Davies Craig Pty Ltd v Comptroller-General of Customs
[1986] FCA 356
•19 AUGUST 1986
Re: DAVIES CRAIG PROPRIETARY LIMITED
And: COMPTROLLER-GENERAL OF CUSTOMS
No. VG247 of 1985
Administrative Law
COURT
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Davies J.
CATCHWORDS
Administrative Law - judicial Review - Customs - commercial tariff concession order - DC electric motors for motor vehicle cooling fans - whether goods serving similar functions produced or capable of being produced in Australia - whether significant cross-elasticity of demand between goods - reference to Minister's Second Reading Speech - error of law - relevant provisions misconstrued
Words or Phrases - "goods serving similar functions" "cross-elasticity of demand"
Administrative Decisions (Judicial Review) Act 1977 Cth) s.5
Customs Act 1901 (Cth) Part XVA, ss.269B, 269C
HEARING
MELBOURNE
#DATE 19:8:1986
ORDER
The application for an order of review is granted.
The subject decision, taken on 8 October 1985 by Mr Ian Bamford, is set aside.
The matter is remitted to the respondent for re-consideration according to law.
The respondent shall pay the applicant's costs of these proceedings.
Note : Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
This is an application under s.5 of the Administrative Decisions (Judicial Review) Act 1977 (Cth) to review a decision refusing the application by Davies Craig Proprietary Limited for a commercial tariff concession order pursuant to Part XVA of the Customs Act 1901 (Cth). The decision was taken on 8 October 1985 by Mr Ian Edward Bamford, Assistant Director, Tariff Concession and Quota Branch, Australian Customs Service, who was a delegate of the Comptroller-General of Customs.
Part XVA of the Customs Act 1901 (Cth), which was introduced into the Act by Act No.19 of 1983, provides for the making of commercial tariff concession orders. The general effect of an order when made is to apply the rate of duty "Free" which subjects the goods to any relevant revenue duty, currently 2%, and to margins of preference applying under international trade agreements. A concession order applies in respect of all goods, by whomsoever imported, meeting the description of the goods specified in the order which are imported into Australia after the date specified in the order.
The only provisions to which I need refer are set out in ss.269B and 269C of the Customs Act 1901 (Cth). Section 269C(1) provides :
"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."
Section 269B(3) and (4) provide :
"269B.(3) For the purposes of this Part, identical goods shall be taken to serve similar functions.
(4) Without limiting sub-section (3), for the purposes 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."
In February 1985, the applicant, Davies Craig Proprietary Limited, applied for a tariff concession order. The form of application contained the following information :
"Precise Description of Goods to be Imported
DC Flat Electric Motors, 12 Volt to 27 Volt, up to 150 watt output having a length not including shaft, not exceeding :
52mm for motors up to 50 watt output, or 55mm for motors up to 100 watt output, or 65mm for motors up to 150 watt output
Suggested Commercial Tariff Concession Order Wording
DC Flat Electric Motors, 12 Volt to 27 Volt designed for use in the manufacture of motor vehicle cooling fan assemblies
Function that the Goods are Intended to Serve
To provide motive power for electric cooling fans in limited space available in motor vehicles;
A. Between radiator and engine B. Between radiator grill and radiator C. Between radiator grill and air conditioner condensor
Other Functions Goods May Serve
To provide motive power for electric exhaust fans installed in enclosed spaces :-
boats & ships".
Subsequently, on a suggestion by the Australian Customs Service, the applicant agreed to the deletion of the word "flat" from the description of the goods to be imported.
As appears from the description of the goods set out in the form of application, the goods are small electric motors which are constructed so as to have a smaller length though greater diameter than usual electric motors. They have a particular advantage in providing the motive power for electric cooling fans where space is limited.
On 8 October 1985, the decision-maker, Mr Bamford, wrote to the customs agents for the applicants setting out his decision as follows :
"I am writing to you at this time to advise that I am refusing your above referenced application. This is despite the fact that your latest communication with this office is unanswered. The contents of that letter have been taken into account, however the issues raised have no bearing on the question of Tariff Concessional admission.
The sole criteria under which a Commercial Tariff Concession may be made is that goods serving similar function are not produced or capable of being produced in Australia.
In assessing an application for particular goods it is therefor necessary to first identify the function the goods serve. In the case of your application you identified this function as 'To provide motive power for electric cooling fans in limited space available in motor vehicles'. From examination of information supplied in support of your application I would not dispute that, for the purposes of PART XVA of the Customs Act, this is an accurate definition of the function the goods normally serve and indeed the function for which they were designed.
From the outset of your application Preslite have stated that they manufacture goods serving similar function. They have provided evidence in support of this claim to this office. Your client has never disputed this claim and has in fact agreed with it in his letter to you of 22 August 1985.
Mr Davies' endeavours to establish that a prima facie case exists for a Tariff Concession have focused on two aspects, namely the unavailability of motors to Davies Craig specifications and the existence of 'separate markets' for Preslite and Davies Craig products. As explained above, neither of these questions is relevant as the essential issue of the availability of goods serving function (sic) has already dictated that a concession is not appropriate."
The reference in that letter to goods manufactured by Preslite was a reference to electric motors of ordinary configuration which were manufactured by an Australian company, Preslite Australia Ltd, and which also were used to provide power for electric cooling fans in motor vehicles and boats.
It was submitted by Mr M. Dowling, QC, senior counsel for the applicant, and not disputed by Mr E.D. Lloyd, QC, senior counsel for the respondent, that I should adopt the following description of "cross-elasticity of demand" which appears at page 47A of the booklet entitled "Tariff Concession System" :
"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."
I am content to adopt that definition which sets out my understanding of the term.
The application for review was brought on a number of grounds, namely, that Mr Bamford had taken into account irrelevant considerations, had failed to take into account relevant considerations and had misconstrued the relevant provisions of Part XVA of the Customs Act 1901 (Cth) and that there was no evidence or other material to justify the making of the decision.
In affidavits which were relied upon by the applicant, there were suggestions of bias and unfair conduct on the part of Mr Bamford and, at the hearing of the application for review, Mr Bamford was vigorously cross-examined. I do not propose to discuss these allegations in any detail. There is nothing in the material before me which leads me to think other than that Mr Bamford performed his duty fairly and in an entirely neutral manner. In my opinion, nothing that he did reflects discredit upon him or the Australian Customs Service or discloses any bias or unfairness on his part. In my view, the allegations which appeared either expressly or by inference from the affidavits and which may be inferred from the tone of the cross-examination are without justification.
I need not discuss further the individual allegations made with respect to irrelevant considerations.
Nor need I discuss separately the individual allegations made with respect to the failure to take into account relevant considerations. The most important allegation made appeared in paragraph 2(b)(i) of the application for review, namely,
"2.(b) The respondent failed to take relevant considerations into account in the exercise of the power, namely
(i) The fact that the goods produced by Preslite Australia served a different market than the goods imported by the applicant and that there was no cross-elasticity of demand between them. This is a relevant consideration by virtue of s.269B(4) of the Act as amplified in the booklet entitled 'Tariff Concession System' that is published by the Australian Customs Service."
This allegation is a significant one. However, in order to consider it, it is necessary to turn to the material which was before Mr Bamford when he made his decision and to ascertain whether that material should have led him to conclude that the goods produced by Preslite Australia served a different market from that served by the goods to which the concession order would apply and that there would be no cross-elasticity of demand between them. See s.5 of the Administrative Decisions (Judicial Review) Act 1977 (Cth).
Part of the material which was put in support of the application for a concession order included a brochure put out by the applicant with respect to the applicant's electric cooling thermatic fan. This brochure, part of Exhibit C, makes no suggestion that the applicant's fans are for use only in areas of limited space in respect of which conventional electric fans are not suitable. The brochure included the following information :
"DAVIES CRAIG make models to suit almost every popular make of car. Study this chart and find the one to suit your car. Check the distance between your pulley and the radiator to determine if there is enough space to fit a shroud model
(DCS9/DCS11). The other models should be fitted behind the radiator if space is available - otherwise in front of the radiator - see dimensions of each model below. With air- conditioned cars, the Thermatic Fan must be fitted to the rear-face of the radiator and a condenser fan fitted between the grill and condenser."
The brochure instructs readers to check the space available in the car and select a model. It gives a schematic diagram of a number of fans and motors and sets out the dimensions thereof. There are instructions to select types DCS9 or DCS11 according to engine capacity, provided there is sufficient space between the radiator and the engine. There is an instruction that, if space is limited, selection is to be made between units DC5, DC7, DC7P or DC12 according to engine capacity and the space available. Of these motors, DC7 is a motor of the conventional type and presumably limitation in space relates to the size of the fan blades and not to the size of the electric motor (it is not material that there is attached, by stapling, to the brochure, a note that as from 1 July 1984 model DC7 was discontinued). There is a further note that the unit DCS9 could be fitted to a Commodore 2.85L, a Commodore 4, a Mazda 929, a Toyota Celica, a Toyota Corona, a Datsun 280C and a Datsun 200B, and that a DCS11 could be fitted to a Commodore 3.3, a Commodore 4.2, a Valiant, a Volvo 6, and Fords XA, XB and XC and that a DC12 could be fitted to Fords XD and XE. The brochure also illustrates models for air-conditioners. Another part of the brochure states, "Available to suit most makes and cars from leading accessories and parts dealers around Australia." In general, the brochure extols the virtues of an electric fan over a belt-driven radiator fan.
There is nothing in that brochure which suggests that the applicant's flat fans would not be suitable for use wherever an electric-driven fan is appropriate.
The next significant document is a wholesale price list of the applicant's thermatic fans as at 1 April 1983. This list shows that a DC7, a conventional type fan, has a list price of $82.26, while a DC7P, a flat fan, has a list price of $94.38. There are other component parts listed and it was put on behalf of the applicant that a reader would understand that the mounting parts for a flat motor were more expensive than the mounting parts for an ordinary type electric motor. With respect to these matters I can do no more than say that, even if I had understood the document without explanation, I would not have inferred from it that there was no cross-elasticity of demand as between two types of motors. I would only have concluded that price was one of the factors that had to be taken into account in choosing between different models of fans.
Next, there is a statement made by Preslite Australia as follows :
" 30 January 1985
Davies Craig Pty Ltd
30 Beaconsfield Parade
Port Melbourne Vic 3207
Attention : Mr M G Davies
Dear Sir,
I write to you in reply to your letter of 20 December, 1984. I would first like to apologise for the delay in replying but we did not receive you (sic) letter until 17 January, 1985.
Your (sic) will note from the 'Approach to Australian Manufacturing Form (CTC2)' I have given an affirmative answer to three of the four questions.
1. Preslite do manufacture goods serving similar functions to those you have mentioned.
2. Preslite would accept orders for the production of goods to serve similar function.
3. A reduction of customs duty payable on these goods would seriously affect the market available to goods manufactured in Australia.
In view of the above we believe a 25% duty should be imposed."
I need say no more about this allegation by Preslite Australia and I go on to look at any other information put by the applicant to the Australian Customs Service. This includes copies of letters from the applicant to its customs agent, copies of which were sent to the Customs Service.
In a letter dated 29 January 1985 from the applicant to its customs agent, the following information appears :
"These motors are used in the manufacture of cooling fans for automobiles. Those fans are used in two applications; firstly, as engine cooling fans mounted close to the radiator, and secondly, as condenser fans mounted close to the air-conditioning condenser.
We manufacture kits, as described in the coloured brochure enclosed, which are sold through retail outlets throughout Australia. Those kits are also exported to New Zealand, Japan, France, England, and in modified form to Denmark.
We also sell the motors, together with certain other components, to two distributors in the U.S.A. who add some local components to form kits similar to those which we manufacture here. Those kits are then sold under the respective brand names of those distributors in the U.S.A.
Condenser fans are included in the range of kits but a greater volume of condenser fans is sold in Australia and the U.S.A. direct to manufacturers and installers of automobile air-conditioning equipment.
Summing up, our market can be divided in to three main parts, one, the retail market in Australia and overseas supplied through wholesalers who buy from us and, in many cases, who sell to retailers who supply the man in the street.
Two, the air-conditioning market in which we sell directly to the supplier or installer of auto air- conditioning equipment.
Three, export markets in England, France, Denmark, Canada, U.S.A., Japan, Israel, and New Zealand."
That information would not lead to a conclusion that there was no cross-elasticity of demand as between flat motors and ordinary electric motors.
Next is a letter of 7 March 1985 from the applicant to its customs agent which contains the following information :
"It is evident that the Preslite motors they have described are really a different product from the motors we need for installation in confined spaces. For instance, although they have not told us the output in watts of the two smaller motors they have described, we would assess them at about 45 watts and 47 watts respectively and in that range we have specified in our description 'a maximum length of 52 mm'. Their motors are 105 mm and 92.4 mm respectively. Similarly, the 'about 80 watts' motor of which they have promised us a drawing and specification, is 112 mm long against the maximum we have specified for motors up to 100 watts - 55 mm. The limitation on applications of the conventional type motor made by Preslite may be illustrated by the fact that for many years we have included in our range a kit using a motor similar to one produced by Preslite but which we have sourced from a preferred manufacturer in Sydney. That model is described in our brochure enclosed as DC7. From the same brochure you will see the description of DC7P which uses a flat motor and gives the same performance (1400 cubic feet per minute).
It will be seen from our Price List, also enclosed, that the suggested retail price of DC7 with the conventional motor is cheaper by $13.21 than DC7P with the flat motor. The purchaser of DC7P has to put up with another disadvantage, that is, a current draw of 10 amps against the conventional motor's current draw of 8 amps.
Despite those disadvantages, we sold during the year ended 30th June, 1984 2171 kits of Model DC7P against only 847 kits of Model DC7."
On this information, particularly the last paragraph, a reader could conclude that the flat motors were competitive with ordinary motors. That is precisely what the last paragraph states.
In a letter dated 20 March 1985, from the applicant to its customs agent, there appears the following paragraph :
"Firstly, they (Preslite Australia) stress that they do manufacture goods 'serving similar functions' but we want to point out that their conventional shaped motors of about twice the length of the 'flat motors' we use will not serve a similar function in the confined space available in the majority of applications for which our product is used."
That paragraph does not say that there are no significant circumstances in which the two types of motors could be alternatives. Indeed, it merely states that the applicant's flat motors would in the majority of cases be used in confined spaces for which conventional motors would not be suitable. By inference, both types of motors could be used in the minority of circumstances in which the applicant's motors were in fact used.
In a letter dated 22 August 1985, there appears the following information :
"As the Customs letter mentions, Preslite do produce fans for use 'as original equipment in locally manufactured motor vehicles'. This, however is a different market from those we have identified in our application for concession. The markets we serve are the retail market, the auto air-conditioning market, and the export market.
.....
It is our submission that Preslite has not demonstrated its capability to produce motors as described for the markets we have specified, in that it has not shown a preparedness to accept an order for such goods in the normal course of business.
.....
In summary, ten of the eleven local manufacturers we approached acknowledged that they are not capable of producing the motors which are the subject of our application, whilst the other manufacturer, Preslite, has shown it is not willing to accept our order in the normal course of business."
Certainly, the first paragraph I have set out states that the two types of fans serve different markets. Yet there is no useful supporting material given to establish that there would not be cross-elasticity of demand between the two types of markets.
Despite the long correspondence that passed on this matter, I can find no other information that bears significantly on this topic, other than the fact that no Australian manufacturer, other than Preslite Australia, claimed that it produced a motor which served the same function as the applicant's motor.
The above information, which was before Mr Bamford when he made his decision, seems to disclose little more than that the applicant's flat motors could be used in circumstances of limited space for which conventional electric motors would not be suitable. It does not appear to demonstrate that the applicant's motors could not compete with conventional motors or that there would be no cross-elasticity of demand between the two types of motors. On the documentary information that was before Mr Bamford, I would not myself have concluded that there would be no competition between the two types of motors.
It follows that the allegation that "goods produced by Preslite Australia served a different market than the goods imported by the applicant and that there was no cross-elasticity of demand between them" was not established by the material which was before Mr Bamford when he made his decision. Therefore, the ground that he failed to take that matter into account must fail.
I need not deal with the other allegations that Mr Bamford failed to take relevant considerations into account. The other matters raised are all peripheral matters of little significance. Nor need I deal further with the ground that there was no evidence or other material to justify the making of the decision. As stated above, there was material before Mr Bamford which would have justified a finding on his part that there could be competition and cross-elasticity of demand between the two types of electric motors.
I turn now to the only matter in respect to which, in my view, there was an error in the decision-making process.
In his affidavit, relied upon by the respondent, Mr Bamford deposed, inter alia,
"12. I first examined Davies Craig's application for a TCO on 15th August 1985. It was dealt with on file C85/30349. The filed contained, inter-alia, documents contained in Exhibits 'A', 'C', 'D', 'E', 'G', 'H', 'I', 'J', 'K', 'L', 'M', 'P', 'Q', 'R', 'S', 'T', 'U' to the affidavit of Mervyn George Davies. This correspondence demonstrated that Preslite produced motors which were supplied to automobile manufacturers for the purpose of engine and air conditioner condenser cooling.
13. Preslite also advised in its correspondence with Davies Craig that its motors were suitable for other ancillary functions for which Davies Craig indicated the imported motors could be used (e.g., for use with electric exhaust fans in confined spaces on boats and ships). In this regard, I refer to the section headed 'Other functions goods may serve' in Exhibit 'C' to the affidavit of Mervyn George Davies.
14. Having examined the contents of the file, I formed the view that the description of the function that the goods were intended to serve which was provided by FMI on the CTC(1) form was appropriate insofar as it referred to the provision of motive power for electric cooling fans in limited space available in motor vehicles. As a consequence, I formed the view that the market in which these goods competed included all or any goods serving that function.
.....
16. It was my understanding that there were no motors of the type described by the applicant in its CTC(1) form, manufactured in Australia. However, it was also my understanding that the motors manufactured by Preslite were supplied by it to automobile manufacturers and serve a similar function.
.....
19. My decision was made having regard to the provisions of Section 269B of the Customs Act and, in particular, sub-Section 269B(4). Any Tariff Concession Order if made, could not be limited to goods used for the applications for which Preslite motors had been identified by the applicant as being unsuitable. Having formed the opinion that Preslite motors served a similar function to those imported by the applicant, I was not satisfied that there would be no substantial 'cross elasticity of demand' between the imported flat motors and those motors currently being produced by Preslite."
Notwithstanding the reference in paragraph 19 of the affidavit to the question of cross-elasticity of demand, it is clear from those paragraphs that Mr Bamford turned his attention primarily to the function which the motors would perform as motors. He drew his conclusion as to cross-elasticity of demand from the conclusion that they both served a similar function.
This conclusion which I draw from Mr Bamford's affidavit is confirmed by the letter of 8 October 1985, in which Mr Bamford expressly said that the existence of separate markets for Preslite Australia and Davies Craig products was not a relevant matter, as the essential feature was the availability of goods serving a similar function. Mr Bamford's oral evidence was to the same effect. In cross-examination, Mr Bamford gave this evidence :
"- - - that the goods serve a similar function?--- Yes, I stated that.
What did you base that on, Mr Bamford?---On the identification of the function that the goods serve - - -
.....
Look - well - please continue at any event - you save us time?---Having identified the function that the goods serve, then seeing a statement by the applicant that Preslite Australia manufactured goods which served that function.
Did you identify the function as providing motive power for electric cooling fans in limited space in motor vehicles?---I - yes."
It is thus clear that Mr Bamford gave to the words in s.269C "goods serving similar functions" their meaning in ordinary parlance and not the meaning attributed to them in s.269B(4). Mr Lloyd submitted that this was indeed the correct approach and that s.269B(4) did not limit the meaning and effect of s.269C but simply dealt with the circumstance in which cross-elasticity of demand demonstrated that the goods served a similar function.
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.
As there was alleged to be ambiguity in relation to the provisions, both parties relied upon the Second Reading Speech of Senator the Honourable J. Button, the Minister for Industry and Commerce, which appeared in the Hansard Report of Senate proceedings of 24 May 1983. In that report, at page 715, Senator Button said,
"The key words in the criterion are 'serving similar functions' and new section 269B(4) provides an interpretation of them. The test will be the degree of cross-elasticity of demand between the imported and Australian produced goods. In practical terms, this means that these tariff concessions will be decided by determining the effect that a reduced rate of duty will have on competition or potential competition between the local and imported goods. This will be based on a practical and realistic assessment of the market situation. The onus will be on the applicant for a tariff concession to identify the goods involved, the market for the goods and the degree of competition or potential competition between the imported goods and Australian-made goods."
The Minister's speech confirms the interpretation that I have placed upon the words. Part XVA intends that the question of similar function is to be determined by reference to the two criteria specified in s.269B, namely "identity of the goods" or, alternatively, "significant cross-elasticity in the market".
As Mr Bamford did not approach the matter in this way, his decision must be set aside and the matter remitted for re-hearing. I come to this conclusion with some reluctance, as I think that the allegations which were made against Mr Bamford and, in the correspondence, also against Preslite Australia, were unfounded and that the applicant, as well as Mr Bamford, did not turn its attention to the question of cross- elasticity of demand as between the two goods. However, as Mr Bamford was incorrect in his approach, it is proper that the matter should be remitted for re-consideration in the light of the exposition of Part XVA which I have enunciated in these reasons. The question of cross-elasticity of demand is the matter which will have to be considered. There may be information bearing upon this matter other than that that was before Mr Bamford at the time of his decision.
For these reasons, I shall set aside the decision under review and remit the matter for re-consideration according to law. The respondent should pay the applicant's costs of these proceedings.
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