Intertex Pty Ltd and Chief Executive Officer, Customs
[2001] AATA 377
•7 May 2001
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2001] AATA 377
ADMINISTRATIVE APPEALS TRIBUNAL )
) No V00/130
GENERAL ADMINISTRATIVE DIVISION ) Re
INTERTEX PTY LTD
Applicant
And
CHIEF EXECUTIVE OFFICER, CUSTOMS
Respondent
AndLESLIE FRANCIS & ASSOCIATES AUSTRALIA PTY LTD
Party Joined
DECISION
Tribunal Mrs Joan Dwyer, Senior Member
Mr A Argent, Member
Mr C Ermert, Member
Date7 May 2001
PlaceMelbourne
Decision The Tribunal affirms the decision under review. (Sgd) Joan Dwyer
Senior Member
CUSTOMS - tariff concession order - whether substitutable goods - whether goods identified as substitutable goods are produced in Australia - whether wholly or partly manufactured in Australia - whether produced in Australia in the ordinary course of business - decision affirmed
Customs Act 1901 ss 269P(1) and (3), 269B(3), 269C, 269D(1), (2) and (3), 269E(1)
Re Vulcan Australia Pty Ltd and Comptroller-General of Customs and Another (1994) 20 AAR
Re Tony Wain Agencies and Another and Comptroller of Customs (1994) 35 ALD 649
Re Bag and Jute Co (T’wth) Pty Ltd and Comptroller-General of Customs and Southcorp Australia Pty Ltd (1998) 38 ALD 357
Re Thirco Pty Ltd and Collector of Customs (1994) 35 ALD 665
Re Landis and Gyr (Australia) Pty Ltd and Chief Executive Officer of Customs and Email Meters (AAT 11276, 3 October 1996)
REASONS FOR DECISION
7 May 2001 Mrs Joan Dwyer, Senior Member
Mr A Argent, Member
Mr C Ermert, Member1. This is an application for a review of a reconsideration decision dated 8 December 1999 which affirmed a decision made 19 October 1998 rejecting an application to make a Tariff Concession Order (“TCO”) under s 268P of the Customs Act 1901 (“the Act”) for Textile Yarn described as follows:
TEXTILE YARN, 100% olefin air textured resultant count 1200 denier
2. Mr Cuthbert, Managing Director of Intertex Pty Ltd, appeared for the applicant (“Intertex”). Mr Komora, a solicitor with the Australian Government Solicitor, appeared for the Chief Executive Officer of Customs and Mr McHugh, of McHugh and Eastwood Australia Pty Ltd, Customs Brokers, appeared for Leslie Francis and Associates Australia Pty Ltd (“Leslie Francis”), the party joined.
3. The Tribunal had before it the documents (“the T documents”) lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (“the AAT Act”) and also the exhibits tendered during the hearing. The Tribunal received the applicant’s Statement of Events, Documents, Facts and Contentions, as exhibit A3. The Transcript (at page 19) states that page 14 of the submission was taken into evidence. That is not correct. The submission was taken in as a whole as it contained a number of documents on which the applicant relied (trans. p22).
4. The applicant’s Statement of Events, Documents, Facts and Contentions (A3) and the T documents both included some pages which contained confidential material. The documents had been exchanged with those pages either blank, or with certain sections deleted. They were the subject of confidentiality orders made by Deputy President Forrest on 26 July 2000 in respect of the T documents, and by Senior Member Handley on 17 October 2000 in regard to A3. During the hearing the Tribunal varied the confidentiality orders to provide that access be given to certain parts of the documents disclosure of which had been previously prohibited. The orders as varied are attached as Schedule 1 to this decision.
5. Mr Cuthbert, appeared and gave evidence on behalf of Intertex. Evidence was also given by Mr Feiglin and by Mr Burge of Classweave Industries Pty Ltd (“Classweave”) on behalf of the respondent. Mr Semmler appeared and gave evidence on behalf of Leslie Francis. He is the Manager of Textured Yarns which is a division of Leslie Francis.
6. Mr Cuthbert explained that the application is for a TCO in respect of 1200 denier 100% olefin air textured yarn which Intertex imports from Europe. It is woven by contract weavers into fabrics designed by Mr Cuthbert and his wife. The fabrics are sold to fabric wholesalers and used for office screens and typists’ chairs. Mr Cuthbert produced a number of samples of fabric showing the difference between fabrics woven from the 1200 denier soft yarn which he uses, and similar fabrics woven with alternative yarn which is available in Australia. The Tribunal observed a difference in colour, appearance and tactile qualities. Mr Cuthbert said that there are only two suppliers in Europe of the very fine filament which Intertex imports. He said his supplier has more colour matching expertise than the supplier who supplies Leslie Francis and Classweave.
7. Mr Cuthbert explained that the soft 1200 denier yarn which Intertex uses is made by combining a 300 denier core yarn with a number of 150 denier effect yarns. All witnesses described producing yarn suitable for use in office furniture fabrics by a similar process combining an olefin 300 denier filament core yarn with one or more effect yarns. The effect yarns go through the compressor at a different take up speed to the core yarn. This produces bulking and an irregular appearance. The original filament, which would not be suitable for making into fabric becomes a yarn suitable for weaving into office upholstery fabrics.
8. Mr Cuthbert said that his fabrics sell at a dearer price than similar fabrics made by his competitors from 1100 or 1300 denier non-soft yarns. He said this is because the production of a soft yarn, using a number of 150 denier effect yarns, is more expensive than the production of fabric using a yarn made from simply one 300 denier core yarn and one or more 300 denier effect yarns. Mr Cuthbert said the fact that clients chose the dearer Intertex fabric over the fabrics made by competitors indicates that there are tactile and visual qualities which cannot be obtained with the use of substitute yarns.
9. In the Intertex submission Mr Cuthbert stated at p8:
A. GOODS ARE NOT SUBSTITUTABLE
The product manufactured by INTERTEX is not substitutable when made from raw material (yarn) produced by Leslie Francis/Textured Yarns or Classweave for the following reasons :-
(a) Tactile Properties – The fabric produced by INTERTEX has “soft-bulky” properties achieved as a result of using a raw material manufactured from very fine denier filament (150 den) when compared to the article produced by LeslieFrancis/Textured Yarns and Classweave which is made from a much coarser filament (300 den)
(b) Visual Properties – The visual effect for both colour and surface appearance is achieved by using the much finer denier filament described above (a) whereby a more subtle and blurred distribution of colour is attained giving a more sophisticated appearance. This effect cannot be achieved using the coarser denier filament as used by the objectors.
(c) Attempts have been made by Leslie Francis/Textured Yarns to supply substitute fabric against INTERTEX fabric to our client.
The substitute fabrics have been rejected by our client even though the Leslie Francis/Textured Yarns cloths were offered at considerably lower prices with a proposed saving on purchases by our client of $. . . per annum.
The cloths offered were deemed as NOT SUBSTITUTABLE for appearance, handle and colour.
To further illustrate and re-inforce INTERTEX contentions on this matter, our client does in fact now purchase the offerings made, but runs them as separate entities in their own right and markets them at much lower prices than the INTERTEX cloth.
$. . . /metre as opposed to $. . ./metre. This obviously confirms further again that the product is not substitutable.In addition the complete colour range offered by INTERTEX of some 17 colourways cannot be commercially matched by Leslie Francis/Textured Yarns who offer 2 colours only. (saving and prices have been deleted)
the legislation
10. The relevant legislative provisions are found in s 269P(1) and (3) of the Customs Act 1901. Those sections provide as follows:
269PThe making of a standard TCO
(1)If a TCO application in respect of goods, other than goods sent out of Australia for repair, has been accepted as a valid application under section 269H, the CEO must decide, not later than 150 days after the gazettal day, whether or not he or she is satisfied, having regard to:
(a) the application; and
(b)all submissions lodged with the CEO before the last day for submissions; and
(c)all information supplied and documents and material produced to the CEO in accordance with a notice under subsection 269M(4); and
(d) any inquiries made by the CEO;
that the application meets the core criteria.
. . .
(3)If the CEO is satisfied that the application meets the core criteria, he or she must make a written order declaring that the goods the subject of the TCO application are goods to which a prescribed item specified in the order applies.
11. The core criteria are specified in s 269C which provides as follows:
269C Interpretation - core criteria
For the purposes of this Part, a TCO application is taken to meet the core criteria if, on the day on which the application was lodged, no substitutable goods were produced in Australia in the ordinary course of business.
12. There are definitions in s 269B of the terms “substitutable goods”, “produced in Australia” and “ordinary course of business”. They are as follows:
“substitutable goods”, in respect of goods the subject of a TCO application or of a TCO, means goods produced in Australia that are put, or are capable of being put, to a use that corresponds with a use (including a design use) to which the goods the subject of the application or of the TCO can be put;
“goods produced in Australia” has the meaning given by section 269D;
“ordinary course of business” has the meaning given by section 269E;
13. The meaning of “goods produced in Australia”, given by s 269D is as follows:
(1)For the purposes of this Part, goods, other than unmanufactured raw products, are taken to be produced in Australia if:
(a)the goods are wholly or partly manufactured in Australia; and
(b)not less than ¼ of the factory or works costs of the goods is represented by the sum of:
(i)the value of Australian labour; and
(ii)the value of Australian materials; and
(iii)the factory overhead expenses incurred in Australia in respect of the goods.
(2)For the purposes of this Part, goods are to be taken to have been partly manufactured in Australia if at least one substantial process in the manufacture of the goods was carried out in Australia.
(3)Without limiting the meaning of the expression “substantial process in the manufacture of the goods”, any of the following operations or any combination of those operations does not constitute such a process:
(a)operations to preserve goods during transportation or storage;
(b)operations to improve the packing or labelling or marketable quality of goods;
(c) operations to prepare goods for shipment;
(d)simple assembly operations;
(e)operations to mix goods where the resulting product does not have different properties from those of the goods that have been mixed.
14. The meaning of “ordinary course of business”, given in s 269E is as follows :
(1)For the purposes of this Part, other than section 269Q, goods (other than made-to-order capital equipment) that are substitutable goods in relation to goods the subject of a TCO application are taken to be produced in Australia in the ordinary course of business if:
(a)they have been produced in Australia in the 2 years before the application was lodged; or
(b)they have been produced, and are held in stock, in Australia; or
(c)they are produced in Australia on an intermittent basis and have been so produced in the 5 years before the application was lodged;
and a producer in Australia is prepared to accept an order to supply them.
15. The term “substitutable goods” is further explained in s 269B(3) which provides as follows:
(3)In determining whether goods produced in Australia are put, or are capable of being put, to a use corresponding to a use to which goods the subject of a TCO, or of an application for a TCO, can be put, it is irrelevant whether or not the first-mentioned goods compete with the second-mentioned goods in any market.
16. The legislation thus requires consideration of a number of issues:
(a)First there is a question as to the identification of goods capable of being characterised as “substitutable goods”.
(b)Secondly there is a question whether the goods identified as “substitutable goods” are “produced in Australia”. To answer that question it is necessary to decide whether the “substitutable goods” are “wholly or partly manufactured in Australia”. That requires consideration of three factors:
(i)the proportion of the factory or works cost of the goods represented by the value of Australian labour and materials and factory overhead incurred in Australia;
(ii)whether at least one “substantial process” in the manufacture of the goods is carried out in Australia;
(iii)whether the process is an excluded process such as “a simple assembly operation”.
(c)The final question, if the Tribunal finds that “substitutable goods” are “produced in Australia” is whether those goods are “produced in Australia in the ordinary course of business”. To answer that question the Tribunal must decide:
(i)whether the evidence establishes that the goods satisfy (a), (b) or (c) of s 269E(1), which explains the meaning of the term “ordinary course of business”, and
(ii)whether “a producer in Australia is prepared to accept an order to supply them”.
In these reasons for decision we will consider the relevant issues arising under the statutory framework as summarised above.
(a) the identification of “substitutable goods”.
17. Mr Cuthbert attempted to establish that there are no “substitutable goods” produced in Australia. We accept his evidence and find that when fabrics are made up with substitute yarns they are rejected by clients as not meeting the standard for the Intertex sample fabric. Mr Cuthbert agreed that alternative fabrics are available, but claimed that they are not “substitutable” (trans. p27). From the samples produced as exhibits A1 and A2, and on the evidence of Mr Cuthbert we find that the attempts to match the Intertex standards using substitute yarns produced in Australia have been unsuccessful. We find that clients who order the standard fabric do not accept fabrics made up with substitute yarn as a satisfactory substitution. Clients are prepared to pay more for the appearance they prefer. Mr Semmler agreed that one could not substitute his firm’s 1300 or 1100 yarns and make up a fabric which would be acceptable to a client who had ordered the Intertex standard (trans. p80). Thus, if “substitutable goods” must be goods which can be used to produce an identical product to that which is produced using the goods for which application for a TCO has been made, we would find that there are no “substitutable goods” produced in Australia.
18. That does at first seem to be the effect of the relevant legislative provisions. However Mr Komora took the Tribunal through the decisions which have looked at the meaning of the term “substitutable goods”. In Re Vulcan Australia Pty Ltd and Comptroller-General of Customs and Another (1994) 20 AAR 116, the Tribunal considered whether there were “substitutable goods” for goods described as “heaters, space, liquid fuel, domestic portable which do not require connection to any external fuel source or electricity supply.” Vulcan produced heaters which it claimed were substitutable for Dimplex Toyoset heaters in respect of which a TCO application had been made. The Vulcan heaters were not fuelled in the same way as the Dimplex Toyoset heater. Nor were they necessarily as portable as the Dimplex Toyoset heater. The Tribunal, at p125, summarised the submissions of the parties as follows:
Mr Smith [for Dimplex] submitted that goods produced by Vulcan are not substitutable goods. He based his submission on the meaning of the word "use" appearing in the definition of "substitutable goods". To say, he argued, that all heaters are substitutable, regardless of the way they may be fuelled and regardless of whether they are fully portable, semi-portable or fixed units is to give too wide a meaning to that word. Certainly, if a Vulcan heater is warming a room, it can be turned off and a Toyoset kerosene heater substituted for it to heat the room. That it may be substituted does not mean, however, that the two items are substitutable goods. The focus is upon the use and Mr Smith submitted that the use to [which] what we will call "the TCO goods" are put is that of space heaters, being fully portable, stand-alone units, which operate on liquid fuel held in their own fuel tanks and not requiring connection to an external fuel source or electricity supply in order to operate. Vulcan's goods use a different fuel and may or may not be fully portable.
Mr Gross [for Vulcan] and Mr Hegarty [for Customs] both submitted that the goods are substitutable. Mr Hegarty argued that the definition of "substitutable goods" was very broad and showed an intention to cast a net fairly widely in order to identify local products at risk. He said that the use to which the goods could be put was domestic space or room heating. Mr Gross drew the same conclusion and emphasised that the definition focuses on a use to which the goods can, and not must, be put. That it is a use to which the goods can be put is underlined by the specific reference in the definition to the design use as well as the use.
19. The Tribunal in Vulcan considered the dictionary definitions of the word “use”. It decided that the relevant definition in the Shorter Oxford Dictionary (3rd ed, 1944) (reprinted with corrections 1983) was (p126) “A purpose, object, or end, esp of useful or advantageous nature . . .”. After referring also to the Macquarie Dictionary, the Tribunal stated, “the focus of the word “use” when used in isolation without reference to a context is upon the end result i.e. the purpose, object or service.” The Tribunal emphasised that the focus was not upon the means of achieving. Similarly the Tribunal pointed out that the ultimate use was the significant issue and not the means by which that use was achieved. The Tribunal concluded at p126:
Reference must be made to the two things which must correspond. Those two things are the use to which the TCO goods can be put and a use of the substitutable goods. The ordinary meaning of "correspond" in that context is that one use conforms with or is in harmony with the other use. It would be reading too much into the words "corresponds with" to say that the function or process of the use of one must conform with or be in harmony with the other. It follows that, we can find no suggestion in the definition that the means by which the goods achieve any such use is of any relevance at all. We consider, therefore, that we should give the word "use" its ordinary meaning.
20. The Tribunal in Vulcan considered the use to which the goods described in the TCO could be put. It found that they were used for providing domestic space or room heating. It made no reference to the means of achieving that use or to the connection to any external fuel. The Tribunal concluded that the aspect of portability related to the way in which the goods achieved their overall purpose of providing domestic heating, rather than to a use to which they can be put. The Tribunal concluded that Vulcan’s goods may also be put to the use of providing domestic space and room heating. They therefore had the same use and it was not relevant that they achieved that use in different ways. The Tribunal said at p127:
If Vulcan's goods have the same use, they must have a use “that corresponds with" a use to which the TCO goods can be put.
21. On the evidence in this matter there is no doubt that both Leslie Francis and Classweave produce air textured yarns which can be put to the use of making fabric suitable for office upholstery. Mr Cuthbert agreed (trans. p40) that they compete with Intertex. The fact that there is a tremendous range of such fabrics, so that a fabric that is accepted as suitable for that use by one fabric wholesaler or client would not be accepted by another fabric wholesaler or client was emphasised by Mr Cuthbert. Mr Komora submitted that the cases establish that the Tribunal can not regard that as relevant. He suggested, and Mr Cuthbert agreed, that fabrics suitable for office upholstery can be made from a range of yarns from 800 up to 1500 denier yarns. Mr Komora submitted that if the evidence established that air textured olefin yarns produced in Australia can be used for office upholstery, then no TCO can be given in respect of 1200 denier soft yarn or any other denier olefin yarn. If that submission were correct then it would seem that no TCO could be given for any air textured yarn suitable for office upholstery fabric. If the Tribunal must find that the production in Australia of any air textured yarn suitable for use in office upholstery fabrics, is sufficient to defeat the application for a TCO, then one might ask why the type of yarn is relevant. Is the position that the production of any yarn at all in Australia, suitable for use in office upholstery fabrics would be sufficient to mean that the Intertex application for a TCO can not succeed? That seems to be the way in which s 269B(3) has been interpreted.
22. If Vulcan had been the only decision to give such a wide interpretation to the concept of “substitutable goods”, we would have considered those issues in more depth. However the Vulcan decision as to the meaning of “substitutable goods” has subsequently been accepted by the Tribunal, in a number of other decisions.
23. In Re Tony Wain Agencies and Another and Comptroller of Customs (1994) 35 ALD 649, the Tribunal was considering the refusal of TCOs in respect of short cut lengths of woven woollen fabric. They were used for the manufacture of men’s and women’s outer garments. The applications had been refused. On review the Tribunal found that there were “substitutable goods” produced in Australia, but that granting the TCOs applied for was not likely to have any adverse effect on the market for “substitutable goods” produced in Australia. Thus it decided that the TCOs should be granted.
24. As Mr Komora pointed out, the requirement of adverse market effects was repealed by the Customs Amendment Act 1996. The only issue now is whether or not there are “substitutable goods” produced in Australia, in the ordinary course of business. As to the meaning of “substitutable goods” the Tribunal, in Tony Wain, said that it was common ground that “substitutable goods” were produced in Australia. It was submitted for the applicant that “substitutable goods” constituted the production of fabric to be used in wearing apparel, which may be loosely categorised as outer garments. There was some issue as to whether furnishing and other fabrics not used in the making of men’s and women’s outer garments were to be included within the term “substitutable goods”. The Tribunal said at paragraph 30, page 656:
The use to which the imported goods "can be put" is not open ended. Rather, it is referable to the use to which the locally produced goods are put. In other words, if the imported goods are put to a use of a sort to which the locally produced goods are currently put, the two uses correspond and the locally produced goods are "substitutable goods" for the purposes of269B. In this case, the substitutable goods are woollen and/or hair-based fabrics (subject to the inclusions discussed in paragraph 2 above) used in the manufacture of men’s and women’s outer garments.
25. In Re Thirco Pty Ltd and Comptrollerr of Customs (1994) 35 ALD 665, a TCO had been applied for in respect of rolls of cotton fabric used for hand towels in dispensers in industrial, hospital and commercial premises. It was accepted by the applicant that “substitutable goods” were produced in Australia. The market for “substitutable goods” was conceded to include all the products that are used for the drying of hands, whether paper towels, continuous cloth or electric hand dryers.
26. The decisions in Tony Wain and Thirco certainly give a very wide definition to the concept of “substitutable goods”. That wide definition was applied in Re Bag and Jute Co (T’wth) Pty Ltd and Comptroller-General of Customs and Southcorp Australia Pty Ltd (1998) 38 ALD 357. The issues considered in that matter were closer to those in the matter currently before the Tribunal. In Bag and Jute the Comptroller-General of Customs (“Customs”) had refused to grant TCO applications for woven polypropylene end valve sacks used for bagging fertiliser. Southcorp Australia Pty Ltd manufactured open mouth woven polypropylene bags in Australia. It objected to the granting of the TCOs. The Tribunal found, on evidence which was not disputed, that the only type of bag that could be used at the automated Gibson Island Bagging Plant of the applicant, Incitec Ltd, was a block bottom valve type sack, and that the open mouth bag manufactured by Southcorp could not be used at that plant. The Tribunal found that Southcorp did not manufacture end valve sacks and was unlikely to do so because of the cost in redesigning its plant to carry out such production. It also found that Incitec Ltd had tried using paper bags with an end valve, but had found that there was buyer resistance to those bags. It had therefore changed to polypropylene valve sacks
27. The Tribunal found that there was no manufacturer of polypropylene valve sacks in Australia. However the Tribunal found that there were five different types of bags used in Australia to contain fertiliser, and that the polypropylene bags used by Incitec Ltd for that purpose could also hold products other than fertiliser, for example, minerals, fruit products, chemicals and resin. The Tribunal concluded that, in ascertaining what are “substitutable goods”, cognisance must be taken that at least five other types of bags for fertiliser were available in the market, including open mouth polypropylene bags manufactured by the second respondent. The Tribunal said at paragraph 23, pp360-361:
Although the goods the subject of the proposed TCO’s are specifically required for Incitec’s automated production line at Gibson Island and no other manufacturer of fertiliser or other bulk products in Australia uses them, and no other type of bag can be used at the automated plant, that is not sufficient to enable the tribunal to say that there are no substitutable goods produced in Australia.
That seems to be imposing a very difficult test on an applicant for a TCO.
28. The first decision to consider the definition of “substitutable goods”, after the Customs Amendment Act 1996 repealed the requirement relating to adverse effect on the market, was Re Landis and Gyr (Australia) Pty Ltd and Chief Executive Officer of Customs and Email Meters (AAT 11276, 3 October 1996). There was an issue in that matter as to whether mounting frames produced by Email were “substitutable goods” for mounting frames for which Landis and Gyr sought a TCO. The Tribunal heard evidence that the Landis and Gyr frame was made of steel rather than of die-cast aluminium, and that it became part of the magnetic-flux circuit of the meter. The Tribunal said at p6:
While the two frames do not have identical features, both frames serve the same purpose as a mounting for the register, current and voltage coils and rotor bearings. On the evidence we find the mounting frame (Ex. G) manufactured by Email in Australia, in the ordinary course of business, as that expression is defined in s. 269E of the Act, is put to a corresponding use to the goods, the subject of the TCO application in question, that is, as a frame for mounting the various components of the meter. The operative words of the definition of substitutable goods "...a use that corresponds..." means that use demonstrates substitutability not their particular characteristics.
29. Although Mr Cuthbert did not use the term “superior in quality” in discussing the fabrics made by Intertex using the 1200 denier soft yarn, customers who are prepared to pay a higher price for those fabrics, rather than purchase other cheaper fabrics, must conclude that the dearer fabrics have superior qualities in colour, appearance or handle or maybe all three. However the authorities which we have reviewed make it clear that that is not a relevant consideration. If “substitutable goods” are put to a particular use, in this case the manufacture of fabric suitable for office upholstery, that corresponds to the use to which the goods the subject of the application can be put, then those goods are “substitutable goods”. Mr Semmler, Mr Feiglin and Mr Burge gave evidence that Leslie Francis and Classweave do produce an air textured yarn which is used for the manufacture of office upholstery fabrics. That was not contested by Mr Cuthbert
30. There is evidence that the yarns produced by Classweave and Leslie Francis are used for the manufacture of office upholstery fabrics. That use corresponds with a use to which the 1200 denier soft yarn, the subject of the application for the TCO, can be and in fact is put. Thus those yarns can be identified as “substitutable goods”.
(b)Are the goods identified as “substitutable goods” “produced in Australia”?
(i) Cost
31. Section 269D(1) provides as to cost as follows:
269D Interpretation - goods produced in Australia
(1)For the purposes of this Part, goods, other than unmanufactured raw products, are taken to be produced in Australia if:
(a) the goods are wholly or partly manufactured in Australia; and
(b)not less than ¼ of the factory or works costs of the goods is represented by the sum of:
(i) the value of Australian labour; and
(ii) the value of Australian materials; and
(iii)the factory overhead expenses incurred in Australia in respect of the goods.
32. Mr Cuthbert had obtained costing information from Nortex Europe, the company from which he currently imports 1200 denier soft yarn. He had then calculated what he expected what would be the cost of production of the 1200 denier soft yarn from imported filament. He acknowledged that his figures were based on a purchase of the imported filament in pounds sterling, whereas Leslie Francis and Classweave buy in Australian dollars. He also acknowledged that there could be some variation in items such as labour costs and overhead. Mr Cuthbert’s calculation provided estimates of the cost of Australian labour, materials and overhead of a little over 21% for the manufacture of either 1200 denier soft or 1200 denier non-soft yarn. Mr Cuthbert conceded that he was working only on estimates and that he was not in a position to dispute the breakdown of figures produced by Mr Semmler and Mr Feiglin which, for reasons of commercial confidentiality, could not be made fully available to him.
33. Mr Semmler and Mr Feiglin gave confidential evidence as to the amounts of the factory or works costs of the goods represented by the items specified in s 269D(1)(b) in respect of the production by Leslie Francis and Classweave of similar denier acrylic yarns used for manufacture of office upholstery fabrics.
34. Mr Semmler said the cost of the local content of yarns produced by Leslie Francis was in the vicinity of 28% of the total cost of those yarns. The items taken into account were made known to Mr Cuthbert when the confidentiality order made by Deputy President Forrest on 26 July 2000 was varied, and Mr Cuthbert was given copies of pages 50 and 51 of the T documents with only the column of prices and costs deleted.
35. The Classweave costing figures were contained in a submission lodged on behalf of Classweave objecting to the making of the TCO sought by Intertex (Tdocs pp25–28). It set out at page 26 the production costs per kilogram of the items specified in sub-paragraphs 269D(1)(b)(i), (ii) and (iii) in respect of yarn made by Classweave and claimed to be substitutable. The submission also set out the percentage of cost represented by each item. The costs and percentages had been deleted pursuant to the confidentiality order of Deputy President Forrest made 26 July 2000. At the hearing Mr Feiglin said he did not object to the percentages being disclosed. Those percentages showed an Australian labour content of 14% and Australian factory overhead expenses of 13% making a total Australian component of 27% of the factory or works costs of the goods, for the purposes of s 269D(1)(b).
36. There is no dispute about the fact that filament is imported to Australia by both Leslie Francis and Classweave. We accept the evidence given by Mr Semmler and by Mr Feiglin. We find that the yarns produced by Leslie Francis and Classweave are “partly manufactured in Australia” so as to be “taken to be produced in Australia”. Thus we find, as to the “substitutable goods”, that not less than one quarter of the factory or works cost of the goods is represented by the sum of the value of Australian labour and the value of Australian materials and the factory overhead expenses incurred in Australia in respect of the goods.
(ii) Process
37. Mr Cuthbert submitted that the goods are not “partly manufactured in Australia” in that they do not comply with s 269D(2) and (3) which provide as follows:
(2)For the purposes of this Part, goods are to be taken to have been partly manufactured in Australia if at least one substantial process in the manufacture of the goods was carried out in Australia.
(3)Without limiting the meaning of the expression “substantial process in the manufacture of the goods”, any of the following operations or any combination of those operations does not constitute such a process:
(a) operations to preserve goods during transportation or storage;
(b)operations to improve the packing or labelling or marketable quality of goods;
(c) operations to prepare goods for shipment;
(d) simple assembly operations;
(e)operations to mix goods where the resulting product does not have different properties from those of the goods that have been mixed.
38. Mr Cuthbert, who is a qualified textile technician, submitted first that the process of air texturing the yarn carried out in Australia was not a “substantial process” like weaving, but a simple process. He said he had observed the process at the premises of his supplier in the U.K. He explained that it combines one or more ends of filament with a core filament, and thus was a “simple assembly” operation and excluded from the definition by paragraph 269D(3)(d). He said in evidence at trans. pp22–23):
[T]here is only one process attached to texturising yarn. The filament is purchased from a supplier in Europe, already assembled on a package. The yarn is taken off that package through an air-jet where the filaments are fragmented and bulked. The machine even does its rewinding process, all as one operation. But in the case of producing fabric, in the weaving process, as I said, there are at least nine individual steps taken to produce a woven fabric. Now, I consider that to be substantial.
39. Mr Semmler described the process used within Leslie Francis and Mr Burge described the process used within Classweave. We accept Mr Semmler’s evidence that the process is not a simple process but a substantial process. He described it at trans. pp74 and 75:
So what happens is if I want a certain denier yarn I make that up with what they call a core yarn and feeder yarns. That could be one or two or three or four or five – it can be – the more you go then the higher the denier would be. And they can either be the same colour or different colours. So I take my – what I want as – what they refer to as the resultant denier, the resultant – the finished yarn. I make that up of let us say three ends. One is a core to our – my effect yarns, my feeder yarns, and I overfeed those or feed them faster than what it has been taken up at at a certain rate to give me different characteristics of yarns, either – if I feed it in very fast I get a very bulky yarn, heavier. If I feed it in slower I get a smoother yarn and a lower denier.
. . . Now, to take the example of the 12 or the 13 or 1100 denier, whatever you want to talk about, if I have one end of a core and one end of an effect my 300 core is – I will try to go through the maths for you. The 300 core goes in and out the same, so if I say I am making a 1300 that means the effects need to make up 1000. So if I use one end, the 1300 denier end I basically have to do it 333 per cent faster than the other one. That makes a very bulky yarn. I can have two ends which is 600 denier and then we are talking about 167 per cent overfeed. If I take three yarns than I am talking about a 10 per cent overfeed. So to say I want to make a 1200 denier yarn depends on what you want your input yarns to be and then it depends on if that is going to be a very flat yarn, or is it going to be a very bulky yarn. Is it going to be a single colour, is it going to be multi-colour.
40. Mr Semmler said he decides what ends will be used to produce the yarn, and the speed of take up the machinery is set up to deal with the core and feeder yarns at the speeds he has selected. It is then up to the operators to watch how the machine is operating. He said there is one air-compressor which is essentially a feeder for several different machines. Each machine is individually controlled as to the speed of the feeder rolls and how fast the actual machine is going. He explained further at trans. p78:
I have my core and my effect and they are on different wheels or rollers. . . .
So I have my core which is going at essentially the same speed as what it has been taken up at. And then I have my effect which is at, depending on what the yarn is, changes to anywhere from 40 per cent up to 250 per cent. So about – I am sorry, by 40 per cent I mean that it is going 1.4 times faster than my core and if it is 250 per cent it is actually going 3.5 times faster than my core. So it is moving much faster than the core yarn. And then actually it goes into the air jet. So they are on two separate paths and they meet in the air jet. And our air jets are like little boxes. They are made by Haberline. They are machined within thousandths of inches, so that they are very critical, you just can’t even bring them down to a machine shop and have them make you one. There are angles on like the two pieces that come together, so that the yarn is actually going into like a chamber, that is under strict tolerances as well. And it’s within that that the two ends, three ends, four ends, whatever, actually get combined.
41. Mr Semmler said that he does not add heat but that is one of the variables which can be added.
42. Mr Burge who is the Mill Manager for Classweave did agree with Mr Cuthbert (at trans. p132) that the production of yarn suitable for weaving into office upholstery fabrics from filament is a simple process compared to the complicated process of weaving. However he explained that, because of the large expenditure commitment needed to provide a technology which can be operated by one operator, it is not totally correct to describe the process as simple. He produced a diagram (R2) showing the process of texturising yarn. He described the process more briefly than Mr Semmler had done, but it was essentially the same process. He described using 300 denier filaments both for the core and the effect yarns. He said Classweave can produce different denier yarn by changing the gears of the machines. He added at trans. 137:
So our designer will talk to our yarn development person and he will actually develop the yarn by just changing the gears on the machine or using various colours on the machine, develop those yarns and then samples of cloth are produced from that yarn, and from that then a range may be selected for sale.
(iii) Is the process a “simple assembly operation”?
43. The Act in s 269D(3) excludes from the definition of “substantial process in the manufacture of goods”, a number of operations. The only one possibly relevant to this matter is paragraph (d) which excludes “simple assembly operations”. Mr Cuthbert submitted that the combining of core and effect or feeder yarns, as described by Mr Cuthbert, Mr Semmler and Mr Burge was no more than a “simple assembly operation”. We do not accept that submission. We find that the process described by Mr Semmler is a substantial process requiring a technical expertise and expensive technology. It is not a simple process.
44. Mr Semmler showed the Tribunal (ex. P1) two samples of filament and two samples of textured yarn. In our view the filaments have not merely been assembled as submitted by Mr Cuthbert. The character of both the core and effect yarns has been substantially changed by the air-texturing process and a new yarn has been produced. Thus we find that “substitutable goods are produced in Australia”.
(c) in the ordinary course of business
45. Having decided that “substitutable goods are produced in Australia” the only questioning remaining is whether the “substitutable goods produced in Australia” are produced “in the ordinary course of business”. That term is explained in s 269E of the Act. It requires first that the goods have been produced in Australia within certain timeframes, and secondly that a supplier be prepared to accept an order to supply them.
(i)production
46. The Act in s 269E(1) paragraphs (a), (b) and (c) contains three different ways in which the respondent or a party joined may satisfy this component. Classweave claimed in its submission objecting to the making of the TCO that air textured olefin yarn of various counts suitable for the weaving of furnishing fabrics (domestic and commercial) was being continuously produced and that since 1985 it had been prepared to accept an order to supply the goods (T6 p27). Leslie Francis in its submission stated that it had been prepared to accept orders for substitutable goods since 1993. It added (T9 p35):
LESLIE FRANCIS CURRENTLY SUPPLY INTERTEX WITH OLEFIN AIR TEXTURED YARN, BUT NOT 1200 DENIER. LESLIE FRANCIS ARE QUITE PREPARED TO SUPPLY INTERTEX WITH THE IDENTICAL YARN AS DETAILED IN THIS TARIFF CONCESSION APPLICATION.
47. The evidence at the hearing did not support all the claims made by either Classweave or Leslie Francis, but we find they both have been producing substitutable goods on a continuing basis for more than five years. Thus both paragraphs 269E(1)(a) and (c) are satisfied.
(ii) acceptance of an order to supply substitutable goods
48. This is the area in which the evidence varied somewhat from the statements in the submissions. Mr Semmler said that it is not correct to say that Leslie Francis can supply “the identical yarn as detailed in this tariff concession application.” But, as we have already explained, the authorities show that substitutable goods need not be identical goods so long as they can be put to a corresponding use. The evidence is that the yarns which Leslie Francis is prepared to supply can be put to a corresponding use. Further, the evidence as to Classweave’s production did not establish to our satisfaction that it is prepared to accept an order to supply its yarns. Mr Burge said that something like 98% or 99% of the yarn Classweave produces is used by Classweave, but that a very small amount is manufactured for sale. The figures produced by Mr Semmler show that approximately 40% of the yarn Leslie Francis produces is sold on the open market. The larger proportion of its yarn is sold to another division of Leslie Francis.
49. When Mr Cuthbert put in the Intertex application for a TCO, the first decision refusing that application rejected his application on the ground that the Australian manufacturers claimed they were “prepared to accept an order to supply the goods.” The decision-maker said at page 7:
Prepared to Accept an Order
The third and final matter you raised is whether, again for the purposes of the core criteria, the “producer is prepared to accept an order to supply the goods”.
Both objectors have stated in their objection submissions that they currently produce the yarn covered by the TCO and that they are prepared to accept orders for the product. There is no evidence to hand to suggest that this is not the case.
In view of the above, I consider that substitutable goods are produced in Australia in the ordinary course of business. As such, I do not believe that it is appropriate to grant the TCO that has been applied for.
50. In order to answer that line of reasoning Mr Cuthbert included in his Statement of Events, Documents, Facts and Contentions, at pages 14-22, copies of faxes he had sent to Leslie Francis and Classweave attempting to place orders for the 1200 denier yarn and even attempting to place an order for a different yarn. He set out at page 10 of his statement a summary of those attempts. It showed that Leslie Francis had either not responded or had responded that they could not make the yarn requested and that Classweave had either not responded or had responded that they could not assist. Mr Cuthbert said that on one occasion Classweave responded to a request for a different yarn with a quoted price which was so dear that its purchase would have meant that any fabric produced would not have been a realistic commercial proposition. Mr Feiglin and Mr Burge did not dispute that evidence. They said they did not fix the price but they suggested that the reason for the high price quoted by Mr Lederman may have been that the Mill was working to full capacity on other yarns and would have had to bring a crew in to work a Sunday shift to fulfill the order (trans. p139).
51. Classweave only sells on the open market a very small percentage of yarn that is not used for its own fabric production. We are not satisfied that Classweave is prepared to accept an order to supply air textured yarn suitable for weaving into fabric for office upholstery. That seems to depend on its own needs and on the capacity of the Mill.
52. The position is different in regard to Leslie Francis. The evidence of Mr Semmler was that they are prepared to sell their yarns and do regard that as a core part of their business and sell approximately 40% of the yarn they manufacture outside Leslie Francis. Mr Semmler in evidence agreed that he had not been prepared to supply Intertex with the yarns ordered by Mr Cuthbert as shown at pages 14, 15 and 16 of A3. He said he could not supply the yarns ordered because he did not have the colours or the deniers and because the quantities ordered were far too small to justify importing them specially. But he said other colours and deniers can be substituted to make fabrics for office upholstery although they will not produce an identical product.
53. In cross-examination Mr Semmler agreed that paragraph 5 of the Party Joined’s Statement of Facts and Contentions is incorrect. It states:
5.Our client contends that he manufactures a substitutable product and has supplied evidence to the Australian Customs Service to support this contention. Our client manufactures Textile Yarn, 100% Olefin, Air Textured within the range 720 – 4500 Denier. Leslie Francis would be prepared to supply this yarn in 1200 Denier if so requested by Intertex. Leslie Francis currently supply Intertex with 100% Olefin Air Textured Yarn in counts other than 1200 Denier.
Mr Semmler said that was not correct. Leslie Francis would supply 1300 denier yarn rather than 1200 denier. He said that yarn was substitutable, but not identical to the yarn in respect of which this application is made. He agreed that Leslie Francis had not made its offer of a substitute to Intertex and had not clarified the position in its Statement of Facts and Contentions. Mr Burge said as to the use to which different denier yarns are put (trans. p137):
The difference between 1100 denier and 700 denier is quite a difference in look and feel, but the end application tends to be the same. All you need for the finer count of yarn is if you are making complex colours, it gives you clarity of the different yarn colours if it is a finer yarn, but the end application is basically the same between a range of 1100 denier down to about 700.
54. Mr Cuthbert said that he has bought yarn from Leslie Francis, but it has not been a yarn suitable for the production of fabric for office upholstery. It was yarn used in fabrics suitable for loose car seat upholstery. However, he did not say that he had been unable to buy any yarn suitable for weaving into office upholstery fabric from Leslie Francis.
55. Mr Komora submitted that it was not necessary for the respondent to establish that there was a supplier prepared to supply the applicant for the TCO with “substitutable goods”. It is not necessary for us to decide that issue. The evidence here did establish that Leslie Francis does supply Intertex with yarn. Mr Semmler said that if Intertex ordered a 1300 yarn in a colour Leslie Francis had in stock they would supply that yarn. Similarly if the quantity ordered was sufficient to justify importing other colours they would consider that. While there may be real commercial advantages to producing fabric in one colour rather than another, those distinctions are not reflected in the authorities which have explained the concept of “substitutable goods”. We accept Mr Semmler’s evidence and find that Leslie Francis is prepared to accept an order to supply “substitutable goods produced in Australia”. That meets the requirement of supply “in the ordinary course of business” in the core criteria in s 269C. Accordingly the TCO application before us does not meet the core criteria in s 269C.
56. The decision under review will be affirmed.
I certify that the 56 preceding paragraphs are a true copy of the reasons for the decision herein of Mrs Joan Dwyer, Senior Member, Mr A Argent, Member and Mr C Ermert, Member
Signed: Wai Heng Chan
AssociateDate/s of Hearing 30 and 31 January 2001
Date of Decision 7 May 2001
Counsel for the Applicant Nil
Solicitor for the Applicant Mr Cuthbert, Managing Director of Intertex P/L
Counsel for the Respondent Nil
Solicitor for the Respondent Mr Komora, Australian Government Solicitor
ADMINISTRATIVE APPEALS TRIBUNAL ü SCHEDULE 1
ý No. V00/130
GENERAL ADMINISTRATIVE DIVISION þ
Re:INTERTEX PTY LTD
Applicant
And:CHIEF EXECUTIVE OFFICER OF CUSTOMS
Respondent
And:LESLIE FRANCIS & ASSOCIATES AUSTRALIA PTY LTD
Party Joined
O R D E R
Tribunal : Mrs J R Dwyer, Senior Member
Mr A Argent, Member
Mr C Ermert, MemberDate : 31 January 2001
Place : Melbourne
Decision :1.By consent the Tribunal varies the confidentiality orders made pursuant to s 35 of the Administrative Appeals Tribunal Act 1975 by Senior Member Handley on 17 October 2000 and by Deputy President Forrest on 28 July 2000.
2.The Tribunal orders as to the Applicant’s Statement of Events, Documents, Facts and Contentions (Ex A3) as follows:
(a)The specified parts of the following pages may be disclosed only to the respondent, to the Members of the Tribunal hearing the application, to Tribunal staff and to staff of Auscript Pty Ltd:
p8
the figure quoted as savings in the first paragraph of Item A(c) and the two quoted costs per metre in the last paragraph before Item B.
p11
All quoted costs and prices
p12
The whole page
p13
The whole page
p22
The price quoted by Jeffrey Lederman
p23
The whole page
(b)The rest of those pages and all other documents covered by the order of Senior Member Handley are no longer covered by a confidentiality order.
(c)There is no longer any confidentiality order in respect of p24 or the samples at p24 or the carpet samples at pp24(a), (b) and (c) which are exhibit A2 in the proceeding.
3.As to the documents (the T documents) covered by the order made by Deputy President Forrest on 26 July 2000 the s 35 confidentiality order is varied as follows:
T docs p49
this page may be released in full.
T docs p26
the order applies to the costs column but not to the percentages column (trans. p222)
T docs pp50 & 51
Order applies to columns with prices and costs only, not to the items in the left hand column.
(Sgd) Joan Dwyer
Senior Member
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