provides for the concessional admission of goods

under Section 269C of the Customs Act where the

Comptroller-General is satisfied that goods

serving similar functions to the particular

goods are not produced and are not capable of

being produced in Australia by any person in the

normal course of business.

The meaning of "...serving similar functions..."

is defined in Sub-sections 269B(3) and 269B(4)

of the Customs Act.

In considering this matter I was (and remain)

satisfied that ss 269B(3) did NOT apply.

...

Turning to ss 269B(4) of the Customs Act, this

states that goods are taken to serve similar

functions where it can be established that if

the imported and locally produced goods were

readily available for sale throughout Australia,

there would be no significant part of Australia

in which there would be significant

cross-elasticity of demand between the goods, i.e.

between log skidder tyres and locally

manufactured tractor tyres.

In practical terms, cross-elasticity of demand

is determined by examining the interaction

between the goods in the market place and

essentially comes down to the question of

whether the goods compete with each other.

On the information before me, it has not been

established that the imported and locally

produced tyres cannot be substituted for each

other in both agricultural and forestry

operations, even though in some types of terrain

the only suitable tyres may be the imported log

skidder tyres.

The latter situation has been acknowledged by

South Pacific Tyres which is not opposed to

concessional admission of log skidder tyres

provided that their use can be restricted so

that they cannot be substituted for locally made

tractor tyres. However, this is a matter which

falls outside the scope of the Tariff Concession

System.

In the circumstances, I confirm the advice

contained in my letter of 18 October 1988 that I

am not satisfied that grounds have been

established in terms of Part XVA of the Customs

Act to grant the requested Tariff Concession

Order and my previous decision to refuse the

application is maintained."

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

"In any fresh application you should, in

addition to the basic requirements, particularly

address the market overlap created by sales of

log skidder tyres for use in the broad acre

agricultural sector.

In its letter of 19 January 1989 to the

Tasmanian Logging Association, South Pacific

Tyres stated that its objections were based

"upon a good deal of evidence" which the company

has been able to gather on the use of imported

log skidder tyres in broad acre agricultural

work where locally made rear tractor tyres are

also used. However, no details have been

provided.

In your letter of 23 September 1988 you state

that the Bridgestone sales of LS tyres into the

broad acre farm sector represent 6% of total

units sold in the forestry extractive industry.

There is still doubt about the degree of overlap

in the agricultural and logging markets and the

degree, if any, of competition which exists

between locally made R tyres and imported LS

tyres.

As you would understand, applicants need to

demonstrate that a reduction in price (as a

result of a tariff concession) of the imported

good would not significantly effect the market

demand for the locally produced good. The onus

is on the applicant."

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

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

"My reasons for this response are:

in the various functions for which log skidder

tyres may be used (not the particular function

covered by your request) there is local

production of tyres which serve the same

function.

In this regard log skidder tyres have been used

(are being used) for agricultural purposes in

substitution for tractor tyres of the kind

produced by South Pacific Tyres.

Also, in certain terrain, locally produced

tractor tyres have been used for forestry

purposes, with imported log skidder tyres also

being used in similar terrain.

There can be no question that in use it has been

demonstrated that imported log skidder tyres

have been used for purposes for which locally

produced tractor tyres also have been used, i.e.

in those uses both kinds of tyres serve similar

functions.

by reason of their capability of substitution

for locally produced tractor tyres in various

uses there exists a cross elasticity of demand

between log skidder tyres and tractor tyres,

i.e. if the price of tractor tyres was held

constant, a reduction in the price of log

skidder tyres would have a significant effect on

the market demand for tractor tyres.

A TCO on log skidder tyres, by the reason of the

consequent price reduction, would cause more

widespread usage of log skidder tyres for

purposes for which locally produced tractor

tyres are suitable than is currently the case."

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

"South Pacific Tyres does not produce log

skidder tyres as such. The response made to the

application cannot be interpreted as implying

local production.

The response made on behalf of South Pacific

Tyres was against the core criterion of the

Commercial Tariff Concession System, namely

whether goods produced in Australia serve

similar functions to those for which

concessional entry is sought."

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

"269c(1) Subject to this Part, where the

Comptroller, after considering an application

under section 269G for the making of an order

under this section in respect of particular

goods, is satisfied that -

(a) goods serving similar functions to

the particular goods are not

produced in Australia; and

(b) goods serving similar functions to

the particular goods are not

capable of being produced in

Australia by any person in the

normal course of business,

the Comptroller shall make a written order to be

known as a Commercial Tariff Concession Order,

declaring that the particular goods are goods to

which a prescribed item specified in the order

applies."

"269B(3) For the purpose of this Part, identical

goods shall be taken to serve similar functions.

(4) Without limiting sub-section (3), for the

purpose of this Part, goods shall be taken to

serve similar functions to other goods unless

the Comptroller is satisfied that, if both goods

were readily available for sale throughout

Australia, there would be no significant part of

Australia in which there would be significant

cross-elasticity of demand between the goods."

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

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

"Mr Tasker of Bridgestone Earthmover Tyres Pty

Ltd has indicated that the price differential

between the local and imported tyres (in excess

of 35%) is a factor which erodes the cross

elasticity (substitutability) argument. When

making comparisons between the local and

imported tyres at the Trade Price level it can

be seen that there is little difference - it is

only the application of discounts which results

in significant price variations. I do not

consider it reasonable to make price comparisons

after discounting.

However, it is necessary to perform an

evaluation of pricing structures taking into

consideration the likely outcome with the

removal of the duty component, as highlighted in

the final paragraph of the abovementioned letter

of 5 December 1989. I have found, after making

such a comparison, that there is no strength in

Mr Tasker's price-based argument.

...

Having given careful consideration to the

arguments contained in these applications I find

that, in relation to subsection 269B(4), I am

not satisfied that there is no significant part

of Australia in which there would be significant

cross elasticity of demand between the LS2 and

R1 classes of tyres, or between the imported

tubes and flaps and the locally produced ones.

Furthermore, I am of the view that, in relation

to subsection 269E(1), the removal of the duty

from the tyres is likely to have a substantially

adverse effect on the related portion of the

tyre market in Australia. Accordingly, I must

refuse your applications."

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

It is useful to set out in full paragraphs 26 and 27 of those reasons:

"26. In looking at the price comparisons

between the imported and local tyres

provided by Bridgestone ... I noted that

the differences were quite marked after

discounts had been applied. However, at

the trade price level the imported tyres

are only marginally dearer. In an effort

to make price comparisons at a meaningful

level, somewhere akin to the landed duty

paid price of the imported tyres with the

ex-factory price for the locally produced

tyre, I considered that the comparison was

appropriate at the trade price level,

exclusive of the variable discounts. This

level is one which I consider to be fair,

realistic and practical and is made at a

point where it has no effect on market

substitutability.

27. On the basis that locally produced tractor

tyres have been used for forestry

extraction purposes in similar terrain to

that where imported log skidder tyres are

also being used; that up to 7% of imported

log skidder tyres are being used in

agricultural applications; and my view

that there would be a response in the

market to a change in price of the

imported product, I concluded that there

is cross elasticity of demand between the

two types of tyres for the purpose of

Subsection 269B(4)."

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

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

"When two goods are substitutes and the price of

one good is held constant, a variation in the

price of the second good would have a

significant effect on the market demand for the

first.

In economic terms the relative change in demand

for one good resulting from a 1 percentage

change in the price of another is known as the

cross-elasticity of demand.

In the case of substitutes, a decrease in the

price of one good has the effect of decreasing

the demand for the other good.

In practical terms this is determined by

examining the interaction between the goods in

the market place and essentially comes down to

the question of whether the goods compete with

each other."

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

"In my opinion, s 269B(4) is explicit and clear.

It provides that goods shall be taken to serve

similar functions unless the Comptroller is

satisfied that, if the goods were readily

available for sale throughout Australia, there

would be no significant part of Australia in

which there would be significant

cross-elasticity of demand between the goods.

That provision and s 269B(3), with respect to

identical goods, are provisions which were

intended by Parliament entirely to govern the

question of similar function. Identical goods

are deemed to have a similar function. If goods

are not identical, the question is to be

determined by reference to cross-elasticity of

demand.

In other words, I am of the view that Parliament

intended by the definitions in s 269B(3) and (4)

to cover the field. Mechanical or physical

function is covered by s 269B(3), which requires

identity. If there is not identity in this

sense, the issue is to be decided by reference

to the requirement of "significant

cross-elasticity of demand between the goods", which

is a market or economic test and not a

mechanical or physical test, though the

mechanical or physical function of the goods

would be a relevant matter to be considered."

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

"In the first place, it must be noted that there

is again a hypothetical quality attached to the

considerations enjoined by this part of the

section. The decision- maker having, by an

effort of imagination, conjured up a situation,

which may be contrary to current fact, of ready

availability of each of the competing goods on a

nationwide basis, is then required to determine

another hypothetical question whether, in such

envisaged circumstances, there would be

cross-elasticity of demand between the goods, that is

would the goods be substitutable the one for the

other in circumstances where the only factor

determining choice would be price. If satisfied

that such would be the case, the next inquiry,

again hypothetical, is to be whether there would

be "no significant part of Australia" in which

the cross-elasticity of demand so ascertained

would occur to an extent which could be

described as "significant".

In other words, putting the matter as succinctly

as I find possible, the decision-maker was in

this case, confronted with the question whether,

on the assumption of "ready availability" of

both PET and PVC resin throughout Australia

there was demonstrated that there would be an

absence of significant price-based substitution

of the one for the other in any significant part

of Australia.

It has been put on behalf of he applicant that,

in the answering of this question, the

decision-maker should not have regard to future

possibilities; he should tie his considerations

to the present demonstrable facts of the

marketplace. In my view, the hypothetical

nature of the inquiry indicates that this cannot

be so. Although, obviously, the current

situation obtaining between the two goods in the

marketplace and also the history of their

market interaction must be of very considerable

importance, the very nature of the inquiry

requires that the mind of the decision-maker

rove over the possibilities and probabilities of

the result of granting the (TCO) sought. This

must, in my view, inevitably involve

consideration of potential future effects. The

application of the section clearly does not

permit of wild conjecture or flights of fancy

but requires a genuine and reasoned attempt to

foresee the situation throughout Australia on

the assumptions postulated. The decision-maker

is not obliged to assume that the suppliers and

purchasers will remain the same. He can take

account of observable market trends, even though

they may be merely inchoate."

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

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

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

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

1. the first respondent's decision of 15 July 1991 is set

aside, and

2. the applications lodged on 27 July 1990 are to be considered