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[2017] FCA 1114
Federal Court of Australia
2017-09-19
Griffiths J
Original judgment source is linked above.
GRIFFITHS J: 1 The respondents seek an advance ruling under s 192A(a) of the Evidence Act 1995 (Cth) as to the admissibility of an expert evidence report which the applicant proposes to adduce in the substantive proceeding. The substantive proceeding involves an application for judicial review under the Administrative Decisions (Judicial Review) Act 1977 (Cth) (ADJR Act). The judicial review challenge relates to a decision of the first respondent made under s 269ZZM(1) of the Customs Act 1901 (Cth) (Customs Act). By this decision, the first respondent affirmed his previous decision to impose dumping duties on the export of ferrous grinding balls (grinding balls) from the People's Republic of China. The decision was made on the basis of a report made by the second respondent (the Commissioner of the Anti-Dumping Commission). In making the decision, the first respondent also accepted the recommendations and reasons of the third respondent (the Anti-Dumping Review Panel) which are set out in its report 47 (Report 47). 2 The first respondent's decision is challenged on various grounds of review contained in the ADJR Act. The dispute concerning the admissibility of the expert evidence relates only to ground 7, which is as follows (emphasis in original): 7. In so far as the Decision involved calculating the amount of profit using a profit percentage worked out on the basis of the Applicant's actual cost base (which cost base had been rejected by the First Respondent), which percentage was then applied, without adjustment, to the substituted cost base previously used by the First Respondent, the Decision was an improper exercise of the power conferred by the enactment in pursuance to which it was purported to be made, being so unreasonable an exercise of a power that no reasonable person could have so exercised it, pursuant to s 5(1)(e) and s 5(2)(g) of the ADJR Act. Particulars (i) At paragraph 76 of the ADRP report 47, the ADRP observed that the approach of the ADC, in calculating a profit percentage on the basis of the non-substituted costs of the producer, proceeded on the assumption that, if the market situation did not exist, exporters would achieve the same return on investment in percentage terms that they achieved under the market situation, "and that this profit margin should be applied to the (substituted) costs determined by the Commission" (p 22). (ii) Contrary to the assumption that is inherent in that reasoning, the concept of a return on investment is not the same as, and cannot be equated with, the concept of a profit margin, such that the two can be used interchangeably. (iii) Further, and in any event, the methodology adopted by the First Respondent leads to the result that as costs of production increase profits likewise increase. This result is irrational, illogical and unreasonable. (iv) The methodology adopted is also irrational, illogical and unreasonable in circumstances where one of the First Respondent's premises was that the relevant goods were affected by a "particular market situation" involving depressed prices of steel (including steel billet, a major input cost in the manufacture of grinding balls). There is no rational, logical or reasonable basis to infer that a manufacturer of grinding balls which can make a certain level of profit when able to access inputs of depressed prices would make more profits if the cost of inputs were higher. 3 In its terms, ground 7 relates specifically to [76] of Report 47, which states: In its submission, the Commission justified its approach to determining the amount of profit by referring to a discussion at pages 51 and 52 of the Australian Customs and Border Service Report 177. The approach described in that Report involves calculating a profit margin based on the non-substituted costs of the producer. It proceeds on the assumption that, if the market situation did not exist, exporters would achieve the same return on investment in percentage terms that they achieved under the market situation and that this profit margin should be applied to the (substituted) costs determined by the Commission. The assumption that the same profit margin would be achieved is a reasonable one and is consistent with the objective of determining a normal value which reflects arms length transactions in a competitive market. In determining the profit margin, or return on investment, which the producers achieved in reality, the Commission looked at whether goods were sold below the cost of production and applied the OCOT approach to arriving at this profit ration. This approach reflects the process that would have been followed had the Commission not concluded that it was necessary to use the Benchmark to determine the costs of production or manufacture. I consider that this approach to determining the profit component of the normal value was reasonable. 4 The expert evidence is in the form of a report by an economist, Mr Greg Houston. Mr Houston was asked to answer five questions. Those questions, and his brief answers to each of them, are as follows: Question 1: Is the concept of return on investment the same as, or can it be equated with, the concept of profit margin expressed as a percentage of sale price? Please explain these concepts. Answer: Profit margin and return on investment are different economic concepts that cannot be equated with each other. Question 2: In what market conditions, if any, is it reasonable to assume that, as costs of production increase, profits will likewise increase at the same rate so as to maintain the same profit margin? Answer: There are no market conditions in which it would be reasonable to assume that, as costs of production increases, profits will likewise increase at the same rate so as to maintain the same profit margin. Question 3: Is it reasonable and/or rational to assume that a manufacturer of grinding balls who can make a certain level of profit when able to access inputs at depressed prices will make more profits if the costs of inputs are higher? In what factual circumstances, if any, would that assumption be available? Answer: It is not reasonable or rational to assume that any firm who can make a certain level of profit when able to access inputs at depressed prices will make more profits if the costs of inputs are higher. There are no factual circumstances where such an assumption would be consistent with economic principles. Question 4: Do you agree that the approach the ADRP adopted in relation to profit margin, in paragraph 76 of Report 47, was a methodologically sound and reasonable approach to maintain the same return on investment for Longte in a competitive market. Answer: The approach adopted by the ADRP in relation to profit margin, as explained in paragraph 76 of Report 47, was not a methodologically sound and reasonable approach to maintaining the same return on investment for Longte in a competitive or other market. Question 5: In light of your answer to the questions above, or by reference to any other matters you consider appropriate, what is your opinion of the soundness of the approach of the ADRP in Report 47 to determining the amount of profit. Answer: In my opinion, the approach of the ADRP in Report 47 to determining the amount of profit is unsound, because it has sought to achieve the same profit margin, rather than the same return on investment. 5 Mr Houston elaborated upon each of these answers in his eight page expert report.
Consideration and disposition 6 The parties were in substantial agreement concerning the principles guiding the admissibility of evidence in a judicial review case. Generally speaking, evidence which was not before the primary decision-maker is not admissible in judicial review proceedings, however, ultimately the issue falls to be determined by reference to the grounds of judicial review and the particular circumstances of the case (see, for example, McCormack v Commissioner of Taxation [2001] FCA 1700; 114 FCR 574 at [38] per Sackville J; Australian Retailers Association v Reserve Bank of Australia [2005] FCA 1707; 148 FCR 446 at [442] and [457]-[459] (Australian Retailers Association) per Weinberg J and Chandra v Webber [2010] FCA 705; 187 FCR 31 at [40] per Bromberg J). 7 In Australian Retailers Association, in circumstances where there was a claim of Wednesbury unreasonableness, Weinberg J admitted, with some reluctance, competing expert economic evidence on the question whether a decision by the Reserve Bank concerning EFTPOS interchange fees would promote efficiency and competition in the relevant market. And in Minister for Primary Industries and Energy v Austral Fisheries Pty Ltd (1993) 40 FCR 381 expert evidence was admitted in a judicial review challenge which claimed that a fisheries management plan was unreasonable or irrational in operation. Expert evidence from a statistician was admitted as to a mathematical fallacy underpinning a quota formula in the plan. 8 According to the applicant, the alleged unreasonableness to which [7] of the originating application relates derives from the following three elements: (a) the interchangeable use of two economic concepts, return on investment and profit margin, which the applicant says cannot be equated; (b) the flawed "assumption", originally formulated by reference to return on investment but then transposed to profit margin, that a producer would achieve the same profit margin in a competitive market (with higher input costs) as it achieved under a market situation (with lower input costs); and (c) on the basis of that assumption, calculating the amount of profit by applying the same profit margin that the applicant had achieved under the market situation in China to the higher substituted costs used by the ADRP. 9 The applicant explained that the purpose of Mr Houston's report was to provide an explanation of the economic concepts in paragraph 76 and the methodological difficulties with the assumptions made in that paragraph, so as to enable the Court to frame and deal with the unreasonableness ground of review. This was by assisting the Court to understand the basis for the applicant's claim that the approach of the ADRP in calculating the amount of profit, by applying a profit margin that it achieved in a market situation to substituted and higher input costs, was unreasonable in the ADJR sense. 10 The reasons advanced by the respondents in support of their submission that the Houston Report is inadmissible as irrelevant should not be accepted. 11 First, while it appears that the parties are not in dispute as to the meaning of the technical expressions "profit margin" and "return on investment", Mr Houston's answer to question 1, to which this matter relates, informs his evidence concerning questions 2 to 5. 12 Secondly, I consider that Mr Houston's answers to questions 2 and 3 are relevant as to the reasonableness of the assumption upon which paragraph 76 operates. 13 Thirdly, as to the answers to questions 4 and 5, I do not consider that evidence to be directed to the ultimate issue (which, in any event, is now affected by s 80 of the Evidence Act). The evidence is admissible in support of the applicant's claim that the approach of the ADRP to calculating the amount of profit was unreasonable by applying a profit margin that it achieved in a market situation to substituted and higher input costs. 14 It seems to me significant that, in this case, as was the case Australian Retailers Association, the relevant statutory framework incorporates economic principles and concepts. This is reflected in provisions such as s 269TAC of the Customs Act which deals with how the "normal value of goods" is to be determined and contains concepts such as "market", the costs of production or manufacture of goods in the country of export and profits on sale. Similarly, in the Customs (International Obligations) Regulations 2015 (Cth), reg 43 focusses in part on the question whether records are in accordance with generally accepted accounting principles in the country of export and "reasonably reflects competitive market costs associated with the production or manufacture of like goods". Regulation 45 deals with the determination of profit for the purposes of s 269TAC(5B) of the Customs Act. These are all economic concepts. In such circumstances, while I respectfully agree with Weinberg J's remarks in Australian Retailers Association at [459] that the tender of evidence going to the ground of review of unreasonableness should not be encouraged, it is difficult to reject as inadmissible expert economic evidence which goes to the question of whether the decision-maker acted unreasonably or irrationally and not in accordance with sound economic principles. As I understand the position at this time, these are the matters which are addressed in Mr Houston's Report. In my respectful view, his evidence is relevant and, in principle, is admissible in relation to ground 7 of the originating application. 15 The observations of Barrett J in Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2008] NSWSC 1263, to which my attention was drawn, were made in a very different statutory context and legal framework and are distinguishable. The same may generally be said concerning some of the observations of Collins J in R (on the application of Lynch) v General Dental Council [2003] EWHC 2987 (Admin), although his Lordship's observations at [24] are not inconsistent with the course I have taken in the particular circumstances here: 24. It is clear that the court's function must not be usurped. But it seems to me that the court must be enabled to carry out its function. To do this it must understand the material which is put before it. There is in my view a real distinction between the report from an expert which seeks to explain what is involved in a particular process (in this case, treatment) and how complicated that process is and one which goes on to opine that it was irrational for the body to have reached the conclusion it did. I recognise that in this jurisdiction the obtaining by a defendant of a report which disagrees with the views of the claimant's expert may neutralise those views since the court cannot and will not decide the issue of fact. However, it seems to me that in a truly technical field, where the significance of a particular process is in issue expert evidence can be admitted to explain the process and its significance. Cases where this can be permitted will be very rare and what I have said should not be regarded as opening the door to the admissibility of experts' reports in all cases such as this which involve judicial review of an expert tribunal or body. Equally, the court must be careful to recognise and to apply the distinction to which I have referred, albeit in some instances it may be somewhat difficult to see where the line should be drawn. 16 For these reasons, I do not accept the respondents' overall objection to the admissibility of the Houston Report. That objection was expressed at a high level of principle and applied to the Houston Report as a whole. The respondents sought to reserve their position in relation to any specific and technical objections to parts of the Houston Report. Although the applicant opposed this course I consider that the respondents should not be prevented from making individual objections on the basis of matters such as form. Any such individual objections, together with a short statement of their basis, should be filed and served no later than ten business days before the hearing. 17 In the light of this advance ruling, it will be a matter for the respondents to consider whether they wish to adduce competing expert evidence. Any such evidence should be filed and served by no later than 20 business days before the hearing. If there is to be competing economic expert evidence, consideration will be given to directing the experts to prepare a joint report. 18 It is also appropriate to make further directions with a view to the substantive hearing being conducted early year. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Griffiths.
Changshu Longte Grinding Ball Co., Ltd
Parliamentary Secretary to the Minister for Industry, Innovation and Science