to be, and indeed are, the most volatile of all tanker charter rates in that they reflect most closely any current prevailing changes in short-term market conditions.
In 1970, when the Plaintiff allegedly purchased oil from Tepwin Company Limited, the long-term oil charter rates for voyages between the Persian Gulf and U.S. East Coast ports for vessels of cargo capacity of between 35,000 and 65,000 tons equated between "Worldscale 83" and "Worldscale 80". At that time the short-term range for similar tonnages for similar voyages equated between "Worldscale 74" and "Worldscale 127" averaging "Worldscale 88", while the market for the spot market fluctuated between "Worldscale 120" and "Worldscale 290". AFRA rates in 1970 for "medi-
urn" size cargoes ranged from "Worldscale 102" to "World- scale 156.8", while that for "Large 1" size cargoes was "Worldscale 75.3" to "Worldscale 109.7".
In March, 1968, i.e. the time that the contract of affreight- ment between Associated Bulk Carriers Ltd. and Murphy Oil Trading Company was entered into, the going long-term oil tanker charter rate for Persian Gulf—U.S. East Coast ports voyages equated to "Intascale minus 23%", while the rates for short-term and spot charters equated to "Intascale minus 15%" and "Intascale minus 26%" respectively. At that time AFRA for "medium" size cargoes was "Intascale minus 23.7%", and for "Large 1" size cargoes was "Intascale minus 34.5%".
As I have said, the contract between Associated Bulk Carriers Ltd. and Murphy Oil Trading Company was a contract of affreightment. The rates negotiated for such contracts, unlike the rates negotiated for time charters or consecutive voyage charters, are not designed to reflect the entire cost of the round-trip voyage of the vessel, but are rather negotiated on the assumption that the cost of the return voyage or of a portion of it, will be borne or defrayed by revenue derived from the transportation of other cargo. It may therefore be expected that rates negotiated for contracts of affreightment will be lower than rates negotiated for time charters or consecutive voyage charters, and a comparison of the rate agreed to in the contract between Associated Bulk Carriers Ltd. and Murphy Oil Trading Company with the going rates for time charters and consecutive voyage charters in effect in 1968 bears this out.
While the rate in the Associated Bulk Carriers Ltd.— Murphy Oil Trading Company contract at "Intascale minus 62 1 / 2 %" appears to be low when compared to their prevalent rates for time charters or consecutive voyage charters for voyages between the Persian Gulf and U.S. East Coast ports, it was agreed to by independent parties and thus presumably met their respective needs in March, 1968. It is therefore, in my opinion, a "fair market rate" or "fair market value" for the transportation of oil under the special conditions agreed to by the parties at that time for the 2' year period specified.
. Was the contract of February 1, 1970 (Exhibit 1, Book 1, Document 42) entered into between Murphy Oil Trading Company and Tepwin Company Limited a contract which was typical of contracts of affreightment normally entered into in the course of the tanker chartering trade?
This contract purports to be a subcontract of affreight- ment whereby Murphy Oil Trading Company endeavours to charter to Tepwin Company Limited ships under charter to Murphy Oil Trading Company from Associated Bulk Carri ers Ltd. by virtue of the contract of affreightment of March 23, 1968.
'There are, however, unusual features to this contract. In the ship chartering business the parties to a contract of affreightment are referred to as "owner" and "charterer", respectively, and the parties to a subcontract of affreight- ment are referred to as "chartered owner" or "disponent
owner" and "charterer", respectively. The description of the parties employed in this contract of February 1, 1970, is not customary in the trade. The only conclusion I can come to as a person experienced in the business is that this contract was drawn by a person not familiar with the language in the trade. In fact, it appears from the transcript of Mr. Monzin- go's examination for discovery (pp. 293-294 ...) that this contract was drawn "in house", i.e. by an employee of the Murphy group of corporations.
Clause 1 of the contract provides that liftings are to be made commencing February 1, 1970, and also that "the first lifting shall not be made prior to February 1, 1970". Obvi ously, since the contract is to take effect on February 1, 1970, the reference to any liftings prior to that date is redundant. Also, it is patently impossible for no liftings to be made in the past, i.e. before February 1, 1970, and I have never seen any such clause in any contract entered into in the normal course of business.
Furthermore, one of the provisions of Clause 1 of the contract is physically most awkward to implement. Unless one assumes that the first lifting is to be made right on February 1, 1970, the date of the contract, and the last on December 31, 1970, the reference to a minimum of 12 liftings in thirty-day periods assumes an air of improbability. The reference to a maximum of 20 liftings in thirty-day periods certainly looks like a mathematical impossibility. Also it is difficult to understand why such awkward and unworkable lifting provisions were substituted for the straight-forward lifting provisions under the prime contract between Associated Bulk Carriers Ltd. and Murphy Oil Trading Company.
Finally, the freight is, in clause 6 of this contract, expressed as "Worldscale 46.6" on Persian Gulf loadings. While it is usual in the trade to express "Worldscale" rates in fractions of .25, .5, or .75, it is unusual to express them in other fractions, such as .6, as is done in this contract. It therefore seems to me that this "Worldscale 46.6" rate is merely a conversion factor, probably of "Intascale minus 62 1 / 2 %" (the rate quoted in the Associated Bulk Carriers Ltd.—Murphy Oil Trading Company contract of affreight- ment).
The foregoing are all features which are unusual in a contract of affreightment which are entered into by parties dealing at arm's length in the ordinary course of business. They are of a nature which leads me to believe that whatever may have been the reasons for drafting this contract between Murphy Oil Trading Company and Tepwin Company Lim ited, commercial considerations could not have been para mount, so that in my opinion, this contract is not one which is typical of contracts of affreightment normally entered into in the course of the tanker chartering trade.
3. Were the freight 'rates charged by Murphy Oil Trading Company to Tepwin Company Limited in the contract of February 1, 1970, (Exhibit 1, Book 1, Document 44) "fair market value"?
Had Murphy Oil Trading Company or Tepwin Company Limited, on or about February 1, 1970, gone into the market
to obtain a contract fo the transportation of oil of 11 or 12 months' duration, for the quantities specified in the contract of February 1, 1970, they would have sought a short-term charter, a consecutive voyage charter or a contract of affreightment. Of these three types of contract, a contract of affreightment is usually the cheapest. On or around Febru- ary 1, 1970, the going market rates for voyages from the Persian Gulf to U.S. East Coast ports for the duration in question were equivalent to about "Worldscale 88" for short- term charters, (although it should be borne in mind that both time charters and consecutive voyage charters are usually negotiated on a world-wide trading basis, rather than merely for more restricted voyages, such as between the Persian Gulf and U.S. East Coast ports).
Around February 1, 1970, the spot market was about "Worldscale 100" for one voyage between the Persian Gulf and U.S. East Coast ports. A prudent purchaser of oil transportation would go into the spot market only to supple ment a basic transportation contract; he would not consider the spot market as a basis for oil transportation for anything but the shortest of periods. The spot market rates around February 1, 1970, in my view, therefore, are inappropriate when considering a transportation contract, such as that between Murphy Oil Trading Company and Tepwin Com pany Limited. Rather, a company with the needs of Murphy Oil Trading Company, i.e. to perform a contract, such as that between it and the Tepwin Company Limited, would have been interested in a time charter of an at least eleven- month duration or a consecutive voyage charter or a contract of affreightment. Since both Murphy Oil Trading Company and Tepwin Company Limited by their contract indicated that a contract of affreightment met their needs, the most relevant market rates to consider would therefore appear to be rates of similar contracts of affreightment to take effect around February 1, 1970. Had such a contract been entered into in the market at that time, the rate would, in my opinion, have been about "Worldscale 78", and this rate would most accurately reflect "fair market value" in the circumstances.
The rate of "Worldscale 46.6" charged to Tepwin Com pany Limited by Murphy Oil Trading Company cannot therefore be said to be comparable to market rates, but was rather below them. Bearing in mind that this was a transac tion which neither was negotiated nor came into existence as a result of normal market forces, and that it is one of the basic purposes of any business transaction to charge what the market will bear, so as to maximize profits, the fixing of this rate could not have been motivated by commercial consider ations. Since it cannot, therefore, be said to have had any relation to the market, it cannot, in my opinion, be said to have "constituted 'fair market value' ".
4. Did the freight element in the price of crude oil delivered C.I.F. Portland, Maine, charged to the Plaintiff by Tepwin Company Limited under their agreement of February 1, 1970 (Exhibit 1, Book 1, Document 43), constitute "fair market value"?
Although the contract between the Plaintiff and Murphy Oil Trading Company of August 2, 1968, for the sale of oil delivered at Portland, Maine at US $1.9876 per barrel does not break down the price into its crude oil and transportation elements, it may safely be assumed that the crude oil element was no more than US $1.39 per barrel. This is supported by the contract between BP Canada and the Plaintiff of April 1, 1966, as amended on October 23, 1968, and Mr. Monzingo's testimony in his examination for discovery, at pp. 301-305 ... By simple subtraction the transportation element of the total price therefore amounted to about US $0.60 per barrel. "Intascale minus 62 1 / 2 %", as per the contract of affreight- ment of March 28, 1968, between Associated Bulk Carriers Ltd. and Murphy Oil Trading Company, was about US $0.58. The difference between US $0.60 and US $0.58 per barrel may possibly lie in marginal mathematical errors in the calculation of those figures.
It may also be safely assumed that the price of the type of crude oil involved in this case F.O.B. Persian Gulf (Kharg Island) was no more than US $1.39 per barrel in February, 1970 (see the crude oil sale agreement of February 1, 1970 between Murphy Oil Trading Company and Tepwin Com pany Limited, and Mr. Monzingo's testimony at pp. 301-305 of the transcript of the Plaintiff's examination for discovery, ... Therefore, when US $1.39 is subtracted from US $2.25 (the purported sale price in the agreement of February 1, 1970, between the Plaintiff and Tepwin Company Limited), the transportation element amounts to US $0.86 per barrel, or an increment of between US $0.26 and US $0.28 per barrel over the transportation element of the price in the Plaintiff—Murphy Oil Trading Company contract of August 2, 1968.
US $0.86 per barrel as of February 1, 1970 is about "Worldscale 69". At that time all the going market rates for the transportation of oil between the Persian Gulf and U.S. East Coast ports were higher ... The price purportedly charged by Tepwin Company Limited to the Plaintiff by the agreement of February 1, 1970, was therefore, at least to the extent of its transportation element, below the "fair market value" prevailing at the time.
A purchaser of oil in the position of the Plaintiff before February 1, 1970, i.e. having a contract for the supply of oil by Murphy Oil Trading Company at US $1.9876 per barrel, for a period of time which was not to expire until April 30, 1973, would naturally seek to improve its position by seeking to lower its costs, or otherwise. The substitute of the contract of February 1, 1970, for that of August 2, 1968, however, increases the Plaintiff's costs. Such a substitution would make commercial sense only if the Plaintiff were somehow to gain other benefits. Such benefits could not have laid in any additional transportation services to be performed by Tepwin Company, for the Plaintiff continued to buy the oil delivered at Portland, Maine with no responsibility by it for the transportation of the oil.
Mr. Monzingo has stated in his examination for discovery (see pp. 235-240 ...) that the Plaintiff had by December, 1969, become concerned about both the supply of the oil which it purchased from Murphy Oil Trading Company and
about its transportation. Mr. Monzingo has stated that the sale contract of August 2, 1968, between the Plaintiff and Murphy Oil Trading Company was only a "best efforts contract", under which shortages had developed apparently occasioned by interruptions in the availability of crude oil supply and slippages in its transportation, and that the new contract with Tepwin Company Limited was substituted for that with Murphy Oil Trading Company in order to alleviate these difficulties.
However, I fail to see how, in any commercial sense, this objective could possibly have been achieved by such substitu tion. For Tepwin Company Limited did not have any greater control over the supply of oil than Murphy Oil Trading Company from which it purchased its oil (see the sale agreement of February 1, 1970, between Tepwin Company Limited and Murphy Oil Trading Company). So far as the alleged transportation problem is concerned, Tepwin Com pany Limited could not have alleviated it, in that it purported to obtain its transportation by way of its subcontract of affreightment with Murphy Oil Trading Company. It may well be that Tepwin Company Limited may have had to charter transportation at higher rates, in addition to that of its subcontract of affreightment; but this cannot, in my opinion, be viewed as an improvement over the situation prevailing up to that time, because Murphy Oil Trading Company could have chartered such additional transporta tion itself, and it did in fact do so twice in 1969 (see Mr. Monzingo's testimony on his examination for discovery at pp. 252-253, ...) In any event, Tepwin Company Limited did not pay out this US $0.26 to US $0.28 per barrel transporta tion increment to anyone for additional transportation efforts, but rather retained it as its profits which it then remitted to its parent company Murphy Oil Company, Ltd., of Calgary, Alberta, as a dividend.
... (Spur Oil Ltd.) also alleges (see paragraph 12 of the Statement of Claim) that "Tepwin performed a bona fide and economic business function for and on behalf of both ... (Spur Oil Ltd.) U.S. Parent Corporation and its Canadian Parent Corporation in acting as an insulator of the business operations and assets of the Plaintiff from the risk of poten tial liability as an owner of tanker cargoes of crude oil which could arise in the event of spillage of such crude oil on the high seas or in coastal waters while facilitating the utilization by the U.S. Parent Corporation of its proprietary crude produced in Venezuela and the Persian Gulf area".
... (Spur Oil Ltd.) had purchased its oil from Murphy Oil Trading Company at Portland, Maine up to February 1, 1970. This meant that ... (Spur Oil Ltd.) was not exposed to any risks in the transportation of oil before its delivery at that port. The practice to purchase the oil at Portland, Maine continued after February 1, 1970, the only difference being the purported substitution of Tepwin Company Limited for Murphy Oil Trading Company. I therefore find it difficult to understand how the substitution could have afforded ... (Spur Oil Ltd.) any insulation from high-seas transportation risks in addition to that under its contract with Murphy Oil Trading Company. On the other hand if one were to assume from the allegations in paragraph 12 of the Statement of Claim that from February 1, 1970 onward ... (Spur Oil Ltd.) would have had to look after its own transportation of
oil to Portland, Maine had it not been for the interposition of Tepwin Company Limited, such interposition could not, in my opinion, have saved ... (Spur Oil Ltd.) from being exposed to the risk of potential liability. For Tepwin Com pany Limited being a company without an established com mercial reputation for reliability and credit, would not likely have been able to enter into any oil transportation contracts without ... (Spur Oil Ltd.) guaranty of performance.
Furthermore, assuming that what is meant by "facilitating the utilization by the U.S. Parent Corporation of its proprie tary crude oil produced in Venezuela and the Persian Gulf area" is arranging for its transportation, then Tepwin Com pany Limited certainly had no greater capability in this regard than Murphy Oil Trading Company. In fact, all the expertise in this regard lay with Murphy Oil Trading Com pany, and not with Tepwin Company Limited, a newcomer to the field. On the other hand, if what is meant by that phrase is that Tepwin Company Limited facilitated the U.S. Parent Corporation's ability to sell its crude oil, I find it difficult to see how ... (Spur Oil Ltd.)—Tepwin Company Limited contract was an improvement in this regard over ... (Spur Oil Ltd.)—Murphy Oil Trading Company contract.
I have also reviewed the documentation produced by the parties and the transcript of Mr. Monzingo's examination for discovery in a search for a commercially justifiable basis on which the increment in the transportation element of the price was calculated, but have been unable to discover one. In other words, the amount of this increment appears to have been arrived at arbitrarily with no reference to market factors.
It is therefore my opinion that the substitution of the contract with Tepwin Company Limited for that with Murphy Oil Trading Company was not undertaken for any valid commercial reasons. Similarly, since the transportation element of the price ostensibly agreed to between ... (Spur Oil Ltd.) and Tepwin Company Limited neither reflected the going market rate for such transportation in February, 1970, nor was arrived at for any valid commercial reasons it cannot, in my opinion, be taken to have "constituted 'fair market value' ".
Taking into consideration this and the other expert evidence and the evidence of Spur Oil Ltd., as to the status of the document, Exhibit 1, Book
1, Document 21.1, it would appear that on August
2, 1968 Spur Oil Ltd. entered into a crude oil sales agreement and crude oil processing agreement with British Petroleum at Montreal (see Exhibit 1, Book 1, Documents 1, 2 and 3). After that, the persons at El Dorado, Arkansas, having control and management of all the Murphy enterprises wanted to expand operations in Quebec, Canada, to develop what is referred to in the evidence as the Sasson Proprietary crude. For that purpose Spur Oil Ltd. obtained an option from British Petroleum to bring in its own proprietary crude for refining by British Petroleum at the latter's refin-
ery at Montreal, Quebec, Canada. In preparation for that Murphy Oil Trading Company (U.S.) entered into the contract of affreightment in 1968 above referred to, namely Exhibit 1, Book 1, Document 12. It appears that the intention under this contract was that Murphy Oil Trading Com pany (U.S.) would supply Spur Oil Ltd. with sufficient proprietary crude to fulfill the Spur Oil Ltd.'s obligation with British Petroleum, that is by the shipment of such proprietary crude from the Middle East to Portland, Maine and then by tran- shipment by pipeline to Montreal, Quebec for Spur Oil Ltd.'s account.
It would appear that Murphy Oil Trading Com pany entered into this contract (Exhibit 1, Book 1, Document 12) because it had agreed to supply Spur Oil Ltd. with its crude requirements at a price of $1.9876 U.S. per barrel to enable Spur Oil Ltd. to carry out its intent by the contract with British Petroleum to put proprietary crude oil through British Petroleum's refinery. Mr. Monzin- go's evidence in effect confirms this. Otherwise, Spur Oil Ltd. would be put out of business or would have to buy crude from British Petroleum, either of which alternative would be economically objectionable. (See Exhibit 1, Book 1, Document 15.)
It appears further from the evidence that in 1969 Murphy Oil Company Ltd. in order to fulfill such obligation with British Petroleum chartered the ships Phantam and Orient Clipper at spot charter rates and did not pass on this excess cost of doing so to Spur Oil Ltd. Mr. Monzingo confirms this. (See page 257 of his discovery, which was made part of the evidence.) What Mr. Monzingo said was that this excess cost could not be passed on because of the agreement with Spur Oil Ltd., (that is, agreement of August 2, 1968, Exhibit 1, Book 1, Document 21.1).
As further corroboration that the parties acted upon Exhibit 1, Book 1, Document 21.1 on the basis that it was a contract, such document should be compared with Exhibit 1, Book 1, Document 22, the agreement with Spur Oil Ltd. and British Petroleum. From such comparison it appears that the figures in Exhibit 1, Book 1, Document 21.1 are the quantities of crude oil that were to be produced to Spur Oil Ltd. or otherwise Spur Oil
Ltd. might lose the British Petroleum processing agreement or have to buy more crude oil from British Petroleum.
It appears further from his evidence that Mr. Bilger believed that he had to supply the quantities referred to in Exhibit 1, Book 1, Document 21.1 at $1.9876 U.S. per barrel.
It therefore is conclusive from the evidence that the document Exhibit 1, Book 1, Document 21.1 was considered by the parties to be a valid contract and all parties acted upon it pursuant to its terms at all relevant times, including the taxation year 1970, notwithstanding the said agreements dated February 1, 1970 between Tepwin and Spur Oil Ltd.
It further is conclusive from the evidence that it was never intended that the officers and directors of Tepwin at Bermuda would exercise manage ment and control of Tepwin's business in any aspect. Instead, they were to carry out the instruc tions given by officers and directors of Murphy Oil Corporation at El Dorado, Arkansas, and to a lesser degree in certain matters given by officers and directors of Murphy Oil Company Ltd., at Calgary, Canada, and Spur Oil Ltd. as detailed above.
It appears also that the purpose of acquiring and operating Tepwin was to use it as a vehicle to repatriate tax-free dividends to its Canadian parent company, Murphy Oil Company Ltd., at Calgary, Alberta, by causing Tepwin to declare such dividends.
The allegations and claims for relief of the parties and then authorities are now detailed hereunder.
Allegations and Claims for Relief
A. Spur Oil Ltd.'s allegations and claim for relief in this action are that: "the sum of $1,622,728.55 ... which was disallowed by the Minister, is prop erly deductible from ... (Spur Oil Ltd.'s) income in computing its taxable income for its 1970 taxa tion year and (a declaration is claimed) directing the Minister to reassess ... (Spur Oil Ltd.'s) income accordingly reversing to the extent neces-
sary the consequential adjustments of capital cost allowance and exploration and development costs".
B. The defendant's allegations and claims for relief are:
1. The following is the applicable statutory law in relation to the facts of this case, namely, sections 3, 4, 12, 17, 23 and 137 of the Income Tax Act, R.S.C. 1952, c. 148 prior to amend ments in section 1 of c. 63, S.C. 1970-71-72.
2. Spur Oil Ltd. "carried on business through a corporation in the name of Tepwin, and that at no time during ... (Spur Oil Ltd.'s) 1970 taxa tion year did Tepwin carry on business by itself so as to earn or to otherwise be entitled to any income, and that Tepwin was a device to artifi cially increase the expenses of the ... (Spur Oil Ltd.) for Canadian tax purposes while enabling the resulting cash flow to be returned to the Canadian Parent, Murphy Calgary, free of Canadian income tax."
3. Spur Oil Ltd. "was not dealing with Tepwin at arm's length and that ... (Spur Oil Ltd.) purchases of crude oil from Tepwin made at a price in excess of fair market value should be deemed to have been made at the fair market value thereof within the meaning of section 17 (1) of the Income Tax Act".
4. "the amount of $1,622,728.55 claimed by the Plaintiff as a portion of the cost of its petroleum products sold was not an outlay or expense incurred for the purpose of gaining or producing income from a business and was not deductible within the meaning of section 12(1)(a) of the Income Tax Act".
5. "the deduction of $1,622,728.55 in respect of an expense claimed by the Plaintiff, should not be allowed as that amount would unduly or artificially reduce the income of the Plaintiff within the meaning of section 137 (1) of the Income Tax Act".
Authorities
Unduly or Artificially Reducing Income
Section 137(1) of the Income Tax Act, R.S.C. 1952, c. 148 reads as follows:
137. (1) In computing income for the purposes of this Act, no deduction may be made in respect of a disbursement or expense made or incurred in respect of a transaction or opera tion that, if allowed, would unduly or artificially reduce the income.
This statutory concept of "unduly" or "artifi- cially" has been considered in many contexts, including so-called sham transaction and artificial transaction matters.
A. Sham Transactions
Sham transactions as considered in the cases appear to be transactions in which the taxpayer has used various technicalities or devices for the purpose of tax avoidance. Sham transactions have been defined by Lord Diplock in Snook v. London & West Riding Investments, Ltd.' and his defini tion has been adopted for Canadian income tax purposes by the Supreme Court of Canada in M.N.R. v. Camerons. Lord Diplock said at page 528:
As regards the contention of the plaintiff that the transac tions between himself, Auto-Finance, Ltd. and the defendants were a "sham", it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejora tive word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.
Seemingly expanding the definition of "sham" the Court of Appeal of the Federal Court of Canada appears to have added to this defined concept of sham for tax purpose by appending the concept of "business purpose". See M.N.R. v. Leona per Heald J., and utilized by Cattanach J. in Mendels v. The Queen 4 ; but see contrary Massey Ferguson Ltd. v. The Queens per Urie J.
' [1967] 1 All E.R. 518 at 528.
2 [1974] S.C.R. 1062. ' [1977] 1 F.C. 249. 4 [1978] C.T.C. 404. 5 [1977] 1 F.C. 760.
B. Artificial Transactions
1. Lord Diplock in the Privy Council case of Seramco Ltd. Superannuation Fund Trustees v. Income Tax Commissioner 6 on an appeal from Jamaica based on the consideration of the Jamaica Income Tax Law 1954, section 10(1)' at page 107 makes a distinction between "artificial" and "ficti- tious" (that is "sham") transactions as envisaged by the words employed in section 10(1) of the above Act. That section is in many ways analogous to section 137(1) of the Canadian Income Tax Act above quoted. Lord Diplock said:
"Artificial" is an adjective which is in general use in the English language. It is not a term of legal art; it is capable of bearing a variety of meanings according to the context in which it is used. In common with all three members of the Court of Appeal, their Lordships reject the trustees' first contention that its use by draftsman of the subsection is pleonastic—that is a mere synonym for `fictitious'. A fictitious transaction is one which those who are ostensibly the parties to it never intended should be carried out. `Artificial' as descriptive of a transaction is, in their Lordships' view, a word of wider import.
Where in a provision of an Act an ordinary English word is used, it is neither necessary nor wise for a court of construction to attempt to lay down in substitution for it, some paraphrase which would be of general application to all cases arising under the provision to be construed. Judicial exegesis should be confined to what is necessary for the decision of the particular case....
2. The following categories of artificial transac tions have been considered by the courts (and undoubtedly there are many more categories):
(i) Inherently artificial transactions such as capital cost allowance transactions, depletion allowance transactions or other specific relieving provisions as for example in section 66 of the present Income Tax Act, all of which appear to take precedence over the general anti-avoidance provision in section 137 (1) of the Canadian Income Tax Act (now section 245 (1) under the current Act). See for example, Jackett C.J. in The Queen v. Alberta and Southern Gas Co.
6 [1976] S.T.C. 100.
7 "Where the Commissioner is of opinion that any transac tion which reduces or would reduce the amount of tax payable by any person is artificial or fictitious, or that full effect has not in fact been given to any disposition, the Commissioner may disregard any such transaction or disposition, and the persons concerned shall be assessable accordingly."
Ltd. 8 and Pratte J. in Produits LDG Products Inc. v. The Queen 9 , and the obiter also in Harris v. M.N.R. 1 ° Because of the particular facts of the Harris (supra) case, perhaps that case should be put in the category of artificial trans actions referred to in (ii) below.
(ii) Transactions proven by evidence to be artifi cial in which cases the Court has directly applied Part I of the Act (i.e. the pre-1972 Act) to uphold assessments for tax.
See for example, Judson J. in Smythe v. M.N.R. " at page 69:
There is only one possible conclusion from an examination of these artificial transactions and that must be that their purpose was to distribute or appropriate to the shareholders the "undistributed income on hand" of the old company. No oral or other documentary evidence is needed to supplement this examination. There was, however, an abundance of other evidence. This was a well-considered scheme adopted on the advice of professional advisers after other means of extraction of the undistributed income—including payment of a tax under the provisions of s. 105(b) of the Act—had been weighed and rejected.
In this connection, while recognizing that cor porations are distinct and separate legal persons (see Salomon v. A. Salomon and Company, Limited"; Pioneer Laundry & Dry Cleaners, Limited v. M.N.R. 13 ; and The Commissioners of Inland Revenue v. His Grace the Duke of Westminster 14 ), it is always necessary to consid er the essential realities of transactions done by separate legal persons, individuals or corpora tions, to determine whether or not the execution of the transactions entered into by them is within the principles of the Duke of Westmin- ster case (supra) or whether the execution is akin to a theatrical performance. Templeman L.J. put the matter of this consideration in this
way at page 979 in W. T. Ramsay Ltd. v. Inland Revenue Commissioners 18:
8 [1978] 1 F.C. 454; affirmed [1979] 1 S.C.R. 36.
9 [1976] C.T.C. 591.
10 [1966] S.C.R. 489 at 505.
" [1970] S.C.R. 64.
12 [1897] A.C. (H.L.) 22.
" [1940] A.C. (P.C.) 127.
14 [1936] A.C. (H.L.) 1.
15 [1979] 1 W.L.R. 974.
The facts as set out in the case stated by the special commissioners demonstrate yet another circular game in which the taxpayer and a few hired performers act out a play; nothing happens save that the Houdini taxpayer appears to escape from the manacles of tax. The game is recognisable by four rules. First, the play is devised and scripted prior to performance. Secondly, real money and real documents are circulated and exchanged. Thirdly, the money is returned by the end of the performance. Fourthly, the financial position of the actors is the same at the end as it was in the beginning save that the taxpayer in the course of the performance pays the hired actors for their services. The object of the performance is to create the illusion that something has happened, that Hamlet has been killed and that Bottom did don an ass's head so that tax advantages can be claimed as if something had happened. The audience are informed that the actors reserve the right to walk out in the middle of the performance but in fact they are the creatures of the consultant who has sold and the taxpayer who has bought the play; the actors are never in a position to make a profit and there is no chance that they will go on strike. The critics are mistakenly informed that the play is based on a classic masterpiece called "The Duke of West- minster" but in that piece the old retainer entered the theatre with his salary and left with a genuine entitlement to his salary and to an additional annuity.
(iii) Some transactions that are not at arm's length. Prima facie, the conclusion is that such transactions are artificial.
(iv) Some transactions that are entered into by so-called off-shore corporations where the man agement and control of such off-shore corpora tions is elsewhere than in such off-shore loca tions. Prima facie, the conclusion is that the transactions entered into by such off-shore cor porations are artificial.
3. As to determining the residence of a corpora tion and how a corporation operates, the following should be recalled for the purpose of considering whether or not any transactions that may be entered into by a corporation are artificial within the meaning of section 137(1) of the Income Tax Act:
In the Income Tax Act, persons resident in Canada are taxable upon their world-wide income; whereas taxpayers not resident in Canada are taxable only upon income earned in Canada. A corporation is a person for the pur poses of the Income Tax Act. A corporation may not consolidate its income from subsidiary
corporations for the purpose of the Canadian income tax.
If a corporation is resident in Canada, it must file returns and pay Canadian income tax. The basic test of corporate residence is established in the English jurisprudence in the case of De Beers Consolidated Mines, Limited v. Howe 16 namely [at page 458], "[the] company resides for purposes of income tax where its real busi ness is carried on.... and the real business is carried on where the central management and control actually abides".
Ordinarily, the central management and con trol of a corporation is found to be where the directors of the corporation meet and exercise management and control of the corporation and its affairs.
It has been held that a corporation may be resident in more than one jurisdiction if the central management and control of the corpora tion is exercised in more than one country: Swedish Central Railway Company, Limited v. Thompson". It may be that such dual residence should be found infrequently: Egyptian Delta Land and Investment Company, Limited v. Todd 18 and Koitaki Para Rubber Estates Lim ited v. The Federal Commissioner of Taxation 19 .
The said English test with respect to the determination of the residence of a corporation for tax purpose based on its management and control is applicable in Canada. In British Columbia Electric Railway Company, Limited v. The King 20 , the Privy Council on an appeal from the Supreme Court of Canada held that a company incorporated in the United Kingdom was resident in Canada on the basis of control exercised in Canada.
16 [1906] A.C. (H.L.) 455. " [1925] A.C. (H.L.) 495.
18 [1929] A.C. (H.L.) 1.
19 (1940-41) 64 C.L.R. 15.
20 [1946] A.C. (P.C.) 527.
The state of mind of directors and managers of a company is treated in law as being the directing mind and will of such a company and control of what it does. Lord Justice Denning in H. L. Bolton (Engineering) Co. Ltd. v. T. J. Graham & Sons Ltd. 2' at page 172 said:
A company may in many ways be likened to a human body. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and manag ers who represent the directing mind and will of the com pany, and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such. So you will find that in cases where the law requires personal fault as a condition of liability in tort, the fault of the manager will be the personal fault of the company. That is made clear in Lord Haldane's speech in Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd. ([1915] A.C. 705, 713-14; 31 T.L.R. 294). So also in the criminal law, in cases where the law requires a guilty mind as a condition of a criminal offence, the guilty mind of the directors or the managers will render the company itself guilty. That is shown by Rex v. I.C.R. Haulage Ltd., ([1944] K.B. 551; 60 T.L.R. 399; [1944] 1 All E.R. 691) to which we were referred and in which the court said ([1944] K.B. 551, 559): "Whether in any particular case there is evidence to go to a jury that the criminal act of an agent, including his state of mind, intention, knowledge or belief is the act of the company ...."
An example of the affirmation of this princi ple is the case of The Lady Gwendolen 22 :
Useful guidance on how the mind and will of a company may be manifested is also to be found in the judgment of Lord Justice Denning (as he then was) in H. L. Bolton (Engineering) Company, Ltd. v. T. J. Graham & Sons, Ltd., [1957] 1 Q.B. 159, at pp. 172 and 173. The learned Lord Justice there said:
... A company may in many ways be likened to a human body. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such. So you will find that in cases where the law requires personal fault as a condition of liability in tort, the fault of the manager
21 (1957) 1 Q.B. 159.
22 [1965] 1 Lloyd's Rep. 335 at pp. 345-346.
will be the personal fault of the company. That is made clear in Lord Haldane's speech in Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd... .
A little later Lord Justice Denning said:
So here, the intention of the company can be derived from the intention of its officers and agents. Whether their intention is the company's intention depends on the nature of the matter under consideration, the relative position of the officer or agent and the other relevant facts and circumstances of the case ....
On the principles stated in these cases I should be dis posed to say that actual fault on the part of Mr. Boucher, as registered ship's manager and head of the traffic depart ment, would be sufficient in the particular circumstances of the present case to constitute actual fault or privity of the company. But I do not find it necessary to reach any final conclusion upon this point—for it seems to me that in the particular circumstances of this case all concerned, from the members of the board downwards, were guilty of actual fault, in that all must be regarded as sharing responsibility for the failure of management which the facts disclose. Certainly I would not dissent from the view expressed by the learned Judge . that Mr. D. O. Williams, the responsible member of the board, must be regarded as guilty of actual fault.
The following are the considerations which impel me to that conclusion. I agree with the submission made on both sides that the test to be applied in judging whether shipown- ers have been guilty of actual fault must be an objective test. A company like the plaintiff company, whose shipping activities are merely ancillary to its main business, can be in no better position than one whose main business is that of shipowning. It seems to me that any company which embarks on the business of shipowning must accept the obligation to ensure efficient management of its ships if it is to enjoy the very considerable benefits conferred by the statutory right to limitation. [Emphasis added.]
4. In reference to the transactions listed in para graph 2(iii) and (iv) above, (namely certain non- arm's length transactions and transactions entered into by so-called off-shore corporations) there is an onus to adduce evidence to rebut such prima facie conclusion. If it is not rebutted, then a finding that the transaction is artificial will result; and taxation will be determined by a direct application of Part I of the Act. (The reference to Part I of the Act is to the Income Tax Act prior to the Act as amended by Statutes of Canada of 1970-71-72, c. 63 which came into force on January 1, 1972.)
Conclusions
The question therefore for determination in this case is whether or not the transactions entered into as of February 1, 1970, namely:
(a) the "sub-charter of affreightment" between Tepwin and Spur Oil Ltd. (Exhibit 1, Book 1, Document 42);
(b) the crude oil sales agreement between Murphy Oil Trading Company and Tepwin Company Limited (Exhibit 1, Book 1, Docu ment 43); and
(c) the delivery of crude oil agreement between Tepwin and Spur Oil Ltd. (Exhibit 1, Book 1, Document 44)
are artificial transactions within the meaning of section 137(1) of the Income Tax Act.
On the facts in this case such a determination must be based on either (1) the residence of Tepwin and what it did at the material times; or (2) the validity or not of the so-called contract dated August 2, 1968, Exhibit 1, Book 1, Docu ment 21.1 between Spur Oil Ltd. (formerly Murphy Oil Quebec Ltd.) and Murphy Oil Trad ing Company (the Delaware Corporation); or (3) both bases.
The evidence established that the management and control of the off-shore corporation Tepwin was not in Bermuda. And instead of evidence being adduced to rebut the prima facie conclusion arising from that fact, the evidence adduced estab lished conclusively that the management and con trol of Tepwin was divided between El Dorado, Arkansas and Canada and Tepwin was therefore resident in those locations and not in Bermuda at all material times. As a consequence, it was proven that all decisions by Tepwin to enter into the three contracts, Exhibit 1, Book 1, Documents 42, 43 and 44 by Tepwin with Spur Oil Ltd. and the actual execution of these contracts by Tepwin were made and done by Tepwin while resident in both El Dorado, Arkansas and Canada.
The evidence further established that the offi cers and directors of Tepwin at Bermuda had nothing to do with the purchase of crude oil from the Persian Gulf area or from the spot market or with the delivery of it to Portland, Maine for on-going pipeline delivery to Montreal or with the sale of the crude oil to Spur Oil Ltd.; and specifi cally also that Tepwin did not do so at Bermuda by
way of any of its officers or directors qua Tepwin who personally were resident in El Dorado, Arkan- sas or in Canada either.
The evidence further established that what the officers and directors and the solicitors at Ber- muda did was act merely as scribes under the direction of Mr. Watkins from El Dorado, Arkan- sas for the purpose of having Directors' meetings declaring dividends, which dividends were passed tax free to the Canadian parent company and which dividends as to the amount of each were based on the quantum of the so-called Tepwin charge times the number of gallons of crude oil in each shipload which left the Persian Gulf for delivery to Portland, Maine and then by pipeline to Montreal, Canada. Other than that, they did prac tically nothing because Tepwin did not carry on the business of buying, selling and delivering crude oil in 1970.
The evidence also conclusively established that Murphy Oil Trading Company (the Delaware Corporation) prior to and up to February 1, 1979, did in fact sell crude oil to Spur Oil Ltd. at $1.9876 U.S. per barrel under the so-called con tract between them (Exhibit 1, Book 1, Document 21.1); and this contract document was never for mally or informally abrogated.
Exhibit 1, Book 1, Document 21.1, therefore, at all material times was a valid and subsisting contract.
As a consequence, these three transactions evi denced by the three contracts, Exhibit 1, Book 1, Documents 42, 43 and 44, are artificial within the meaning of section 137(1) of the Income Tax Act. Accordingly by direct application of Part I of the Income Tax Act, the finding is that the excess cost of petroleum products sold, the excess being the total of the so-called Tepwin charge, in computing the net income from the 1970 taxation year of Spur Oil Ltd. is not an allowable expense.
The appeal is therefore dismissed with costs, but the assessment is referred back for re-assessment not inconsistent with these reasons.
Counsel may prepare in both official languages an appropriate judgment to implement the forego ing conclusions and may move for judgment in accordance with Rule 337(2)(b). Judgment shall not issue until settled by the Court.
 You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.