Translationz Pty Ltd and Australian Trade and Investment Commission - [2020] AATA 958

Translationz Pty Ltd and Australian Trade and Investment Commission [2020] AATA 958 (27 March 2020)
Division:GENERAL DIVISION
File Number: 2018/5948
Re:Translationz Pty Ltd
APPLICANT

AndAustralian Trade and Investment Commission (Austrade)
RESPONDENT

DECISION
Tribunal:Mr A. Maryniak QC, Member
Date:27 March 2020
Place:Melbourne

The Tribunal affirms the decision of the Respondent made 3 October 2018.
..........................[sgd]..............................................
Mr A. Maryniak QC, Member
Catchwords
TRADE AND COMMERCE – export market development grants – eligible services – eligible expenses – whether eligible promotional activity was for an approved promotional purpose – whether related entity – apportionment – translation services
Legislation
Australian Trade and Investment Commission Act 1985 (Cth)
Corporations Act 2001 (Cth)
Export Market Development Grant Act 1997 (Cth)
Cases
HYFN (Australia) Pty Ltd and Australian Trade Commission [2012] AATA 114
Parker Pen (Aust) Pty Ltd v Export Development Grants Board (1983) 46 ALR 612
Speedo Knitting Mills Pty Ltd v Commonwealth of Australia (1981) 37 ALR 417
Secondary Materials
Export Market Grants Administrative Guidelines, Australian Trade and Investment Commission, July 2018
REASONS FOR DECISION
Mr A. Maryniak QC, Member
27 March 2020

The Applicant seeks review of the Decision of a Delegate of the Chief Executive Officer of the Respondent made on 3 October 2018, pursuant to s.99 of the Export Market Development Grant Act 1997 (Cth) (EMDG Act). The Respondent’s decision affirmed an earlier decision of 13 June 2018 that the Applicant was not entitled to a grant under the EMDG Act.[1]
[1] This decision did vary the decision of 13 June 2018 so that the claimed expenses were not disallowed in full. The adjustments made after apportioning the claimed expenses resulted in a determination that $13,076 were eligible expenses. However, this was below the statutory minimum threshold and as such it was determined that Applicant was not entitled to a grant.
On 1 May 2016, the Applicant entered into a Transaction Services Contract (TSC) with a United States of America entity, Translationz Corporation (TzCorp), incorporated on 28 November 2011. The Applicant describes its core business as providing export services in the form of ‘translation and interpreting service’.
On 1 November 2017, the Applicant applied for a grant and claimed total expenses for the 2015-2016 and 2016-2017 financial years in the amount of $94,726, incurred in relation to overseas representation, marketing visits and promotional literature and advertising.
Part 3 of Division 1 of the EMDG Act defines who is eligible for a grant. Section 5 sets out the underlying principle as follows:
5 Object of Part
(1) This Part defines who is eligible for a grant.
(2) The underlying principle is that only small or medium Australian businesses that:
(a)are developing export markets for eligible products; and
(b)have a prospect of success in their export enterprise;
should be eligible for a grant.
Section 6 sets out those eligible for a grant. Relevantly, it provides:
6 Who is eligible for a grant?
(1)Each of the following:
(a)an individual who is a resident of Australia;
(b)a body incorporated under the Corporations Act 2001;
(c)an Association or co-operative incorporated under an Australian law;
(d)a partnership regulated by an Australian law;
(e)a joint-venture approved by the CEO of Austrade under section 89;
(f)a body corporate established for a public purpose by or under an Australian law;
is eligible for a grant in respect of a grant year if it satisfies the conditions applicable to it under section 7.
The grantee must be, in the opinion of Austrade (a body in existence by s.7 of the Australian Trade and Investment Commission Act 1985 (Cth)), genuinely carrying on business in Australia during the relevant period. The relevant Minister is required by s.101(a) of the EMDG Act to determine, by legislative instrument, guidelines to be complied with by the CEO of Austrade in forming, for the purposes of paragraph 7(1)(a) or 4(aa), an opinion whether a person is genuinely carrying on a business in Australia.
The EMDG Administrative Guidelines state for the purposes of s.37 of the EMDG Act, expenses will only be eligible where the Applicant is promoting exports to be made in the capacity of principal, thus a grantee must, pursuant to cl. 5.10.6:
·own the products being promoted for export
·be the seller of these products to foreign residents, rather than being for example an agent of the seller
·must include transactions for claimed expenses and export earnings (if any) in the applicant’s accounts, not just in consolidated accounts or in the accounts of a related entity.
By s.28(2) of the EMDG Act its underlying principle is that only expenses relating to specific promotional activities genuinely incurred by applicants for the purpose of marketing eligible products in foreign countries should qualify.
By ss.29 and 33 of the EMDG Act the following expenses are claimable only for the approved promotional purpose:
(a)the maintenance of overseas representatives (Item 1A);
(b)marketing visits outside Australia made by an applicant or agent (Item 2); and
(c)provision of promotional literature or other advertising (Item 6).
For the purposes of s.33, an eligible promotional activity in relation to an applicant is for an approved promotional purpose if it is carried out for the purpose of creating, seeking or increasing demand or opportunity in a foreign country for, inter alia, eligible services that the applicant intends to sell to persons that are not residents of Australia (s.37(1)(d) of the EMDG Act). The applicant must be the principal, apropos the activities.
Business structures, for example, that involve one company owning the product and another promoting it within a group of related companies are permitted in strictly limited circumstances. An applicant may incur eligible expenses to qualify for a grant where it and its related entity between them meet the principal status requirements, that is the applicant should own the service and sell it to a foreign resident:s.37(1A). Importantly, both the applicant and any related entity must, if incorporated, be Australian companies, pursuant to the Corporations Act 2001(Cth): s.37(5).
THE APPLICANT’S SUBMISSIONS
The Applicant submits that the benefits from Tzcorp would derive to its Australian business:
(a)Where actual export sales are made directly to the Applicant;
(b)As the written contract and position description with the North American Representative, in evidence, specifically state that they represent the Applicant to market and sell its services: for example as per the Summary of the position description states:
The candidate will be responsible for the design, implementation and execution of marketing and sales activities and execution of marketing and sales activities for the North American market on behalf of [the Applicant]. S/he will work closely with the Australian leadership team to promote lead generation and sales for the Australian business.
The Applicant submits that it has a contract with an international marketing representative (Tzcorp) to provide marketing services (the Applicant is paying for such services). This contract covers, inter alia, service delivery method and payment of net proceeds and obligations. The Applicant submits that all of the Applicant’s marketing expenses claimed (as incurred by Tzcorp) were for the sole benefit of the Applicant and hence such expenses for those export activities should not be apportioned.
The Applicant further submits that if Tzcorp were to be treated as though it is not a related entity, eligibility would be maintained as there is a contractual relationship between the Applicant and Tzcorp where all the benefits are paid to the Applicant, Tzcorp did not receive any payment from the Applicant, thus all arguments of the Respondent, associated with apportionment are falsely premised.
THE RESPONDENT’S SUBMISSIONS
The Respondent contends that the Applicant’s proposed model is speculative, not based on objective facts and should be rejected. An inextricable link between the eligible promotional activity carried out and the approved promotional purposes, as set out above, must exist: s.37 EMDG Act.
In establishing an approved promotional purpose, primarily, objective facts are of more relevance to any determination: see Lockhart J in Parker Pen (Aust) Pty Ltd v Export Development Grants Board (1983) 46 ALR 612 at 621.
Equally, where these objective facts underpin the Respondent’s apportionment of disputed expenses, calculated on the basis of ‘beneficial concessions or grant in absence of substantiation’ (per HYFN (Australia) Pty Ltd and Australian Trade Commission [2012] AATA 114 at [42]) the Applicant bears the onus of establishing an alternative basis for apportionment of expenses based on objective facts; see also Woodward J in Speedo Knitting Mills Pty Ltd v Commonwealth of Australia (1981) 37 ALR 417 at [44].
The Respondent submits that the Applicant, by email of 7 September 2018, failed to distinguish (or apportion) between the Applicant’s eligible and Tzcorp’s ineligible services. Without reference to any objective and ascertainable facts, the Applicant also claimed that it earned export ‘income’ or ‘sales’ from Tzcorp (which the Respondent disputes) so as to assert that all of its ‘export marketing activities’ should be considered to be eligible expense:
All of the EMDG expenses claimed were to promote the export business of Translationz Pty Ltd. This promotional activity generated export sales. Export sales were made through two channels. First, export sales directly to overseas companies (ie paying Translationz Pty Ltd directly) … Secondly, through Translationz Corp. While it is difficult to attribute specific marketing sales to individual sales, all of the sales were due to our export marketing activities.
The Respondent further submits that where the inextricable link is not established it is necessary to apportion the expenses claimed such that the adjusted expenses are ‘reasonable’ (per column 3 of s.33 of the EMDG Act).
For the 2015-2017 financial years the Applicant claimed $94,726 comprising:
(a)Overseas Representation $68,486;
(b)Marketing visits $18,963; and
(c)Promotional literature and advertising $7,277.
The Respondent submits that the Applicant’s export sales in the US/Canada as principal, are eligible services totalling $16,670 and the US Tzcorp’s sales (not being an Australian entity) within US/Canada totalling $153,199 are ineligible services. Hence the eligible services component of the overall sales amounts to approximately 10% of such sales.
The Respondent further submits this method of apportionment results in:
(a) the Overseas Representatives expenses of $68,486 claimed at Schedule 1A being adjusted to $6,849; and
(b) the Promotional Literature and Advertising expenses of $7,277 claimed at Schedule 6 being adjusted to $728;
The Applicant’s claimed marketing visit expenses of $18,963 are also to be apportioned, the Respondent submits. The Applicant’s export sales to all markets as principal total $61,230 but the US Tzcorp sales in US/Canada of $153,199 are ineligible services. The Applicant’s overall export sales and Tzcorp’s sales in the U.S./Canada total $214,429. The Respondent submits a higher apportionment in the Applicant’s favour is appropriate because the overseas marketing visit expenses were more likely to promote the Applicant in markets other than US/Canada. The Applicant’s overall export sales as a percentage of the total of Tzcorp’s and the Applicant’s export sales equates to 29% of the $18,963 expenses claimed at Schedule 2 – Marketing Visits – is $5,499.
The Respondent submits that the total of such adjusted amounts, apportioned as proposed, amounts to $13,076.
CONSIDERATION
By its preamble the Applicant’s TSC acknowledges ‘clients in North America have a preference to transact a (sic) US based company’. Relevantly the ‘Representative’ US Company Tzcorp is appointed to ‘transact’ or sell the services outside Australia. Hence this related US Company is performing the act of selling translation services and not the Applicant. Since Tzcorp is a foreign corporation all sales it makes are ineligible under the EMDG Act.
The payment back method of net proceeds arrangement under the TSC does not, on balance, have the effect of re-characterising the nature of the overseas sales by Tzcorp or its status as a foreign corporation (not permitted by s.37 of the EMDG Act) and the Tribunal accordingly so finds. The TSC facilitates sales of services by Tzcorp and those sales are not eligible under the EMDG Act. The Tribunal is not satisfied that the TSC overrides the relevant provisions of the EMDG Act. The TSC does not give the Applicant ‘principal’ status in respect of such sales. It facilitates sales of services by Tzcorp and those sales are not eligible under the EMDG Act.
Nothing in the oral evidence of the Applicant’s representative Mr Hodgson, who was not cross-examined, is inconsistent with the findings of the Tribunal. Such evidence did not displace the clear nature and effect of the TSC or the foreign status of Tzcorp.
As a consequence, the Tribunal finds that sales of services by Tzcorp are ineligible under the EMDG Act.
It is then necessary to look at what ‘reasonable expenses’ incurred by the Applicant should be apportioned pursuant to s.33 of the EMDG Act under column 3 of the Table. The remaining question for the Tribunal is what is the correct and preferable amount of ‘claimable expenses’?
The TSC only provides for the Applicant to be compensated for the marketing expenses which it incurred in the process of generating business for Tzcorp in the US/Canada.
The Applicant submits:
(a)The ineligible Tzcorp earnings should be re-characterised as export income of the Applicant;
(b)The speculative estimate (the Applicant admitting that there was no evidence before the Tribunal to support such estimate) of Tzcorp sales of $60,000, without the support of the full-time ‘export’ person claiming the credit of $53,481 in sales to the benefit of the Applicant;
(c)Applying a ‘contribution margin’ and allocating 40% of that margin resulting in a purported benefit to Australia of 106%; and
(d)As a consequence no adjustment should be made and the Applicant’s expenses as claimed should be allowed in full and then apportioned.
To the contrary, the Respondent contends that the Applicant’s proposed approach is speculative, not based on objective facts and should be rejected. An inextricable link between the eligible promotional activity carried out and the approved promotional purpose must exist: s. 37 of the EMDG Act.
In establishing an approved promotional purpose, primarily objective facts are of more relevance and should be given greater weight: Parker Pen (Aust) Pty Ltd v Export Development Grants Board (1983) 46 ALR 612 at 621 per Lockhart J.
The Respondent further submits that where the inextricable link is not established it is necessary to apportion the expenses claimed such that the adjusted expenses claimed are ‘reasonable’ (per column 3 of s.33 of the EMDG Act).
The Applicant’s export sales in the US/Canada as principal are eligible services totalling $16,670 and the US Tzcorp’s sales (not being an Australian entity) within US/Canada totalling $153,199 are ineligible services. Hence the eligible services component of the overall sales amounted to about 10% of such sales.
The Respondent further submits that this method of apportionment results in:
(a)the Overseas Representatives expenses of $68,486 claimed at Schedule 1A –being adjusted to $6,849; and
(b)The Promotional Literature and Advertising expenses of $7,277 claimed at Schedule 6 being adjusted to $728.
The Applicant’s claimed marketing visit expenses of $18,963 are also to be apportioned. The Applicant’s export sales to all markets as principal total $61,230 but the US Tzcorp sales in US/Canada of $153,199 are ineligible services, consistent with the submitted approach above.
The Applicant’s overall export sales and Tzcorp sales in the US/Canada total $214,429. The Respondent submits a higher apportionment in the Applicant’s favour is appropriate here because the overseas marketing visit expenses were more likely to promote the Applicant in markets other than US/Canada. The Applicant’s overall export sales as a percentage of the total of Tzcorp and the Applicant’s export sales equates to 29%. Such a percentage of the $18,963 expenses claimed at Schedule 2 – Marketing Visits is $5,499.
Accordingly, the Respondent submits that the total of such adjusted amounts is $13,076.
On balance, the Tribunal is satisfied that the Respondent’s submissions regarding apportionment represent the correct or preferable approach. The Tribunal does not accept, on the evidence and submissions before it, the Applicant’s proposed approach.
As discussed above, the Tribunal has found that the Applicant is only the principal in respect of exporting eligible services in its own right. This does not include the sale of services by Tzcorp as the Applicant is not the principal. Tzcorp is a USA company invoicing its local clients and receiving full sales proceeds from such sales and, it does not qualify as a related entity under s. 37(1A) of the EMDG Act.
As submitted by the Respondent, on balance, the Tribunal finds the funds in the amount of US$22,696 repatriated from Tzcorp to the Applicant on 24 July 2018 not to be an eligible export earning as it does not comprise sales of eligible goods, services or disposal of intellectual property.
On the evidence, the Tribunal finds that the correct or preferable apportionment is as argued by the Respondent for the reasons advanced by it:
(a)For the US/Canada market, apportioning the Applicant’s Overseas Representation and Promotional Literature and Advertising by comparing its eligible export revenue of $16,670 in that market with that of Tzcorp, resulting in a 10% apportionment of those expenses; and
(b)For Rest of World, apportioning the Applicant’s Marketing Visits expenses by comparing its eligible export revenue of $61,320 in total with that of Tzcorp resulting in a 29% apportionment of those expenses.
DECISION
On the basis of the findings above, the correct or preferable decision is to affirm the Review Decision dated 3 October 2018.

I certify that the preceding forty-four (44) paragraphs are a true copy of the reasons for the decision herein of Mr A. Maryniak QC, Member.

................[sgd]...........................................
Associate
27 March 2020
Dates of hearing:  24 September 2019
Date of Final Submission:                  9 August 2019
Advocate for the Applicant:               Adam Hodgson
Solicitor for Respondent:                  Lenny Leerdam