When are locally manufactured products “substitutable goods”?

The issue of whether “substitutable goods” are produced in Australia turns on the “use” of the imported goods compared to the locally produced goods.

Tariff Concession Orders (TCOs) play an important role for Australian producers and importers. The TCO system generally allows for the removal of customs duties on imported goods where there is no local industry producing “substitutable goods” in Australia.

The decision of Robertson J in Nufarm Australia Ltd v DowAgrosciences Australia Ltd (No 2) [2011] FCA 757 sets out the correct application of the “substitutable goods” test.

1. The path to the Federal Court

The dispute centred on whether a TCO should be granted to Dow AgroSciences (Dow) for certain imported herbicides. Nufarm Australia Ltd (Nufarm) objected to Dow’s TCO application on the basis that Nufarm produced substitutable goods in Australia. Customs accepted Nufarm’s objection and refused to grant the TCO.

Dow applied to the Administrative Appeals Tribunal (AAT) to review the decision. The AAT member concluded that the goods were not substitutable and granted the TCO to Dow.

The reasoning was that the imported Trifluralin Technical product is a pre-emergent herbicide that is applied to the soil before planting. In contrast, the 2,4-D acid formulations produced by Nufarm are post-emergent herbicides. The AAT member found that the means of killing weeds were quite different and therefore the goods were not substitutable.

On appeal, Robertson J found that the AAT erred in concluding that Nufarm’s goods were not substitutable goods and remitted the case back to the AAT to be heard again.

2. The law

The relevant test, set out in section 269P(3) of the Customs Act 1901, establishes the core criteria for successfully applying for a TCO. A TCO can only be granted if:

“…on the day on which the application was lodged, no substitutable goods were produced in Australia in   the ordinary course of business.”

“Substitutable goods” are defined by section 269B as:

“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.”

3. The appeal to the Federal Court

Nufarm submitted that the AAT applied the incorrect test. The AAT concluded that the imported Trifluralin formulations and the locally-produced  2,4-D formulations did not kill weeds in the same manner and therefore the goods were not substitutable.

Nufarm argued that it was not relevant whether the herbicides were pre-emergent or post-emergent. The relevant question was whether they killed the same weeds in the same crops.

Robertson J concluded that the AAT member’s reasoning was incorrect. He stated that:

“[M]erely to say that one herbicide operates in a different manner to another does not establish that the goods were not substitutable because it leaves open that the goods have a corresponding use, that is, in killing the same weeds in the same crops.”

His Honour considered that the AAT looked only to the times and means of killing weeds. The AAT reasoning did not adequately address whether the locally-produced goods had a use that corresponded to the use of the imported goods. Robertson J also confirmed that a practical “trade and commerce” approach was required to determine the respective uses rather than a scientific approach.

Robertson J also agreed with Nufarm’s submission that there was a denial of procedural fairness in the proceedings before the AAT. This was largely on the basis that the AAT failed to address Nufarm’s claim that 2,4-D acid was substitutable with Trifluralin Technical because there was an overlap in the types of weed killed or controlled in certain crops.

4. Applying the test

In his judgment, Robertson J sets out a practical analysis for determining whether imported goods and locally-produced goods are substitutable.

(a) What are the TCO (imported) goods?
(b) To what use or to what uses are they put or can they be put?
(c) What are the goods claimed to be substitutable?
(d) To what use or to what uses are they put or can they be put?
(e) Are the uses in (b) and (d) (or any of them) corresponding uses?

For more detailed information on this please contact Fletch Heinemann via [email protected] of Cooper Grace Ward Lawyers.