TARIFF CONCESSION ORDERS - SUBSTITUTABLE GOODS TEST
Australia has in place the logical system of granting tariff concessions for imported goods where there is no local manufacturer. This sounds sensible, but for decades the Courts have interpreted the relevant legislation in a way that disregards commercial reality when considering whether the locally made goods and the goods the subject of the concession application, are substitutable. However, a recent Tribunal decision has suggested that some of the most difficult caselaw is no longer applicable.
While the matter is far from settle, the reasons in the recent decision present opportunities for importers (including Australian industry that often requires imported goods).
Alstom Transport Australia Pty Ltd and Comptroller General of Customs
Original AAT decision
The current decision was handed down by the Administrative Appeals Tribunal and has a long history. It concerns a tariff concession order (TCO) application for certain driverless trains. The local manufacturer produced driver operated trains.
Like all TCO applications, a key issue was whether goods produced by the local manufacturer were substitutable for the goods described in the TCO. The legislation sets out that the test of substitutability is whether the TCO goods and the locally made goods can be put to a corresponding use. Over many Tribunal and Court cases it has been held that the locally made goods and the TCO goods do not have to achieve a corresponding end use in the same manner.
A decision was first given by the Tribunal in 2019. At that time, the Tribunal identified the relevant use of the TCO goods as “the transportation of passengers by rail”. Having made this finding, it was held that the locally produced driver operated trains and the driverless trains, could both be put to the same use. As such, the TCO should not be made.
The decision reflected a wide approach being taken to identifying the “use” of the TCO goods and disregarding the means in which the respective trains performed that use.
Full Federal Court decision
Alstom successfully appealed the original AAT decision to the Full Federal Court. The Full Federal Court emphasised the primacy of the description of the goods in the TCO application given that application had been accepted by the Comptroller-General of Customs (Customs).
The Full Federal Court built on this by holding that describing the use of the goods as “the transportation of passengers by rail” did not address the uses of the particular TCO goods as those goods were never described simply as passenger trains, without more.
By reference to other (non-TCO) caselaw, the Full Federal Court noted that the task is not to identify some broad genus of goods. Rather, the task is to identify the actual goods the subject of the TCO application.
The matter was sent back to the AAT for it to decide the matter in accordance with the Full Federal Court direction.
The updated AAT decision
The recent AAT decision is important as it shows the practical application of the Full Federal Court guidance. The AAT felt that in considering the use of the goods and what are substitutable goods, it must give primacy to the TCO wording. That TCO wording described a very specific driverless train.
In effect, that TCO wording described how the goods would perform the relevant use. The AAT ultimately made a finding that the driverless trains described in the TCO application and the locally produced manned trains, were not substitutable goods.
In doing so, it raised the important question of whether many significant TCO cases over the past 3 decades had implicitly been overruled by the Full Federal Court. The Tribunal validly asked whether these previous cases, in applying the substitutability test, had given primacy to the wording of the relevant TCOs. For instance, in the often cited 1994 Vulcan decision the Tribunal found that portable heaters (without a connected power source) were substitutable for wall mounted heaters. Both heaters performed the function of domestic room heating, albeit in a different manner. The Tribunal in Alstom commented that in the Vulan decision, that Tribunal “far from paying close attention to the TCO itself, or giving primacy to the TCO description, actually put to one side some its terms.”
If the Tribunal in Vulcan had given primacy to the terms of the TCO, it would have had to have limited the relevant “uses” to heating a room without a power connection. The locally made goods could not achieve this use. Rather than just focusing on the ultimate end use, the Tribunal in Vulcan should have considered how the relevant heaters performed that use.
The Tribunal in Alstom considered a series of other notable TCO cases and recognised that the decision makers in those cases had not given primacy to the TCO description and, rather, had identified a broad category of goods and uses.
In finding that the driverless trains and the manned trains were not substitutable, the Tribunal rejected an argument by the Customs that both goods can be put to the same practical use, being the transport by rail of at least 1540 passengers at any one time at a maximum speed of at least 100 km/h. The driver/driverless difference was said by Customs to only be concerned with the means of controlling the trains, and not the ultimate use to which the trains are put.
Ultimately, the Tribunal found that in considering the use of the TCO goods, it must treat as part of that use that the trains are driverless trains. Any use of the train that was not a use of a driverless train will not be a proper answer to the question “to what use can the TCO goods be put”.
A crucial outcome for future TCO applications
Effectively this case confined the use of the TCO goods, in part, to the way in which that use would be achieved. If the TCO description places an inherent restriction on the way in which a use will be performed, it is wrong to consider a wide use that ignores that limitation.
Consistent with this decision, a locally made good may have the same broad end use, but will not be substitutable if:
it achieves that end use in a way in which the TCO goods could not function or perform; and
it cannot achieve the end use in the same way in which the TCO goods perform that end use.
This is a big departure from the existing case law which rejected any consideration of how an end use was achieved.
Future TCO applications
If this approach is followed, it permits a more sensible approach where goods which are inherently different goods are not deemed substitutable merely because they broadly perform a similar end function.
However, the caselaw is far from settled. Customs has the option of again appealing the AAT decision. Further, even if the decision remains, neither the AAT nor the Full Federal Court expressly overruled the previous case law. There is likely to be uncertainty in this area until a superior Court is prepared to expressly set out its view on the existing case law.
Nevertheless, the key finding of the Full Federal Court, and the finding that was clearly applied by the AAT, is that primacy must be given to the wording of the TCO. Where opposition to a TCO is likely, future TCO applicants should be careful to provide a detailed description of the TCO goods that may support a finding of a more restrictive end use.
If Customs rejects a TCO application, legal advice on the implications of this recent decision should be sought when considering the merits of Customs internal review or an application to the AAT.