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
.27¢
US
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
corporation
by
the
name
of
Tepwin
Company
Limited.
The
.27¢
US
per
barrel
of
crude
oil
is
sometimes
referred
to
in
evidence
as
“the
Tepwin
charge”
and
represents
the
difference
between
$1.9876
US
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
US
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
US
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
the
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
representing
the
extent
of
the
profit
element
for
the
crude
oil
that
arrived
on
the
ship
MS
VICTORIA
in
December
1970.
(See
Exhibit
1,
Document
193).
And
accordingly,
this
assessment
must
be
referred
back
for
reassessment
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
to
the
disputed
matters
of
this
assessment
the
Minister’s
position
(the
defendant)
is
that
the
sum
representing
the
differential
between
$1.9876
US
per
barrel
of
crude
oil
and
$2.25
US
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
defendant)
alleges
that:
1.
in
December
1969,
Murphy
Oil
Company
Ltd
(“Murphy
Calgary’’),
as
a
Canadian
incorporated
company
which
wholly
owned
Spur
Oil
Ltd
acquired
Tepwin
Company
Limited,
a
Bermuda
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
Compny
(“Murphy
Trading’’),
a
Delaware
Company
associated
with
Spur
Oil
Ltd;
3.
by
Agreement
dated
February
1,
1979
(see
Exhibit
1,
Document
44)
Spur
Oil
Ltd
purported
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
pursuant
to
an
Agreement
dated
August
2,
1968
(see
Exhibit
1,
Document
21.1);
5.
Tepwin
earned
a
net
profit
in
its
1970
taxation
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
transportation
of
750,000
tons
of
crude
oil
from
designated
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
material
times
thereafter
at
which
Tepwin
or
any
other
person,
could
have
arranged
affreightment
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,
Document
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
quality
of
crude
oil
could
have
been
acquired
by
Spur
Oil
Ltd
on
the
open
market
to
meet
its
requirments
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,
Arkansas)
and
personnel
and
their
titles
namely:
(see
pages
174
and
175)
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
reorganization
of
Murphy
Oil
Trading
Company
(the
Delaware
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,
Bermuda
was
100%
acquired
by
Murphy
Oil
Canada
Ltd
the
latter
of
whose
headquarters
is
at
Calgary,
Alberta.
Tepwin
Company
Limited
of
Bermuda
was
a
so-called
“shelf”
corporation
incorporataed
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
arrangements
for
and
bought
this
Burmuda
corporation
for
Murphy
Oil
Company
Limited
Canada.
Then
as
said
in
evidence
by
him,
Mr
Waktkins
caused
to
have
put
into
Tepwin
the
following
assets:
(1)
a
transportation
arrangement,
namely,
a
contract
of
affreightment
between
Murphy
Oil
Company
(the
Delaware
Corporation)
and
Associated
Bulk
Carriers
Limited,
Hamilton,
Bermuda
(see
Exhibit
1,
Book
1,
Document
12
dated
March
28,
1968)
which
contract
of
affreightment
had
a
2
/?
years
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
Trading
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
US
per
barrel
instead
of
$1.9876
per
barrel
which
Spur
Oil
Ltd
had
heretofore
paid.
Spur
Oil
Ltd
had
heretofore
paid
$1.9876
US
per
barrel
price
by
reason
of
the
document
dated
August
2,
1968
(Exhibit
1,
Book
Il,
Document
21.1).
1.
MURPHY
OIL
CORPORATION
CORPORATE
ORGANIZATION
CHART
1969,
1970,
1971
2.
PERSONNEL
LIST
(except
those
of
Murphy
Oil
Trading
(Western)
Company,
which
was
not
given
in
evidence)
1969,
1970,
1971
El
Dorado,
Ark
USA
Murphy
Oil
Trading
Company
|
BEASLEY,
L
R
|
Murphy
Oil
Corporation,
Tepwin
Company
Limited
|
|
El
Dorado,
Ark
USA
|
|
|
BILGER,
PC
|
Murphy
Oil
Corporation,
Tepwin
Company
Limited,
|
|
BUTTERFIELD,
H
C
|
Tepwin
Company
Limited
|
|
Hamilton,
Bermuda
|
|
|
CARNES,
R
A
|
Murphy
Oil
Corporation,
Tepwin
Company
Limited
|
|
El
Dorado,
Ark
USA
|
|
|
COLLIS,
C
T
|
Tepwin
Company
Limited
|
|
Hamilton,
Bermuda
|
|
|
COWGER,
C
E
|
Murphy
Oil
Corporation,
Murphy
Oil
Trading
Company
|
|
El
Dorado,
Ark
USA
|
|
|
CRAIG,
D
R
|
Murphy
Oil
Corporation
|
|
El
Dorado,
Ark
USA
|
|
|
DI
TOMASO,
N
|
Murphy
Oil
Company
Ltd,
Murphy
Oil
Quebec
Ltd
|
|
Montreal,
Quebec
|
|
|
FRANCE,
T
H
|
Murphy
Oil
Company
Ltd,
Murphy
Oil
Quebec
Ltd
|
|
Calgary,
Alberta
|
|
|
GOULD,
J
A
|
Murphy
Oil
Company
Ltd,
Murphy
Oil
Quebec
Ltd
|
|
Calgary,
Alberta
|
|
|
GRANT,
A
W
|
Murphy
Oil
Quebec
Ltd
|
|
Montreal,
Quebec
|
|
|
GWINELL,
A
|
Tepwin
Company
Limited
|
|
Hamilton,
Bermuda
|
|
|
HAIRE,
E
H
|
Murphy
Oil
Corporation,
Murphy
Oil
Trading
Company,
|
El
Dorado,
Ark
USA
Tepwin
Company
Limited
|
IRWIN,
I
G
M
|
Murphy
Oil
Company
Ltd,
Murphy
Oil
Quebec
Ltd
|
|
Montreal,
Quebec
|
|
|
MATTHEWS,
F
R
|
Murphy
Oil
Company
Ltd,
Murphy
Oil
Quebec
Ltd
|
|
Calgary,
Alberta
|
|
|
McDonald,
p
C
|
Murphy
Oil
Company
Ltd,
Murphy
Oil
Quebec
Ltd
|
|
Calgary,
Alberta
|
|
|
MONZINGO,
H
B
|
Murphy
Oil
Company
Ltd,
Murphy
Oil
Quebec
Ltd,
|
|
Calgary,
Alberta
|
Tepwin
Company
Limited
|
|
MURPHY,
C
H,
Jr
|
Murphy
Oil
Corporation,
Murphy
Oil
Company
Ltd
|
|
,
El
Dorado,
Ark
USA
|
|
|
O’CONNOR,
J
A,
Jr
|
Murphy
Oil
Corporation,
Murphy
Oil
Company
Ltd
|
|
El
Dorado,
Ark
USA
|
|
|
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,
Murphy
Oil
Quebec
Ltd
|
|
Calgary,
Alberta
|
|
|
SHIPP,
C
T
|
Murphy
Oil
Corporation
|
|
El
Dorado,
Ark
USA
|
|
|
STRATHY,
J
G
K
|
Murphy
Oil
Company
Ltd,
Murphy
Oil
Quebec
Ltd
|
|
Toronto,
Ontario
|
|
|
WATKINS,
J
W
|
Murphy
Oil
Corporation,
Tepwin
Company
Limited
|
|
El
Dorado,
Ark
USA
|
|
|
YOUNG,
E
T
|
Murphy
Oil
Company
Ltd,
Murphy
Oil
Quebec
Ltd
|
|
Calgary,
Alberta
|
|
|
WIMER,
K
|
Murphy
Oil
Corporation
|
|
El
Dorado,
Ark
USA
|
|
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
US
per
barrel
until
February
1,
1970.
As
to
Exhibit
1,
Document
21.1
also
Mr
Monzingo,
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
Limited,
Canada,
and
Director
and
President
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
transaction
which
established
at
the
date
of
that
document
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,
Document
21.1
which
had
existed
from
August
2,
1968,
was
substituted
for
the
arrangement
or
contract
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
US
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
Documents
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,
justified
the
upward
change
in
the
Spur
Oil
Ltd
cost
to
$2.25
US
per
barrel,
the
amount
of
which
change
was
the
sum
representing
the
said
differential,
approximately
.27¢
US
per
barrrel
of
crude
oil.
Mr
Watkins
said
that
he
undertook
this
reorganization
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
certain
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
p
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
Company
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
Counsel,
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
corporation
organization;
and
Mr
Watkins
was
in
charge
of
the
legal
matters
of
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
directed
by
the
directors
and
officers
of
Murphy
Oil
Company
in
El
Dorado,
Arkansas,
(see
Exhibit
1,
Book
III,
Document
188,
the
money
chart,
as
to
how
the
funds
were
transferred
between
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
delivering
oil,
none
of
its
officers
and
directors
in
Bermuda
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
(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
differen-
tial
between
$2.25
and
$1.9876)
Spur
Oil
Ltd
always
considered
that
it
was
not
paying
the
sum
representing
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
proforma
office
in
Bermuda.
(See
Exhibit
1,
Book
II,
Document
141
being
the
financial
statements
for
Tepwin
Company
Limited
for
the
year
ended
December
31,
1970);
(4)
the
fact
that
Mr
Watkins
informed
the
solicitors
in
Bermuda,
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
approximately
equal
to
the
so-called
.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
accountants
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,
BP
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
.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
dividends
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
to
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,
NY
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
to
the
following
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)
constituted
‘‘fair
market
value’’.
4.
Whether
the
freight
element
in
the
price
of
crude
oil
delivered
CIF
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
Department
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
contract
of
March
23,
1968,
constitute
“fair
market
value”?
The
contract
of
March
23,1968
between
Associate
Bulk
Carriers
Ltd
as
“Owner”
and
Murphy
Oil
Trading
Company
as
“Charterer”
..
.
(Exhibit
1,
Book
1,
Document
12)
is
a
contract
which
in
the
shipping
trade
is
known
as
a
“Contract
of
Affreightment”.
In
the
oil
shipping
business
a
contract
of
affreightment
is
an
agreement
whereby
an
owner
of
tankers
or
other
bulk
carriers
agrees
to
make
available,
on
a
voyage
charter
basis,
as
distinguised
from
a
time
or
bare
boat
basis,
a
certain
vessel
within
a
restricted
physical
condition,
such
as
length,
beam,
draft,
etc,
at
certain
time
intervals
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
percentages
above
or
below
a
scale
of
rates
which
was
known
as
“Intascale”.
Thus
the
contract
of
afferightment
between
Associated
Bulk
Carrieres
Ltd
and
Murphy
Oil
Trading
Company
.
.
.
expresses
the
transportation
fee
at
“Intascale
less
62
/2.”
“Intascale”
was
a
rate
reference
published
by
The
International
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,
NY.
Both
the
Intescale
and
Worldscale
rates
are
predicted
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
US
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
operating
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
abandoment
of
“Intascale”
and
the
adoption
of
“Worldscale”
was
the
desire
to
merge
the
“Intascale”
rate
structure
with
the
American
Tanker
Rate
Schedule
(known
as
“ATRS”)
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
US
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,
ie
owned
vessels,
longterm
chartered
vessels,
short-term
chartered
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
to
time,
which,
depending
on
market
conditions,
may
vary
from
eight
to
twelve
years.
Thus
a
long-term
charter
will
ordinarily
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
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
US
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
“medium”
size
cargoes
ranged
from
“Worldscale
102“
to
“Worldscale
156.8”,
while
that
for
“Large
1”
size
cargoes
was
“Worldscale
75.3”
to
“Worldscale
109.7.
In
March,
1968,
ie
the
time
that
the
contract
of
affreightment
between
Associated
Bulk
Carriers
Ltd
and
Murphy
Oil
Trading
Company
was
entered
into,
the
going
long-term
oil
tanker
charter
rate
for
Persian
Gulf—US
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
contarct
at
“Intascale
minus
62V2”
appears
to
be
low
when
compared
to
their
prevalent
rates
for
time
charters
or
consecutive
voyage
charters
for
voyages
between
the
Persian
Gulf
and
US
East
Coast
ports,
it
was
agreed
to
be
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
Zz
year
period
specified.
2.
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
affreightment
whereby
the
Murphy
Oil
Trading
Company
endeavours
to
charter
to
Tepwin
Company
Limited
ships
under
charter
to
Murphy
Oil
Trading
Company
from
Associated
Bulk
Carriers
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
affreightment
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
Monz-
ingo’s
examination
for
discovery
(pp
293-294
.
..)
that
this
contract
was
drawn
“in
house”,
ie
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”.
Obviously,
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,
ie
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,
or
.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
/2
%”’
(the
rate
quoted
in
the
Associated
Bulk
Carriers
Ltd—Murphy
Oil
Trading
Company
contract
of
affreightment).
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
Limited,
commercial
consideration
could
not
have
been
paramount,
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
for
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
February
1,
1970,
the
going
market
rates
for
voyages
from
the
Persian
Gulf
to
US
East
Coast
ports
for
the
duration
in
question
were
equivalent
to
about
‘‘Worldscale
88”
for
shortterm
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
restrictive
voyages,
such
as
between
the
Persian
Gulf
and
US
East
Coast
ports).
Around
February
1,
1970,
the
spot
market
was
about
“Worldscale
100”
for
one
voyage
between
the
Persian
Gulf
and
US
East
Coast
ports.
A
prudent
purchaser
of
oil
transportation
would
go
into
the
spot
market
only
to
supplement
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
Company
Limited.
Rather,
a
company
with
the
needs
of
Murphy
Oil
Trading
Company,
ie
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
Company
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
transaction
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
considerations.
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
CIF
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
barrrel.
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
US
$0.60
per
barrel.
“Intascale
minus
62
/2%”,
as
per
the
contract
of
affreightment
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
FOB
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
Company
Limited,
and
Mr
Monzingo’s
testimony
at
p
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
barrrel
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
US
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,
ie
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
contracts”,
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
Compahy
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
substitution.
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
Company
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
transportation
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
transportation
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)
US
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
potential
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
US
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
Company
Limited
being
a
company
without
an
established
commercial
reputation
for
reliability
and
credit,
would
not
likely
have
been
able
to
enter
into
any
oil
transportation
contracts
without
...
(Spur
Oil
Ltd)
guaranty
of
preformance.
Furthermore,
assuming
that
what
is
meant
by
“facilitating
the
utilization
by
the
US
Parent
Corporation
of
its
proprietary
crude
oil
produced
in
Venezuela
and
the
Persian
Gulf
area”
is
arranging
for
its
transportation,
then
Tepwin
Company
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
Company,
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
US
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
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
1,1968
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,
Document
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,
Canda,
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
refinery
at
Montreal,
Quebec,
Canada.
In
preparation
for
that
Murphy
Oil
Trading
Company
(US)
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
Company
(US)
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
trans-shipment
by
pipeline
to
Montreal,
Quebec
for
Spur
Oil
Ltd’s
account.
It
would
appear
that
Murphy
Oil
Trading
Company
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
US
per
barrel
to
enable
Spur
Oil
Ltd
to
carry
on
its
intent
by
the
contract
with
British
Petroleum
to
put
proprietary
crude
oil
through
BP’s
refinery.
Mr
Monzingo’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
Limited
in
order
to
fulfill
such
obligation
with
British
Petroleum
chartered
the
ships
PHANTOM
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
p
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
1,
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
US
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
management
and
control
of
Tepwin’s
business
in
any
aspect.
Instead,
they
were
to
carry
out
the
instructions
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
properly
deductible
from
..
.
(Spur
Oil
Ltd’s)
income
in
computing
its
taxable
income
for
its
1970
taxation
year
and
(a
declaration
is
claimed)
directing
the
Minister
to
reassess
.
.
.
(Spur
Oil
Ltd’s)
income
accordingly
reversing
to
the
extent
necessary
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
RSC
1952,
c
148
prior
to
amendments
to
section
1
of
c
63,
SC
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
taxation
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
artificially
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
subsection
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
paragraph
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
subsection
137(1)
of
the
Income
Tax
Act”.
Authorities
Unduly
or
Artificially
Reducing
Income
Subsection
137(1)
of
the
Income
Tax
Act,
RSC
1952,
c
148
reads
as
follows:
(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
operation
that,
if
allowed,
would
unduly
or
artificially
reduce
the
income.
This
statutory
concept
of
“unduly’’
or
“artifically”
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,
[1967]
1
All
ER
518
at
528,
and
his
definition
has
been
adopted
for
Canadian
income
tax
purposes
by
the
Supreme
Court
of
Canada
in
MNR
v
J
A
Cameron,
[1974]
SCR
1062;
[1972]
CTC
380;
72
DTC
6325.
Lord
Diplock
said:
As
regards
the
contention
of
the
plaintiff
that
the
transactions
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
pejorative
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
MNR
v
Leon,
[1976]
CTC
532;
76
DTC
6299,
per
Heald,
J,
and
utilized
by
Cat-
tanach,
J
in
L
Mendels
v
The
Queen,
[1978]
CTC
404;
78
DTC
6267;
but
see
contrary
Massey-Ferguson
v
The
Queen,
[1977]
CTC
6;
77
DTC
5013,
per
Urie,
J.
B.
Artificial
Transactions
1.
Lord
Diplock
in
the
Privy
Council
case
of
Seramko
v
ITC,
[1976]
STC
100,
on
an
appeal
from
Jamaica
based
on
the
consideration
of
the
Jamaica
Income
Tax
Law
1954
subsection
10(1)*
at
107
makes
a
distinction
between
“artificial”
and
“fictitious”
(that
is
“sham”)
transactions
as
envisaged
by
the
words
employed
in
subsection
10(1)
of
the
above
Act.
That
subsection
is
in
many
ways
analogous
to
subsection
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
transactions
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
subsection
137(1)
of
the
Canadian
Income
Tax
Act
(now
subsection
245(1)
under
the
current
Act).
See
for
example,
Jackett,
CJ
in
fl
v
Alberta
and
Southern
Gas
Co
Ltd,
[1977]
CTC
388;
77
DTC
5244;
[1978]
CTC
780;
78
DTC
6566,
and
Pratte,
J
in
Produits
LDG
Products
Inc
v
The
Queen,
[1976]
CTC
591;
76
DTC
6344,
and
the
obiter
also
in
L
J
Harris
v
MNR,
[1966]
SCR
489;
[1966]
CTC
266;
66
DTC
5189.
Because
of
the
particular
facts
of
the
Harris
(supra)
case,
perhaps
that
case
should
be
put
in
the
category
of
artificial
transactions
referred
to
in
(ii)
below.
(ii)
Transactions
proven
by
evidence
to
be
artificial
in
which
cases
the
Court
has
directly
applied
Part
I
of
the
Act
(ie
the
pre-1972
Act)
to
uphold
assessments
for
tax.
see
for
example,
Judson,
J
in
Smythe
et
al
v
MNR,
[1970]
SCR
64;
[1969]
CTC
558;
69
DTC
5361
at
69
[562,
5363]:
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
corporations
are
distinct
and
separate
legal
persons
(see
Salomon
v
Salomon,
[1897]
AC
22;
Pioneer
Laundry
&
Dry
Cleaners
Limited
v
MNR,
[1940]
AC
27;
[1938-39]
CTC
411;
1
DTC
499-69
and
Inland
Revenue
Commissioners
v
Duke
of
Westminster,
[1936]
AC
1),
it
is
always
necessary
to
consider
the
essential
realities
of
transactions
done
by
separate
legal
persons,
individuals
or
corporations,
to
determine
whether
or
not
the
execution
of
the
transactions
entered
into
by
them
is
within
the
principles
of
the
Duke
of
Westminster
(supra)
case
or
whether
the
execution
is
akin
to
a
theatrical
performance.
Templeman,
LJ
put
the
matter
of
this
consideration
in
this
way
at
p
978
in
W
T
Ramsay
v
IRC,
[1979]
WLR
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
Westminster’,
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
management
and
control
of
such
off-shore
corporations
is
elsewhere
than
in
such
off-shore
locations.
Prima
facie,
the
conclusion
is
that
the
transactions
entered
into
by
such
off-shore
corporations
are
artificial.
3.
As
to
determining
the
residence
of
a
corporation
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
subsection
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
purpose
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
v
Howe,
[1906]
AC
455
namely,
“the
company
resides
for
the
purpose
of
income
tax
where
its
real
business
is
carried
on
.
.
.
and
the
real
business
is
carried
on
where
central
management
and
control
actually
abides”.
Ordinarily,
the
central
management
and
control
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
corporation
is
exercised
in
more
than
one
country:
Swedish
Central
Railway
Company
v
Thompson,
[1925]
AC
495.
It
may
be
that
such
dual
residence
should
be
found
infrequently:
Egyptian
Delta
Land
and
Investment
Company
v
Todd,
[1929]
AC
1
and
Kiotaki
Para
Rubber
v
CIT
(1940),
64
CLR
15.
The
said
English
test
with
respect
to
the
determination
of
the
residence
of
a
corporation
for
tax
purposes
based
on
its
management
and
control
is
applicable
in
Canada.
In
BC
Electric
Railway
Company
Ltd
v
R,
[1946]
AC
527;
[1946]
CTC
224;
2
DTC
839,
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.
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
TJ
Graham
&
Sons
Ltd,
[1956]
1
QB
159
at
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
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
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]
AC
703,
713-14;
31
TLR
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
/CR
Haulage
Ltd,
((1944),
KB
511:
60
TLR
399;
[1944]
1
All
ER
691)
to
which
we
were
referred
and
in
which
the
court
said:
([1944]
KB
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
principle
is
the
case
of
The
Lady
Gwendolen,
[1965]
1
Lloyd’s
Rep
335
at
345.
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
QB
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
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
disposed
to
say
that
actual
fault
on
the
part
of
Mr
Boucher,
as
registered
ship’s
manager
and
head
of
the
traffic
department,
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
shipowners
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.
4.
In
reference
to
the
transactions
listed
in
paragraph
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
is
is
not
rebutted,
then
a
finding
that
the
transactin
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,
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,
Document
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
subsection
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,
Document
21.1
between
Spur
Oil
Ltd
(formerly
Murphy
Oil
Quebec
Ltd)
and
Murphy
Oil
Trading
Company
(the
Delaware
Corporation);
or
(3)
both
basis.
The
evidence
established
that
the
management
and
control
of
the
offshore
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
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
al!
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
officers
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
specifically
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,
Arkansas
or
in
Canada
either.
The
evidence
further
establishes
that
what
the
officers
and
directors
and
the
solicitors
at
Bermuda
did
was
act
merely
as
scribes
under
the
direction
of
Mr
Watkins
from
El
Dorado,
Arkansas
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
that
that,
they
did
practically
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
US
per
barrel
under
the
so-called
contract
between
them
(Exhibit
1,
Book
1,
Document
21.1);
and
this
contract
document
was
never
formally
or
informally
abrogated.
Exhibit
1,
Book
1,
Document
21.1,
therefore,
at
all
material
time
was
a
valid
and
subsisting
contract.
As
a
consequence,
these
three
transactions
evidenced
by
the
three
contracts,
Exhibit
1,
Book
1,
Documents
42,
43
and
44,
are
artificial
within
the
meaning
of
subsection
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
foregoing
conclusions
and
may
move
for
judgment
in
accordance
with
Rule
337(2)(b).
Judgment
shall
not
issue
until
settled
by
the
Court.
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