Bridgestone Earthmover Tyres Pty Ltd v Comptroller General of Customs and Assistant Director Industry Development Component Australian Service [1993] FCA 179 (23 April 1993)

FEDERAL COURT OF AUSTRALIA

BRIDGESTONE EARTHMOVER TYRES PTY LTD v. COMPTROLLER GENERAL OF CUSTOMS and
ASSISTANT DIRECTOR INDUSTRY DEVELOPMENT COMPONENT AUSTRALIAN SERVICE
No. NG659 of 1991
FED No. 350
Number of pages - 7
Customs

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Whitlam J(1)

CATCHWORDS

Customs - application for Commercial Tariff Concession Order - cross-elasticity of demand between goods - consideration of current market prices for goods.

Customs Act 1901 ss 269B(4) and 269C(1)

Davies Craig Pty Ltd v. Comptroller General of Customs (1986) 68 ALR 105

ACI PET Operations Pty Ltd v. Comptroller General of Customs [1990] FCA 398; (1990) 26 FCR 531

HEARING

SYDNEY, 8 March 1993
23:4:1993

Counsel for the applicant: N. J. Williams

instructed by Ray Turner

Counsel for the respondent: Alan Robertson

instructed by Australian Government Solicitor

DECISION

The applicant seeks an order of review in respect of a decision of the first respondent's delegate made under the former Part XVA of the Customs Act 1901 ("the Act"). A new Part XVA was substituted in 1992.

2. On 27 July 1990 the applicant lodged 3 applications for a Commercial Tariff Concession Order ("TCO"). Three applications were necessary since the specified goods (tyres, tubes and flaps) had different tariff classifications. It is convenient, however, simply to refer to the goods as log skidder tyres.

3. The applicant had had an earlier application for a TCO in respect of such goods refused. That decision had turned on the cross-elasticity of demand between log skidder tyres and locally manufactured tractor tyres. The first respondent's delegate had written to the applicant's customs agent on 21 July 1989 as follows:
"As you know, the Tariff Concession System

provides for the concessional admission of goods
under Section 269C of the Customs Act where the
Comptroller-General is satisfied that goods
serving similar functions to the particular
goods are not produced and are not capable of
being produced in Australia by any person in the
normal course of business.
The meaning of "...serving similar functions..."
is defined in Sub-sections 269B(3) and 269B(4)
of the Customs Act.
In considering this matter I was (and remain)
satisfied that ss 269B(3) did NOT apply.
...
Turning to ss 269B(4) of the Customs Act, this
states that goods are taken to serve similar
functions where it can be established that if
the imported and locally produced goods were
readily available for sale throughout Australia,
there would be no significant part of Australia
in which there would be significant
cross-elasticity of demand between the goods, i.e.
between log skidder tyres and locally
manufactured tractor tyres.
In practical terms, cross-elasticity of demand
is determined by examining the interaction
between the goods in the market place and
essentially comes down to the question of
whether the goods compete with each other.
On the information before me, it has not been
established that the imported and locally
produced tyres cannot be substituted for each
other in both agricultural and forestry
operations, even though in some types of terrain
the only suitable tyres may be the imported log
skidder tyres.
The latter situation has been acknowledged by
South Pacific Tyres which is not opposed to
concessional admission of log skidder tyres
provided that their use can be restricted so
that they cannot be substituted for locally made
tractor tyres. However, this is a matter which
falls outside the scope of the Tariff Concession
System.
In the circumstances, I confirm the advice
contained in my letter of 18 October 1988 that I
am not satisfied that grounds have been
established in terms of Part XVA of the Customs
Act to grant the requested Tariff Concession
Order and my previous decision to refuse the
application is maintained."

4. That decision was not reversed upon further consideration by a delegate of the first respondent who wrote to the applicant's custom agent on 5 December 1989:

"In any fresh application you should, in
addition to the basic requirements, particularly
address the market overlap created by sales of
log skidder tyres for use in the broad acre
agricultural sector.
In its letter of 19 January 1989 to the
Tasmanian Logging Association, South Pacific
Tyres stated that its objections were based
"upon a good deal of evidence" which the company
has been able to gather on the use of imported
log skidder tyres in broad acre agricultural
work where locally made rear tractor tyres are
also used. However, no details have been
provided.
In your letter of 23 September 1988 you state
that the Bridgestone sales of LS tyres into the
broad acre farm sector represent 6% of total
units sold in the forestry extractive industry.
There is still doubt about the degree of overlap
in the agricultural and logging markets and the
degree, if any, of competition which exists
between locally made R tyres and imported LS
tyres.
As you would understand, applicants need to
demonstrate that a reduction in price (as a
result of a tariff concession) of the imported
good would not significantly effect the market
demand for the locally produced good. The onus
is on the applicant."

5. The applicant included in the information accompanying its fresh applications a price outline. This compared the prices for "4 major sizes" of both types of tyres. The outline set out the "trade price" for each tyre size together with a "discount to consumer" of 10% in the case of log skidder tyres and of 30% in the case of locally manufactured tractor tyres. The applicant also stated that tyre dealers were allowed wholesale discounts of 20% and 45% respectively in respect of the trade prices.

6. A local manufacturer, South Pacific Tyres, opposed the fresh applications in the following terms:

"My reasons for this response are:
in the various functions for which log skidder
tyres may be used (not the particular function
covered by your request) there is local
production of tyres which serve the same
function.
In this regard log skidder tyres have been used
(are being used) for agricultural purposes in
substitution for tractor tyres of the kind
produced by South Pacific Tyres.
Also, in certain terrain, locally produced
tractor tyres have been used for forestry
purposes, with imported log skidder tyres also
being used in similar terrain.
There can be no question that in use it has been
demonstrated that imported log skidder tyres
have been used for purposes for which locally
produced tractor tyres also have been used, i.e.
in those uses both kinds of tyres serve similar
functions.
by reason of their capability of substitution
for locally produced tractor tyres in various
uses there exists a cross elasticity of demand
between log skidder tyres and tractor tyres,
i.e. if the price of tractor tyres was held
constant, a reduction in the price of log
skidder tyres would have a significant effect on
the market demand for tractor tyres.
A TCO on log skidder tyres, by the reason of the
consequent price reduction, would cause more
widespread usage of log skidder tyres for
purposes for which locally produced tractor
tyres are suitable than is currently the case."

7. Subsequently South Pacific Tyres spelt out for the benefit of the applicant its position very succinctly:

"South Pacific Tyres does not produce log
skidder tyres as such. The response made to the
application cannot be interpreted as implying
local production.
The response made on behalf of South Pacific
Tyres was against the core criterion of the
Commercial Tariff Concession System, namely
whether goods produced in Australia serve
similar functions to those for which
concessional entry is sought."

8. The question of "similar functions" had to arise at the threshold of consideration of an application for a TCO. Section 269C(1) of the Act provided:

"269c(1) Subject to this Part, where the
Comptroller, after considering an application
under section 269G for the making of an order
under this section in respect of particular
goods, is satisfied that -
(a) goods serving similar functions to
the particular goods are not
produced in Australia; and
(b) goods serving similar functions to
the particular goods are not
capable of being produced in
Australia by any person in the
normal course of business,
the Comptroller shall make a written order to be
known as a Commercial Tariff Concession Order,
declaring that the particular goods are goods to
which a prescribed item specified in the order
applies."

9. Section 269B(3) and (4) provided:

"269B(3) For the purpose of this Part, identical
goods shall be taken to serve similar functions.
(4) Without limiting sub-section (3), for the
purpose of this Part, goods shall be taken to
serve similar functions to other goods unless
the Comptroller is satisfied that, if both goods
were readily available for sale throughout
Australia, there would be no significant part of
Australia in which there would be significant
cross-elasticity of demand between the goods."

10. When the first respondent's delegate came to consider the application of s 269B(4), he obviously turned his attention to the price information in the fresh applications. The applicant's narrative there stated: "All LS2 tyres are sold at a premium over R1 tyres. There is a substantial cost difference to consumer." The decision-maker however, annotated his file: "Not at the trade price level. Removal of duty would place imported tyres at the advantage at this level."

11. On 15 July 1991 the delegate wrote to the applicant's custom agent refusing the fresh applications. He said:

"Mr Tasker of Bridgestone Earthmover Tyres Pty
Ltd has indicated that the price differential
between the local and imported tyres (in excess
of 35%) is a factor which erodes the cross
elasticity (substitutability) argument. When
making comparisons between the local and
imported tyres at the Trade Price level it can
be seen that there is little difference - it is
only the application of discounts which results
in significant price variations. I do not
consider it reasonable to make price comparisons
after discounting.
However, it is necessary to perform an
evaluation of pricing structures taking into
consideration the likely outcome with the
removal of the duty component, as highlighted in
the final paragraph of the abovementioned letter
of 5 December 1989. I have found, after making
such a comparison, that there is no strength in
Mr Tasker's price-based argument.
...
Having given careful consideration to the
arguments contained in these applications I find
that, in relation to subsection 269B(4), I am
not satisfied that there is no significant part
of Australia in which there would be significant
cross elasticity of demand between the LS2 and
R1 classes of tyres, or between the imported
tubes and flaps and the locally produced ones.
Furthermore, I am of the view that, in relation
to subsection 269E(1), the removal of the duty
from the tyres is likely to have a substantially
adverse effect on the related portion of the
tyre market in Australia. Accordingly, I must
refuse your applications."

12. The delegate subsequently forwarded a statement of reasons under s 13 of the Administrative Decisions (Judicial Review) Act 1977. That statement deals with the reasons for decision in relation to s 269B(4) in paragraphs 20-27. In paragraph 24 the delegate says: "My enquiries indicated that the removal of duty from LS2 tyres would decrease the market demand for the locally produced tyres." However, it is apparent from the reference cited that those inquiries rested on nothing more than the assertion of South Pacific Tyres in its submission first set out above.
It is useful to set out in full paragraphs 26 and 27 of those reasons:

"26. In looking at the price comparisons
between the imported and local tyres
provided by Bridgestone ... I noted that
the differences were quite marked after
discounts had been applied. However, at
the trade price level the imported tyres
are only marginally dearer. In an effort
to make price comparisons at a meaningful
level, somewhere akin to the landed duty
paid price of the imported tyres with the
ex-factory price for the locally produced
tyre, I considered that the comparison was
appropriate at the trade price level,
exclusive of the variable discounts. This
level is one which I consider to be fair,
realistic and practical and is made at a
point where it has no effect on market
substitutability.
27. On the basis that locally produced tractor
tyres have been used for forestry
extraction purposes in similar terrain to
that where imported log skidder tyres are
also being used; that up to 7% of imported
log skidder tyres are being used in
agricultural applications; and my view
that there would be a response in the
market to a change in price of the
imported product, I concluded that there
is cross elasticity of demand between the
two types of tyres for the purpose of
Subsection 269B(4)."

13. The applicant submits that both the record and the above reasons demonstrate error of law in the construction of s 269B(4) of the Act. The decision-maker should have determined cross-elasticity, it is submitted, not in relation to the theoretical list prices, but market prices.

14. The expression "cross-elasticity of demand" was described in an Australian Customs Service booklet as follows:

"When two goods are substitutes and the price of
one good is held constant, a variation in the
price of the second good would have a
significant effect on the market demand for the
first.
In economic terms the relative change in demand
for one good resulting from a 1 percentage
change in the price of another is known as the
cross-elasticity of demand.
In the case of substitutes, a decrease in the
price of one good has the effect of decreasing
the demand for the other good.
In practical terms this is determined by
examining the interaction between the goods in
the market place and essentially comes down to
the question of whether the goods compete with
each other."

15. That definition was adopted by Davies J in Davies Craig Pty Ltd. v. Comptroller-General of Customs (1986) 68 ALR 105 at 108. His Honour went on to say (at 114):

"In my opinion, s 269B(4) is explicit and clear.
It provides that goods shall be taken to serve
similar functions unless the Comptroller is
satisfied that, if the goods were readily
available for sale throughout Australia, there
would be no significant part of Australia in
which there would be significant
cross-elasticity of demand between the goods.
That provision and s 269B(3), with respect to
identical goods, are provisions which were
intended by Parliament entirely to govern the
question of similar function. Identical goods
are deemed to have a similar function. If goods
are not identical, the question is to be
determined by reference to cross-elasticity of
demand.
In other words, I am of the view that Parliament
intended by the definitions in s 269B(3) and (4)
to cover the field. Mechanical or physical
function is covered by s 269B(3), which requires
identity. If there is not identity in this
sense, the issue is to be decided by reference
to the requirement of "significant
cross-elasticity of demand between the goods", which
is a market or economic test and not a
mechanical or physical test, though the
mechanical or physical function of the goods
would be a relevant matter to be considered."

16. Subsequently, in ACI PET Operations Pty Ltd v. Comptroller-General of Customs [1990] FCA 398; (1990) 26 FCR 531 Foster J described s 269B(4) as a provision "difficult to interpret and apply" (at 549). His Honour then proceeded to construe aspects of s 269B(4) which had not previously been the subject of judicial interpretation. On cross-elasticity his Honour said:

"In the first place, it must be noted that there
is again a hypothetical quality attached to the
considerations enjoined by this part of the
section. The decision- maker having, by an
effort of imagination, conjured up a situation,
which may be contrary to current fact, of ready
availability of each of the competing goods on a
nationwide basis, is then required to determine
another hypothetical question whether, in such
envisaged circumstances, there would be
cross-elasticity of demand between the goods, that is
would the goods be substitutable the one for the
other in circumstances where the only factor
determining choice would be price. If satisfied
that such would be the case, the next inquiry,
again hypothetical, is to be whether there would
be "no significant part of Australia" in which
the cross-elasticity of demand so ascertained
would occur to an extent which could be
described as "significant".
In other words, putting the matter as succinctly
as I find possible, the decision-maker was in
this case, confronted with the question whether,
on the assumption of "ready availability" of
both PET and PVC resin throughout Australia
there was demonstrated that there would be an
absence of significant price-based substitution
of the one for the other in any significant part
of Australia.
It has been put on behalf of he applicant that,
in the answering of this question, the
decision-maker should not have regard to future
possibilities; he should tie his considerations
to the present demonstrable facts of the
marketplace. In my view, the hypothetical
nature of the inquiry indicates that this cannot
be so. Although, obviously, the current
situation obtaining between the two goods in the
marketplace and also the history of their
market interaction must be of very considerable
importance, the very nature of the inquiry
requires that the mind of the decision-maker
rove over the possibilities and probabilities of
the result of granting the (TCO) sought. This
must, in my view, inevitably involve
consideration of potential future effects. The
application of the section clearly does not
permit of wild conjecture or flights of fancy
but requires a genuine and reasoned attempt to
foresee the situation throughout Australia on
the assumptions postulated. The decision-maker
is not obliged to assume that the suppliers and
purchasers will remain the same. He can take
account of observable market trends, even though
they may be merely inchoate."

17. It is plain from what Foster J said that the decision-maker is not confined to considering current market prices. But I am quite unable to see how the delegate can make a comparison of prices for the two goods (as he has done here) which excludes the discounts available to consumers. Quite simply, I understand the concept of cross-elasticity as being apt to show how the demand for one good changes when the price of another changes. Market prices means the prices actually paid, and I do not see how cross-elasticity can be assessed, even on a hypothetical basis, unless regard is had to such prices. Here the delegate has reached a "view that there would be a response in the market to a change in the price of the imported product" (paragraph 27 of the statement of reason). This seems a curious conclusion where the delegate has expressly eschewed a comparison of market prices.

18. It follows that I consider the delegate has erred in law in his determination of similar functions under s 269B(4). The delegate should have had regard to the market price of both goods.

19. It is true that the applicant's customs agent repeatedly urged upon the delegate the quite wrong view that, since South Pacific Tyres did not produce identical goods, the delegate was concerned only with the exercise of the discretion under s 269E(1) of the Act. The delegate went on to form an opinion under s. 269E(1) on the basis of which he would, in any event, have refused to make the TCO, but it is not submitted that this exercise of discretion would render futile judicial review of his consideration under s.269C(1). The delegate was incorrect in his approach to the question of cross-elasticity of demand between the two goods and it is necessary that the matter should be remitted for reconsideration.

20. Counsel for the respondent noted that the focus of the applicant's challenge to the decision altered in the amended application filed in Court at the hearing. I will, accordingly, postpone making an order for costs until counsel have had an opportunity to consider these reasons. Meanwhile, I make the following orders:

1. the first respondent's decision of 15 July 1991 is set
aside, and
2. the applications lodged on 27 July 1990 are to be considered