McDonnell Douglas Canada Ltd. v. R., [1997] 1 CTC 37

Muldoon J. — This case concerns a dispute about an excise tax exemption claimed, and refused, on computer components used in the process of manufacturing aeroplane parts and structures, in particular, the wings. The parties have tendered certain agreed facts and admissions, exhibit 1, interspersed hereinafter with other facts found by this Court.

1. The plaintiff, McDonnell Douglas Canada Ltd. (McDonnell Douglas) is a corporation located in Mississauga, Ontario, carrying on the business of the manufacture of parts and components for both commercial and military aircraft.

The plaintiff purchased from Intermec Systems Corporation (Intermec) and IBM Canada Ltd. (IBM) computer components to be used as part of and in its manufacturing and production activities. The price which the plaintiff paid included the federal sales tax which both IBM and Intermec had paid.

2. IBM and Intermec applied for refunds of the federal sales tax paid by them on the sale of the computer components pursuant to section 44.2 of the Excise Tax Act, R.S.C. 1980, c.E-13 (the Act).

3. In a series of Notices of Determination, the refund claims of IBM and Intermec were disallowed by the Minister of National Revenue. These Notices of Determination were as follows:

Number

4. McDonnell Douglas filed Purchaser Notices of Objection to the Notices of Determination.

5. In six identically worded Notices of Decision dated September 29, 1989, the Minister of National Revenue disallowed the plaintiff’s objection and confirmed the assessment of tax.

6. The sole issue for determination in this appeal is whether the computer products in question, which were purchased by McDonnell Douglas from IBM and Intermec, fall within the following tax exempt category as provided in paragraph 1(a) of Part XIII of Schedule III to the Act as follows:

..machinery and apparatus sold to or imported by manufacturers or producers for use by them primarily and directly in

(i) the manufacture or production of goods,

(ii) the development of manufacturing or production processes for use by them, or

(iii) the development of goods for manufacture or production by them

The plaintiffs counsel orally advised the Court that the plaintiff does not rely on item (iii) above for its claim for a refund. (Transcript: vol. I, page 9, lines 15 to 21.)

7. The computer equipment purchased by McDonnell Douglas from IBM consists of an IBM 3083 main frame computer plus peripheral equipment. The main frame computer and peripheral equipment are used for two functions, Manufacturing Resource Planning (MRP2) and operation of a communication system know [sic] as the PICS system.

8. The MRP2 system is a closed loop system and provides shop feedback in terms of availability of equipment and its capacity. It also monitors the performance of each shop. If productivity slips and faulty equipment is found to be the cause, the maintenance requirement is identified.

What follows the first 8 paragraphs are summarized portions of the plaintiffs counsel’s examination of Mr. Lionel Robidoux who was put forth by the defendant for discovery. Mr. Robidoux was, at the time of his interrogation, on August 13, 1992, the director of the defendant’s bureau for federal sales tax (FST) objections. He had been the director, for about a year and a half and prior to holding that office, for FST objections for the Toronto region.

At trial, the defendant’s counsel evinced unease over Mr. Robidoux’s sworn answer that he was authorized to bind the defendant on discovery. It was too late, at trial, to get out of that undertaking. Any person put forth by a corporate party, as this sovereign defendant is, will have to inform himself or herself and will thereby be speaking hearsay, but a representative and different kind of hearsay from the objectionable kind sometimes offered in personal testimony. So hearsay was no reason to release Mr. Robidoux from his and the defendant’s undertaking.

As noted the discovery passages specified at trial and in the transcript: volume I, pages 17 to 42, are accurately summarized in the latter part of exhibit 1. Their places in the particular transcript are cited, but do not need to be repeated here. The facts summarized from the discovery of Mr. Robidoux are as follows:

12. There is no dispute that the subject matter of this appeal is computer equipment purchased from IBM...and Intermec...which is described in the Notices of Determination and the Notices of Objection.

13. There is no dispute that with respect to the amounts of the refund claims that are claimed [that — sic] they are the proper amounts of tax payable in respect of this equipment.

14. The only issue is whether this particular equipment and system falls within the exemption provided in paragraph 1(a) Part XIII of Schedule III to the Excise Tax Act.

15. There is agreement that the subject matter of this appeal is machinery and apparatus sold to or imported by a manufacturer or producer.

16. There is no dispute that if the court ultimately determines that this equipment, which is the subject matter of the appeal, does fall within paragraph 1(a) then McDonnell Douglas would be entitled to the relief sought in the lawsuit.

17. It is agreed that the MRP II system determines when each and every component is to be fabricated.

18. The equipment determines when each and every part is fabricated.

19. Each individual worker has his day’s work set out for him, the next hour of work laid out for him by the MRP IT system.

20. Work Now Sheets commonly referred to on the shop floor as Padres are produced by the system.

21. There are many component operations that have to be undertaken in fact many hundreds or thousands on the shop floor. Sometimes there are interruptions in those operations and sub-operations that require the entire operation to be re-worked to take into account those problems.

22. What is inputted into the system are these interruptions. The system takes the information and adjusts continuously the production schedule to find the most efficient production schedule in light of those interruptions.

23. The MRP II system takes these interruptions or hiccups into account and generates continuously Work Now Sheets or Padres which tell people in the shop floor what component part to fabricate, when to fabricate it and what materials are required using an information base in the computer. If the MRP II system was to cease operating, then both supervisors and workers on the floor would not know what parts to order.

24. If the system was destroyed, production would come to a halt at McDonnell Douglas.

25. On any given day there are over 50,000 orders in the computer system and each week between 1,000 and 1,200 are sent to the shop floor.

26. For all intents and purposes, if the MRP II system went down, then manufacturing on the shop floor would cease until a replacement system could be put in place or until it could be switched over and back to manual.

27. The defendant does not question that the equipment is in fact used in the manufacture or production of goods but questions that it is primarily and directly used in the manufacture and production of goods.

28. With reference to “directly” Mr. Robidoux stated:

“We look at that first, and did it - does the equipment directly control or intervene in the manufacturing process, the continuous process, or in the operations that would be expected of a piece of machinery or apparatus that’s used to produce a physical good. So if, for example, the computer that was used to drive a specific production machinery at McDonnell Douglas or anywhere else that operates a lathe that produces a part or heat treats or controls the heat treating of a component, there is a time, there’s a heat requirement, that’s machinery that’s used directly. So does the machine produce a part or does it control the operations while that part is being made? We have always extended exemption to that.”

29. The Defendant’s position is that if a computer drives a robot that actually welds a piece of a car then it is accepted that the computer falls within the exemption as being used primarily or directly in manufacture or production of goods.

Careful to put before the Court in addition to the numbered summary paragraphs only the questions and answers he selected, the plaintiffs counsel never did tender the transcript of Mr. Robidoux’s examination for discovery. It is too late now, but the Court nevertheless now identifies that transcript with a red capital A.

Counsel for the defendant, in effect invoking rule 494(10) sought to introduce related discovery testimony which he averred was omitted by the plaintiffs counsel when presenting Mr. Robidoux’s evidence on discovery. In regard to paragraphs 23, 24 and 26, above, it was agreed that the

following text should be added (transcript: volume I, pages 67 and 68):

MR. SOUTHEY: Only with the caveat he was not asked and did not say for how long.

THE COURT: Well, yes he was. Question 75 that you mentioned:

Q. And have you any understanding as to how long that would take?

MR. SOUTHEY: Sorry, My Lord, I retract the statement and it’s perfectly acceptable.

THE COURT: Let me try that again. As part of the supplementary answers, questions and answers which Mr. Southey wishes to add to that part, to those parts of the examination for discovery read in by Mr. Barrack, one would summarize those supplementary portions and one does hereby summarize those supplementary portions [with the agreement of opposing counsel] to say this; Mr. Robidoux testified on discovery that he was told by management of the plaintiff, McDonnell Douglas that if the computer in issue suddenly ceased functioning or were destroyed, McDonnell Douglas could carry on production “manually” (meaning of course mentally by human employees) but that Mr. Robidoux could not say and was unable to testify on discovery as to how long that continued production, past the neutralizing of the computer could be carried on. Couldn’t say how long. Indeed, one might refer to question 75 which...one could include in this:

Q. And do you have any understanding as to how long that would take?

A. No. But I shouldn’t -1 would prefer not to speculate concerning possible

events that might occur in the event that this system failed in any way.

That fairly describes Mr. Robidoux’s position. There could be some carry on, he was not in a position to say how long. Is that acceptable now?

MR. SOUTHEY: That’s perfectly acceptable, My Lord.

THE COURT: That seems to be acceptable to Mr. Barrack as well.

The discovery text summarized in paragraph 27 above, was also of concern to the defendant’s counsel. There was much discussion between the respective counsel at trial (transcript: vol. I, pp. 58 to 87) as to which answers were so related that they ought not to be omitted. In this regard the Court had to make rulings, thus, at page 87 of trial transcript, vol. I, the following was permitted (discovery transcript: pages 10 & 11):

22. Q. All right. And, similarly, as I understand the Notice of Decision and the pleadings, there is no dispute that, in part at least, the equipment that is the subject matter of this Appeal is used in the manufacture or production of goods, the issue is whether it is used primarily and directly in the manufacture or production of goods?

MR. SOUTHEY: I’m not sure that I am willing to give a bald admission to that extent. I think that this gets into an area of characterization where we might be admitting more than we care to here. Certainly, in our theory of this, the machine is not primarily and directly used in any of the applications cited in the three subparagraphs.

In addition, I think that our position is that it is not even used in manufacturing or production, it is used in accounting or other applications, and perhaps arguably in an indirect way in the ultimate manufacture of the equipment. But it’s characterization and I am not sure that we can just admit it.

MR. BARRACK: All right. Well, that is helpful in letting me know where we are.

MR. SOUTHEY: Sorry. If I say something and you don’t agree, you have to immediately say “I don’t agree with counsel”, and you can add something.

THE DEPONENT: The only addition that I would like to make with respect to your comments was that we have already indicated in previous letters that it facilitates manufacturing, like any production control system.

It is recorded at page 77 of the trial transcript that the following passage was ruled relevant (discovery transcript: page 35):

82. Q. And to that end — I realize I asked this question before — the Notice of Decision does not seem to question that the equipment is, in fact, used in the manufacture or production of goods, but questions that it is primarily and directly used in the manufacture and production of goods. Is that correct?

A. That’s right. That’s correct.

MR. SOUTHEY: To the extent, counsel, that the business of McDonnell Douglas is the manufacture of equipment, you could use the same argument to say that nothing it does isn’t related to the manufacture of the wings. And to that extent, we agree with whatever you have stated.

MR. BARRACK: All right.

This topic needs clarifying. It was too late, at trial, to resile from item 27, above, drawn from Mr. Robidoux’s examination for discovery, just as it was too late to withdraw his authority to bind the defendant by his answers. The equipment in question was indeed used by the plaintiff in the manufacture or production of goods. This Court so finds as a fact, and would have, in any event. Parties cannot be permitted to wriggle out of firm understandings they earlier forged with their adversaries.

The above mentioned notice of decision was mentioned in discovery and it was placed before the Court as exhibit 6. This decision, nominally of the Minister of National Revenue, was actually signed (if not formulated) by Mr. Robidoux. It is evidence of what the defendant alleged, but does not conclusively resolve the parties’ dispute. The most pertinent passages run thus:

The evidence indicates that the “MRP 2” [manufacturing resource planning] system operates as an integrated, closed-loop system, with a series of subsystems, and performs the following key functions: calculates total parts and materials requirements, generates purchase orders and work orders, identifies the operations to be performed on individual jobs, ranks the tasks to be performed, identifies parts requirements for individual jobs, provides information on parts and materials rejected from individual suppliers, provides warehousing job-“kitting” and inventory control information, schedules workflow, tracks resource shortages and job back-logs, and generates individual job completion reports and operational status reports.

The information provided indicates that the “MRP 2” system is dedicated to the timing and sequencing of the manufacturing or production processes and not to the development of manufacturing specifications, engineering drawings or the design of plans that are to be used in the manufacture or production processes. The evidence also shows that the system does not intervene directly in the manufacture or production of goods.

The primary functions of the “MRP 2” system are to receive and process production oriented information and generate operational instructions for workers along with reports for management. These functions are seen as being administrative or managerial in nature, and while facilitating your manufacturing and production activities, are not directly associated with the development of your manufacturing processes nor do they interact directly with machinery and apparatus used in the manufacture of production of goods. As the “MRP 2” system is not used primarily and directly for qualifying uses under paragraph 1 (a) of Part XIII of Schedule III to the Excise Tax Act, the goods at issue do not qualify for exemption under this part.

Accordingly, there are no grounds on which to vary or vacate the determination.

[Emphasis added.]

The plaintiff’s counsel did not succeed in wringing a clear and unambiguous admission from Mr. Robidoux, counselled as he was. However the above considered evidence and the testimony of Mr. Raymond Rogers, at trial, leave no doubt that the subject computer components were used in the manufacture or production of goods — the very statutory expression enacted by Parliament. The Court so finds on the evidence tendered.

The much more difficult question, upon whose semantics reasonable people can surely disagree, is whether that apparatus was imported by the plaintiff (i.e. manufacturers or producers) for use by them primarily and directly in such manufacture or production. The Court interprets the plain meaning of those words to mean that the apparatus is used primarily and directly - two different ideas - in such manufacture or production. The primary and direct uses of the apparatus provide the questions to be resolved. There can be only one primary use, but more than one direct use. An apparatus can surely be employed in a different direct use for every hour of the day. “Primary” or “primarily” connotes a sense of “leading, the great or principal part, or of first importance, predominant(ly), in a major or most important manner.” This aspect is therefore “the most” or the “foremost” and cannot be exceeded or excelled, but does not utterly exclude others of the same kind of lesser quantity, scope or importance. The Oxford Dictionary of Current English, 7th edition, 1985 and the Living Webster Encyclopedic Dictionary of the English Language, \st edition, 1971 amply confirm the foregoing meanings, and suffice. Nor is there any real deviation of meaning in the French language version of the statute.

The most important evidence on these points came through the expert testimony of Mr. Raymond Rogers, currently a projects management specialist in the plaintiff’s employ. An agreed book of documents, exhibit 3, with 13 tabbed documents, was received through Mr. Rogers’ testimony.

In exhibit 3, the most frequently and thoroughly reviewed document by counsel during the hearing was exhibit 3(10) which, in diagrammatic presentation shows the full functions of the computers in issue. It is titled: “Closed Loop MRP2 System”. This diagram is not easily or elegantly described in words. “MRP”, it will be recalled, stands for “manufacturing resource planning”. The subject computers are used in the fabrication of both elementary and more complex parts of the aeroplane’s wing, which is later assembled prior to being sent out of the factory door in the form of a fully assembled wing, ready to be joined to the fuselage in a plant in California.

There was recorded some important testimony in chief expressed by Mr. Rogers. It may be noted that even the plaintiff’s counsel thought that Mr. Rogers was a susceptible and rather too agreeable witness - a personal trait which does not necessarily condemn his oral testimony, but makes it harder to follow, for the adjudicator must, through constant close attention, supply the self-discipline which Mr. Rogers lacked. In a case with far less pre-trial agreement between the contending counsel, Mr. Rogers’ credibility might well have been impugned, but that is unimportant here. Mr. Rogers just seemed to try too hard not to put negative answers to his questioners, but he did not, in the end, depart too far from what he knows so well.

Here is that pertinent testimony in chief above alluded to, found in the transcript (volume II, pages 228-32):

MR. ROGERS: ...for a number of years, fabrication was sort of the poor cousin of the airplane business. It really is or was true. And kind of understandable, I think in the business, because assembly was where the light shone very brightly and the end product is where the focus was and flying the product was where all the excitement was and making parts was just making parts. You just make a bunch and put them in the bin. But as I say, over the past 10 or 15 years, more and more, we, all of us, all of the manufacturers have come to realize that there is a very large element of cost here that has to be addressed.

Q. Could you compete today without a system like this?

A. I don’t think we would be in business without a system like this.

Q. Now, we’ve seen what the system does. What percentage of the computer activity in this — remembering now that we are talking about computers and peripheral systems, the PICS system, what percentage of that computer activity is used in generating these work-now sheets or padres?

A. Weel, virtually all of it, I guess. I mean, the computer in the PICS system supports another little bit — I’m sorry, I shouldn’t say a little bit. I’m sorry, it’s important to us, but also supports the attendance transmitting comes through those PICS machines. In other words, when the fellows come in in the morning, they clock in to say “I’m at work” and when they go home, they clock out to say “I’ve gone.” That stuff — I’m sorry, those transmissions come through that PICS system and they are sort of routed by the computer that runs MRP but it’s a relatively small percentage of the total activity. Maybe five to ten per cent, I would guess, of the computer.

There is also other reports that come out. You know, it produces, for instance those capacity planning reports, and the infinite profiles and the finite profiles, all those things, but they are all MRP2 associated I guess. There are reports other than just the padres.

Q. Would you build the system for those reports?

A. Well, no. There would be no - I mean, the system is built — the end product is the padre report. There are spinoffs that come, that provide support or additional information but basically the system is there to produce those work-now sheets.

Q. And is the information that is spun off in these reports, is it churned or analyzed within the computers we are talking about or does it get shipped off to other computers where it’s generated?

A. No, it basically runs inside that computer.

Q. Does it send it off — I’m thinking does any of it - is this an accounting system?

A. Oh no. Well, the only thing really that goes to accounting is a little bit of time and attendance stuff that comes through. Also some labour transmission. When a fellow clocks on to a job and says, okay, I’m working, ultimately those hours of work get charge numbers associated with them and that stuff flows off to accounting, but goes to a different computer. The accounting portion isn’t MRP2. It’s accounting. It’s finance.

Q. And that’s my point. The spin off information gets spun off and goes to another -

A. Goes to another computer, yes.

Q. Then if you want an accounting report or - the organization chart if you want a human resources report or you want some other report of that type, it’s generated from another computer?

A. Yes.

Q. Now, does the shop operate 52 weeks of the year?

A. Fifty-one. We shut down at Christmas.

Q. And when you shut the shop down, do you shut the MRP system down? A. Oh yes, yes. It doesn’t run.

Q. Do you continue to heat the shop during the week of the shutdown?

A. Yes.

Q. Do you continue to leave the lights on?

A. Some.

Q. Now -

THE COURT: Just a question. Ordinarily the shop operates during the 51 weeks. How long each day? How much of a day?

MR. ROGERS: It varies, Your Honour. We try to operate on a one shift basis which is eight hours. Some areas are operating two shifts, so 16 hours a day.

THE COURT: In this shop, where you have drawn me the diagram? This principle shop?

MR. ROGERS: It generally tries to run one shift a day.

THE COURT: I see. All right.

MR. ROGERS: Some of the — well, back then probably one shift, I guess. I was going to say, we are trying increasingly to, with some of the larger machine tools to set them up so that they run more than one shift. We are running them a couple of shifts a day.

THE COURT: That would make economic sense.

MR. ROGERS: Yes, for economics, exactly.

Now Mr. Rogers was a voluble witness, and counsel might have had a difficult time trying to prepare him to testify concisely. That may be the despair of counsel, but not counsel’s adversary, and not necessarily the Court’s despair. The Court accepts the following question and answer for all their virtues and vices (transcript: volume II, page 235):

Q. Now, one last question. What do you understand in the context of your working life and experience to be meant in the context of building wings by the term production process or manufacturing process?

A. In the context of my working life, I guess most of my working life has been spent trying to deal with or refine or sophisticate the manufacturing process or the production process because the process really is the whole thing and increasingly we have come to understand that the process is all of the consideration that are applied to the efficient production of the thousands of parts that are required to go into the airplane.

That really is the process. The building of one airplane is relatively straightforward. The building of one part is relatively straightforward. The building of the parts for one airplane perhaps could be managed. But when you start building and production and when you have got ongoing activity with all these thousands of parts, the process that you use to flow that stuff through is shot. That’s - for us anyway, or for me, that’s the production process.

MR. BARRACK: Thank you, those are my questions.

The “padres” mentioned earlier were instructions to workers as to the fabrication work which they were imminently to perform upon designated material or parts — “work-now” directions is a synonym for a padre. The padre formed an immediate or imminent scheduling function for workers’ work in fabrication. That fabrication was all worked out in advance and inputted by humans — the process planners, who foresaw all the permutations, combinations, accidents, shortages and prescribed alternate parts, material and courses of proceeding with the job(s) at hand. Thus, the machine-driven software could direct how to cope with all imaginable fabrication problems.

The cross-examination of Mr. Rogers, recorded in the transcript: volume II, pages 248 through 261, was helpful to the Court. In effect, it demonstrates that the computers in question neither think nor innovate, naturally, because they cannot. The course of fabrication is plotted, thought through and foreseen by the process planners, who basically produce “paper” in order to equip the computers with the directing software whereby the workers are instructed to do their work. Is this to be designated comprehensively as “scheduling”?

Under cross-examination that agreeable witness, Raymond Rogers testified further as follows (transcript: volume II, pages 310-11):

Q. As I understood it, the worker is supposed to do a particular task, is able to go to the screen and type in what the task is and that fabrication outline comes up on the screen.

A. Yes, that can be done. It’s not typically the way that he would get his instructions.

Q. He typically gets it in hard copy?

A. Yes, from the fabrication outline.

Q. Okay, and I understand that workers’ attendance is kept track of through their signing on to the PICS material and that goes on to human resources?

A. Yes, that’s correct. And payroll.

Q. And payroll. And I understand that through PICS, there is an accounting done of what machinery is working and what machinery is not working in a particular shop?

A. In some shops, yes, that’s done.

Q. And I understand that there is some sort of quality control aspects that are also done by this operation, it’s programmed to determine if parts received from outside contractors are up to the quality required by MDCAN? [the plaintiff].

A. Yes, that’s true. There was some later use of the system, if I can say that, where the facility was provided for the inspection people, the quality assurance people to record the fact that parts had been accepted, through the PICS system.

Q. Now, do you agree with me that all of those functions are significant functions to MDCAN?

A. Oh definitely.

Q. And do you agree with me specifically that the scheduling function that is done by the IBM 3038 is not a primary function?

A. I don’t think — in the scheduling is integral in the MRP2. No, it’s not its primary function. I mean, the largest part of the resource is not used strictly doing scheduling.

THE COURT: “The largest part of the resource”, can you explain what you mean by that?

MR. ROGERS: Well, of the power of the computer.

THE COURT: Okay.

What did the cross-examiner and the witness each understand by “the scheduling function”? The cross-examiner did not attempt to clarify: he took that possibly damning answer and let it lie in ambush, for which he cannot be criticized, but he cannot expect pure gold from it either. From his answers on re-examination, it seems clear that the witness was unclear about which computer was being referred to or what meaning to ascribe to “scheduling”, or both. A less eager-to-please, more astute witness would have insisted upon a clearer question or questions. These must have been unclear because Mr. Rogers seemingly changed his tune again, this last time on re-examination (transcript: volume II, pages 327-28).

Q. ...are the rules of mathematics that are programmed into the computer, are they the same as the type of rules that Mr. Southey talked to you about are programmed into the MRP2 system?

A. Oh yes, very much.

Q. And the programming that he talked about that people put into the computer, are those analogous to the rules of mathematics that go into my calculator?

A. Yes, much the same.

Q. Now, when you then said that the largest part of the resource, you talked about that concept, with the resource you are talking about, this calculation function?

A. Yes.

Q. And when you said the largest part of the resource is not used in scheduling, can you expand on that which you were referring to, what is the largest part of the resource dedicated to?

A. It’s dedicated to doing these continuing interactions and calculations through the course of the night. Now, I suppose arguably the output is scheduling but it is doing so much more, it’s considering so many more things as it goes on. The schedule is one thing that it knows but it is doing a number of other things.

Q. All right, and the output of that resource, of all of those calculations against all of those rules of mathematics and all of the external rules that are put in is what?

A. Is the Padre reports and plus any other of those peripheral reports, all that stuff that has been identified in the schematic.

THE COURT: Excuse me just one minute. You went a little fast for me. Can you tell me, Mr. Rogers, you said the largest part of the resource is dedicated to continuing. To continuing what? I didn’t get that.

MR. ROGERS: To the continuing iterations of the data.

MR. BARRACK: ...he said iterations and calculations.

According to the witness, then, the output of those iterations and calculations is those reports which come to the workers “as to what to do”, like padres.

Late in the course of Mr. Rogers’ testimony, he gave this cogent evidence (transcript: volume II, pages 343-44):

MR. BARRACK: And at the same time, just so it is clear, what you have told us is in that five year period there was an identical piece of hardware, another big computer like that as well.

MR. ROGERS: Yes.

MR. BARRACK: And this computer that we are seeking the exemption on, as I understand it, ran the system, this MRP2 system?

MR. ROGERS: Yes.

MR. BARRACK: The PICS system had some time and attendance function?

MR. ROGERS: Yes.

MR. BARRACK: And you testified before as to what percentage of use that PICS system would be dedicated to that.

MR. ROGERS: Yes, I believe five to ten per cent.

MR. BARRACK: Right, and you also testified that some of the by-products were thrown off into other areas including this other computer?

MR. ROGERS: Yes.

MR. BARRACK: And if we were to go through the organization charts, things like — and I believe I asked this question before, but just to clarify, things like accounting, human resources, other office or staff type functions, nonmanufacturing functions, were performed in which computer?

MR. ROGERS: Well, the other computer. If the MRP 1 is A, the other one being B then all of those functions were performed in the B computer.

MR. BARRACK: Right, and after approximately 1990, did McDonnell Douglas still continue to run the software, the MRP2 software that was in this equipment we are talking about?

MR. ROGERS: Yes.

MR. BARRACK: But it ran it offsite in another computer?

MR. ROGERS: Yes.

THE COURT: And got rid of the hardware?

MR. ROGERS: Yes.

This evidence is believable. The Court concludes from it that the IBM 3083 main frame computer and peripheral equipment for which the tax exemption is claimed was sold to McDonnell Douglas for use by them primarily (but not quite exclusively) in the manufacture or production of aeroplane wings or the development of manufacturing or production processes for use by them. The straight forward linear work-now padres show the primary use in manufacture and/or production of the wings, and the alternative courses of work to circumvent foreseen kinds accidents and material shortages. inter alia, evince the development of manufacturing or production processus which could be required for use by McDonnell Douglas. Those are the processes held in reserve to be used when and if the actual manufacture or production of aeroplane wings was obstructed by interruptions or material shortages. The apparatus on which the tax exemption is claimed, was for use primarily in the manufacture or production of the wings (the “goods”) because about 90 per cent to 95 per cent of its power or capacity was so dedicated, and could be so dedicated because the plaintiff owned an identical other system to perform general office and corporate work. So, the IBM 3083 main frame computer and peripheral equipment were bought for use by the plaintiff primarily in terms of power, capacity and time operating, the functions described in subparagraphs (i) and (ii) in paragraph 1(a) of Part III of Schedule II of the Act. Their use was little else. So, their primary use was as described in subparagraphs (i) and (ii) of the statutory provision. That predominant use was not exclusive, but was not required to be. They were for use primarily as stated in (i) and (ii), because other functions were performed by the duplicate apparatus.

If possible, the parties’ dispute the question inherent in the statutory term “directly” even more profoundly. The parties’ respective counsel placed much jurisprudence and other learning before the Court in this contestation. The notion of apparatus being “used directly” is the earlier and older. In S.C. 9-10 George VI, chap. 30 An Act to amend the Special War Revenue Act, assented to on December 18, 1945, there was a scheduled exemption titled Machinery and Apparatus To Be Used in Manufacture or Production which ran, thus:

Machinery and apparatus, as defined by the Minister of National Revenue, and complete parts thereof which, in the opinion of the Minister, are to be used directly in the process of manufacture or production of goods;

Provided that this exemption shall not apply to office equipment or motor vehicles.

In today’s world the Court does not view the enactments of Parliament as being intended to operate in a vacuum bottle unconnected with the outside events of the society into which Parliament has enacted them. Thus, one can see the Supreme Court of Canada adopting a broader more inclusive view of how legislation should operate in, say, Irving Oil Ltd. v. New Brunswick (Provincial Secretary), [1980] 1 S.C.R. 787, 109 D.L.R.

(3d) 513. The Court’s unanimous judgment was articulated by the late Mr. Justice Pigeon, who is recorded thus at page 797 (D.L.R. 519):

The same observation has to be made with respect to item “D” covering pipes, valves, fittings and other miscellaneous items used at the Mispec location. These items are all used in the integrated process initiated at Mispec and completed at the refinery proper. The trial judge felt that he was bound by the decision of this Court in the Consumers’ Gas case, supra, to hold that any valves or ancillary equipment which fall within the category of pressure regulators have to be excluded from the exemption. With respect, it must be pointed out that this is an error. The reason for which the pressure regulators were denied the benefit of the federal exemption in the Consumers’ Gas case was that they were not used in “the manufacture or production of goods” but in distribution. Such is not the case with respect to the regulators at Mispec, they are used in the overall manufacturing process, the operation of the refinery, not the distribution of its products.

[Emphasis added.]

There is an admitted difference in the products of an oil refinery from those of an aeroplane wings factory. It is a matter of point of view, whether narrow and literal or “fair, large and liberal” views are held in expressing the purpose of the statutes. The latter surely evinces a comprehensive understanding epitomized in what has been termed the integrated plant approach. That is the posture of Pigeon J. in the Irving Oil case where he viewed the integrated process of refining to be there initiated at one point and completed at a significant distance elsewhere, being “the operation of the refinery, not the distribution of its products”, that is, “the overall manufacturing process.” There is good reason to take such a large, modern interpretation, lest the obvious legislative intent of the provisions under consideration become stalled, stultified and limited to the techniques and technologies of the past. This is an era of change, and almost nothing changes so rapidly as technology and the inventions which spawn it. Must Parliament then have to march in hurried lockstep with industrial technological change, in order to defend and sustain the legislative intent, at the peril of letting it lapse in obsolescence? On the contrary, the national legislature must not have imputed to it some reactionary intent, even Luddite proclivities, when it can always enact specific exclusions against the headlong pace of industrial ingenuity, should it specifically desire to repudiate some espied mischief of such ingenuity.

That rhetorical expression seems at least to capture the judiciary’s favourable view of Parliament’s intent. In the recent judgment of the Supreme Court of Canada, Quebec (Communauté urbaine) v. Corp. Notre- Dame de Bonsecours, (sub nom. Quebec (Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours) [1994] 3 S.C.R. 3, [1995] 1 C.T.C. 241, (sub nom. Corp. Notre-Dame de Bon-Secours v. Quebec (Communauté urbaine), sub nom. Notre-Dame de Bon-Secours (Corp.) v. Québec (Communauté urbaine)) 95 D.T.C. 5017, written by Mr. Justice Gonthier, he is recorded at pages 17-18 (C.T.C. 250-51), thus:

there is no longer any doubt that the interpretation of tax legislation should be subject to the ordinary rules of construction. At page 87 of his text Construction of Statutes (2nd ed. 1983), Driedger fittingly summarizes the basic principles: “the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament”. The first consideration should therefore be to determine the purpose of the legislation, whether as a whole or as expressed in a particular provision. The following passage from Vivien Morgan’s article “Stubart: What the Courts Did Next” (1987), 35 Can. Tax J. 155, at pages 169-70, adequately summarizes my conclusion:

There has been one distinct change [after Stubart], however, in the resolution of ambiguities. In the past, resort was often made to the maxims that an ambiguity in a taxing provision is resolved in the taxpayer’s favour and that an ambiguity in an exempting provision is resolved in the Crown’s favour. Now an ambiguity is usually resolved openly by reference to legislative intent.

The teleological approach makes it clear that in tax matters it is no longer possible to reduce the rules of interpretation to presumptions in favour of or against the taxpayer or to well-defined categories known as to require a liberal, strict or literal interpretation. I refer to the passage from Dickson C.J., supra, when he says that the effort to determine the purpose of the legislation does not mean that a specific provision loses all its strictures. In other words, it is the teleological interpretation that will be the means of identifying the purpose underlying a specific legislative provision and the Act as a whole; and it is the purpose in question which will dictate in each case whether a strict or a liberal interpretation is appropriate or whether it is the tax department or the taxpayer which will be favoured.

In light of the foregoing, I should like to stress that it is no longer possible to apply automatically the rule that any tax exemption should be strictly construed. It is not correct to say that when the legislature makes a general rule and lists certain exceptions, the latter must be regarded as exhaustive and so strictly construed. That does not mean, however, that this rule should be transposed to tax matters so as to make an absolute parallel between the concepts of exemption and exception. With respect, adhering to the principle that taxation is clearly the rule and exemption the exception no longer corresponds to the reality of present-day tax law. Such a way of looking at things was undoubtedly tenable at a time when the purpose of tax legislation was limited to raising funds to cover government expenses. In our time it has been recognized that such legislation serves other purposes and functions as a tool of economic and social policy. By submitting tax legislation to a teleological interpretation it can be seen that there is nothing to prevent a general policy of raising funds from being subject to a secondary policy of exempting social works. Both are legitimate purposes which equally embody the legislative intent and it is thus hard to see why one should take precedence over the other.

[Emphasis added. I

To understand why this Court favours the integrated plant or expanded, expansive manufacturing interpretation for the facts of this case, it is necessary to determine the legislative intent of the statutory provisions earlier recited. It appears to be rather clear, and easily divined by a thoughtful person of a reasonable educational attainment. Why does Parliament exempt from sales tax machinery used in the manufacture or production of goods? The intent of Parliament in enacting Schedule III, Part XIII, paragraph 1(a) is to give incentive, insofar as tax measures can, to Canadian manufacturers to acquire ever newer, better and more efficient machinery and apparatus for the manufacture and production of goods, or for the development of manufacturing or production processes, with the objective of making or keeping Canadian industry efficient and competitive. Those two virtues benefit Canadian consumers and all buyers at home, and help make a place for Canadian products abroad, thus earning foreign exchange and helping to maintain a favourable balance of payments in world trade.

Relatively recent history shows that victory in World War II saw the United Kingdom relatively beggared in industrial production and international trade, because not “enough” of its industrial plant had been destroyed in the war. Defeated Germany, by contrast, having sustained massive destruction during hostilities, and loss of what was not destroyed through imposed reparations, was forced to start with virtually and actually new industrial plant. Germany soon outstripped its major European conqueror, not only in the realm of attitude, a factor to be sure, but also because of Germany’s modern industrial technologies and overall efficient capacity.

So it is that an industrialized country whose industrial plant is often renewed to become ever more efficient through the acquisition of ever better machinery or the development of ever more efficient manufacturing or production processes, will prosper. Parliament, with the guidance of various governments of the day, understood that reality and relented in imposing sales tax on the acquisition of new industrial machinery in order to encourage the ongoing modernization of Canadian industrial plant. That much is clear and unambiguous. The plaintiff tendered various excerpts from Hansard in order to demonstrate to the Court that successive Ministers of Finance accepted and promoted the above stated principles of the modernization of industrial capacity. Those excerpts are not needed because there is no ambiguity or even the slightest difficulty in perceiving the legislative intent behind the statutory provisions.

Those excerpts are of no help, indeed, for the various Ministers never discuss what the word “directly” means, nor yet the distinction between manufacture and production, and manufacturing and production processes, already mentioned herein. Also, the very last tab of the plaintiff’s book of legislative history, tab 12, records the fact that the last pertinent amendment during the material time imposed a new hurdle by adding “primarily”, a hurdle which, the evidence clearly shows, the plaintiff has cleared.

In order to understand the meaning of “directly” one starts with a reliable dictionary. “Directly” is the adverb derived from the adjective “direct” which bears the principle meaning. (It may be noted that “directly” and directement, the term expressed in the French language version of the statute are no faux amis, but bear the very same meaning.) The Oxford Dictionary of Current English records the following meanings:

direct..A a. extending or moving in a straight line or by shortest route, not crooked or oblique; straightforward, going straight to the point, frank, not ambiguous; without intermediaries, personal; (of descent) linear not collateral; complete, greatest possible (direct opposite, contrast). 2 adv. in a direct way or manner (deal with him direct); by direct route (train goes to London direct).

directly 1 adv. in a direct line or manner; at once, without delay.

The dictionary definition which appears to be most consonant with the statutory expression is “without intermediaries”, that is — inherent in, or part of, the action or process; continuously proximate. These meaning also bespeak “without intermediaries”.

The Court considers — finds — that the computer products in question which were purchased by McDonnell Douglas from IBN and Intermec were machinery and apparatus purchased for use directly in the activities described in subparagraphs (i) and (ii).

There is nothing in the Irving Oil judgment, supra, nor yet in the case of Coca-Cola Ltd. v. Deputy Minister of National Revenue (Customs & Excise), [1984] C.T.C. 75, [1984] 1 F.C. 447, (F.C.A.) nor again in Deputy Minister of National Revenue v. Amoco Canada Petroleum Co., [1986] 1 C.T.C. 124, 13 C.E.R. 102(F.C.A.) nor of course in the Notre-Dame de Bonsecours case, supra, to suggest, must less ordain, that the Court ought to parse the pertinent tax exemptions with a granulated view of the manufacturing or production operation concerned. Those activities are carried on in a factory where the encouraged industrial activities take place, and whatever machinery or apparatus is used directly in such activities is tax exempt in order to promote acquisition of newer, better, more efficient machinery for manufacturing and production.

Here, it is quite obvious, on the evidence, that had the plaintiff been compelled to get along without the computer apparatus in question, its production and manufacturing of aeroplane wings would have lost speed and efficiency and could hardly, if at all, have proceeded with the “just in time” delivery of needed materials to its fabrication department. The computer apparatus was inherent in that speed and efficiency because it delivered the “padre”, work-now guidance day by day for such fast and efficient manufacturing and production, and also it gave instant alternative guidance processes in the event of accident, shortage of materials or other interruption in the fabrication of parts and components for aeroplane wings. Without it, Mr. Rogers testified, McDonnell Douglas Canada could not have competed in the industrial world. That which was integral or inherent in the plaintiffs manufacture or production of goods, or development of the above mentioned processes, was inescapably for use directly therein.

The defendant’s counsel was most assertive in arguing that because the “padres” or work-now directions were read by humans who then did the drilling or milling, the computer components’ use could not be direct. The defendant conceded that if the computer had been hard-wired to the milling and drilling power tools and operated them, it would have been for use directly in the manufacture or production of goods. But, does that argument not ask the Court to ignore, for purposes of interpretation the thought and words “use by them [the manufacturers and producers] directly in the manufacture or production of goods [or]...”? The computers were acquired for use by the plant workers directly in that industrial activity. The statutory expression actually contemplates that human activity which the defendant’s counsel so repudiated. Again, suppose, by way of analogy, that a worker who has to drill a hole, needs first to determine the calibre of the hole. That worker will use a ruler or calipers in order to determine the diameter of the hole. Can anyone assert with reason that the ruler or the calipers are not used directly in the manufacture of the part, even although they are neither the drill, its motor, or the bit to be selected for the making of the hole? The instruments used for calibration guidance are surely of as much direct use as were the cartons, to hold the bottles, to hold the beverage, the product, in the Coca-Cola case, supra. So surely, it was with guidance instruments and guidance “padres”, by which the workers were guided in their manufacturing jobs.

In order to qualify for the exemption, the machinery and apparatus do not need directly themselves to alter the form, qualities and properties of the goods, the product of the “manufactury” or other industrial arts plant. This is a principle enunciated in the Coca-Cola case referred to earlier above. Also in the same line of thought is the decision of Mr. Justice Macintosh of the Nova Scotia Supreme Court in Stora Kopparbergs Bergslags AB v. Nova Scotia Pulp Ltd. (1980), 119 D.L.R. (3d) 76, 45 N.S.R. (2d) 663 (T.D.).

Although Macintosh, J. was construing a different, but not very dissimilar statute, his words are worth repeating here, for the force and clarity of his most pertinent thought (45 N.S.R. pages 678-79):

Machinery and apparatus are used directly in the manufacture or production when they are used during the manufacturing or production process.

One school of judicial thought limits the exemption to machinery and equipment which perform a function involving a change of the raw material involved into a finished product and excludes machinery and equipment used in the preparation or manufacture or after the completion of the manufacturing process. This view appears to be questioned by the integrated plant theory. Modern manufacturing facilities are designed to operate on an intergraded basis. To limit the exemption to those items of machinery or equipment which produce a change in the composition of the raw materials involved in the manufacturing process would ignore the essential contribution of the devices required for such operation. These items are essential to and a part of the manufacturing process.

Pigeon J., in the Irving Oil case, supra, appears to have followed the integrated plant theory, in that, at page 300 of that case, the following is found:

Such is not the case with respect to the regulators at Mispec, they are used in the overall manufacturing process, the operation of the refinery, not the distribution of its products.

[Emphasis added. I

To all of the above this Court is pleased to state: amen.

Although decisions of the Canadian International Trade Tribunal are not ultimately binding on the Court, they are certainly entitled to respect. In McCain Foods Ltd. v. Minister of National Revenue (1994), 2 G.T.C. 5027, in regard to the physical separation of units claimed to be eligible for the same tax exemption as is here considered, it is stated (2 G.T.C. at page 5031):

The majority of the Tribunal is of the view that the phrase “for use...primarily and directly” is intended to convey of being directly and primarily involved in the manufacture or production of goods. This phrase does not necessarily imply or mean a direct physical connection.

This Court agrees with that statement whether the actual seeming discontinuity be terrestrial distance, passage of time or human activity, as in the case at bar. The important concept is the total procedure of manufacturing, making or producing that which is a final product of the process and is completed in itself, either for sale, or for incorporation into some bigger, further product. Whatever the futuristically advanced form the manufacturing or producing procedure may take, direct use in it will always be an integral part of it, even if such procedure occurs between Earth and the moon or a space station, with numerous human activities involved integrally in it. The integrity of the advancing, sequential, continual, but not necessarily continuous, fabricating process is the Court’s understanding of what is manufacturing and comprehends what is directly used in it.

This Court finds that one integrated process of manufacture and production (that is: fabrication and assembly) took and takes place in the plaintiff’s aeroplane-wing factory. Because the computer products in question were integral components of that process, and used for little else, they were machinery and apparatus sold to or imported by the plaintiff corporation for use by it primarily and directly in the activities described in subparagraphs (i) and (ii).

Clearly, the six identically worded notices of decision, dated September 29, 1989, issued by the Minister of National Revenue will have to be vacated because the plaintiff is lawfully entitled to the exemptions provided in paragraph 1(a) of Part XIII of Schedule III to the Excise Act as it was at all material times. The plaintiff is also entitled to its refund of money paid over pursuant to the Minister’s assertion of the tax payable, together with interest. The plaintiff is entitled to its party-and-party costs of this action.

Pursuant to rule 337(l)(b) the Court indicates that the plaintiff’s solicitors may, after consultation with the defendant’s solicitors, prepare and present a draft judgment to implement the Court’s conclusions herein, and to dispose of the plaintiff’s claims in this action.

Application allowed.