Tariff Concession Orders

Full Federal Court hands down decision on Roundup and the meaning of “substitutable goods produced in Australia”

What are Tariff Concession Orders?

A Tariff Concession Order (TCO) allows an importer to import goods free of duty where no substitutable goods are produced in Australia.

The objective of the TCO system is to prevent embedded costs, in the form of customs duty, being passed on to Australian industry and consumers where there is no relevant local industry to protect.

In broad terms, an applicant can apply for a TCO if it imports goods into Australia and there are no substitutable goods produced in Australia.

The TCO application is published so that local industries are given an opportunity to object to the TCO. Customs then makes a decision to grant or refuse the TCO.

What happened in Kenso Marketing v CEO of Customs?

In Kenso Marketing, Customs refused Kenso’s application for a TCO for certain herbicides it imported.

Nufarm opposed the application on the basis that Nufarm produced a substitutable product, Roundup, in Australia from imported glyphosate acid.

At first instance, the AAT concluded that the imported herbicides were substitutable for Roundup. This was not disputed by the parties.

The relevant issue on appeal to the Full Federal Court was whether Nufarm’s Roundup was “produced in Australia”.

The test in the Customs Act for goods to be “produced in Australia” requires that:

• the goods are wholly or partly manufactured in Australia; and
• not less than 25% of the factory or works costs of the goods is represented by Australian labour, materials and factory overhead expenses.

The Customs Act states that goods will be wholly or partly manufactured in Australia if at least one substantial process in the manufacture is carried out in Australia.

The Full Federal Court dismissed Kenso’s appeal on the basis that Nufarm’s processing in Australia changed the chemical composition of the imported acid base product and turned it into a commercially saleable herbicide – Roundup.

Because glyphosate acid cannot be used as a herbicide in its basic form, the Full Federal Court found that Nufarm’s processing in Australia must necessarily be considered a substantial process of manufacture.

With respect to the factory or work costs requirement, the Court noted that the Customs Act does not define “factory and work costs of the goods” and so the words have their ordinary and common sense meaning.

The Court held that “costs of the goods” means all costs involved in the transformation of material into a finished product, including packing and labelling costs. The Court was satisfied that over 25% of the costs were incurred in Australia, according to the costings provided by Nufarm.

How does the decision affect importers and local producers?

The decision highlights the value of TCO applications for importers and the need for local industry to be vigilant in reviewing relevant TCO applications.

The meaning of the phrase “substitutable goods produced in Australia” continues to be an area of uncertainty and the source of disputes. Similarly, the meaning of “substantial process of manufacture” needs to be analysed on a case by case basis.