Renault (Australia) Pty Ltd and Bureau of Customs

1 ALD 19

---

(Decision by: Brennan J (President), V J Skermer Member, RR L Stock Member)

Renault (Australia) Pty Ltd &
Bureau of Customs

Tribunal:

Brennan J (President)
V J Skermer Member
RR L Stock Member

Subject References:
Value of imported goods
Advertising costs
Customs Tariff
Value of imported goods
Convention Definition of Value
Postulated sale in an open market
Inclusion of advertising costs in seller's price
Jurisdiction
No right to comment where no dispute

Legislative References:
Customs Act 1901 - 154(2)

Decision date: 8 September 1977

---

Decision by:
Brennan J (President)
V J Skermer Member
RR L Stock Member

The question which falls for the Tribunal's determination is the value for duty of a shipment of Renault motor vehicles which were entered for home consumption on 26 April 1977 by Renault Wholesale Pty Ltd, a company which is the sole concessionaire in Australia for all Renault motor vehicles exported to this country by the French manufacturers, Regie Nationale des Usines Renault. We shall refer to the first of these companies as the Wholesale company, and to the second as Renault France. The Wholesale company is also the sole concessionaire for Peugeot vehicles exported by Peugeot Automobile, a French corporation associated with Renault France.

Renault France is a large corporation which has at least two Australian subsidiaries or sub-subsidiaries, namely the Wholesale company and Renault Australia Pty Ltd (to which we shall refer as Renault Australia). Renault France makes the well-known motor vehicles and motor vehicle parts which bear its name and which are sold in many countries. Renault vehicles are advertised for sale and sold throughout Australia under the brand name or foreign trade mark "Renault". They are imported in a "completely knocked down" or disassembled condition. These vehicles are known as ckd vehicles, a term which distinguishes them from cbu, or "completely built up" vehicles. The Wholesale company usually acts as the importer, though Renault Australia sometimes imports the vehicles. After import, the ckd vehicles are assembled, using some components of Australian manufacture. The comparative value of the imported and domestic components is agreed between the applicant and respondent. After assembly, the vehicles are distributed to dealers who sell them by retail to the public. Some dealer outlets are owned by the Renault organization, others are not. An extensive advertising and promotion campaign keeps the Renault brand and the current models of Renault vehicles before the public, and it is common ground that advertising and promotion (which we aggregate as "advertising") is essential to the winning and retention of a share of the Australian market. The market for the various brands of new cars is marked by intense competition, and by extensive advertising which commends either the brand or brand and model of new motor vehicles.

The cost of Australian advertising is borne for the most part by Renault Australia. We have no evidence as to why the Wholesale company imports and Renault Australia advertises the vehicles imported, but in our view the difference in function is not important. Each company is part of the Renault chain of distribution and we shall refer to them collectively as the Australian subsidiaries. A contribution is made by dealers to a fund for "co-operative advertising" which advertises the brand and current models and also the location of the dealers' premises. On occasions, dealers at their own expense publish advertisements which describe Renault vehicles and which set out particulars of their dealerships. Renault France makes no financial contribution to advertising expenditure.

Advertising in Australia is therefore paid for by the Australian subsidiaries and by local dealers of Renault vehicles. It is the totality of this advertising which creates and helps to sustain a favourable market sentiment and thereby assists in the selling of Renault vehicles. The cost of advertising is borne by the companies in the chain of distribution and is set off against the revenue earned in the selling of vehicles. The profits of the Australian subsidiaries are affected by their expenditure on advertising; likewise in the case of the dealers.

Although the cost of advertising is reflected in the price which the public pays for the cars which they buy, advertising is no doubt thought to increase the number of vehicles sold and to support the prices charged. If advertising effects an increase in sales, it facilitates the allocation of fixed costs over a larger number of vehicles and may permit resultant diminution in unit costs to be reflected in the price charged for each vehicle.

Whatever be the economics of advertising expenditure, however, the fact is that the experienced management of the Renault chain of distribution finds it desirable to expend substantial amounts on advertising in Australia. The Australian subsidiaries and the local dealers no doubt conceive the expenditure to be justified because they make the judgment that advertising increases their gross profits. It may be inferred that the cost of advertising is recouped by selling new Renault vehicles, and that the advertising cost incurred by the Australian subsidiaries is recouped in the prices charged for vehicles bought from them. It may also be inferred that the advertising cost incurred by dealers is recouped in the prices charged by them for the vehicles bought by the public. It may be further inferred that, as sales take place, the prices charged are a sound indication of the value of the vehicles sold. Australian advertising benefits Renault France not merely by adding to or maintaining its subsidiaries' profits but by increasing or maintaining the turnover of Renault France's exporting business. Renault France derives a benefit, and its subsidiaries pay the cost.

In addition to the control which Renault France may exercise over the Wholesale company's activities, Renault France entered into a contract with the Wholesale company governing the relationship between them as exporter and importer of motor vehicles. The Wholesale company is thereby granted the exclusive right to sell Renault vehicles in Australia and the use of the Renault trade mark for that purpose. Renault France is given the benefit of a number of contractual undertakings by the Wholesale company, including undertakings with respect to after-sales warranties and advertising. A translation of the advertising clause (cl XV) reads: -

"The Importer and Renault consider that extensive and well-executed advertising is essential not only to the realisation of optimum sales figures, but also to the successful enhancement of the public image both of Renault as a whole and of the local representation of Renault.

"Renault will supply the Importer with the necessary advertising and sales promotion material.

"The Importer undertakes to supply Renault, at the beginning of the commercial year, with a detailed estimate, complete with explanatory notes, of his advertising expenditure.

"Furthermore, the Importer and Renault agree that a certain unity of style in the creation and presentation of advertising in its various forms is essential to ensure the most effective impact of such advertising throughout the world, each party drawing benefit from the combined efforts of the Renault network in all parts of the world."

The relationship, both corporate and contractual, between Renault France and the Australian subsidiaries permits, in the commercial interests of the group, the arrangement and co-ordination of the business of exporting, importing, assembling, distributing, advertising and, in some cases, retail selling of Renault vehicles. The group's arrangements cast the costs of advertising upon Renault Australia. These costs might have been cast upon the Wholesale company or upon any other Australian subsidiary of Renault France or, for that matter, upon Renault France. It does not matter for the purpose of determining the value for duty of the imported vehicles, whether the cost of advertising was borne by one or other subsidiary - what is relevant is that the cost of advertising Renault vehicles under the Renault trade mark was borne in Australia by someone by arrangement with Renault France and was not borne by Renault France. The relevance of that fact to the value for duty appears from a consideration of the statutory hypothesis which must be adopted in order to determine the value for duty.

The determination of the value for duty is governed by the provisions of s 154 of the Customs Act 1901. That section was inserted by the Customs Amendment Act 1976 and came into operation on 1 July 1976. Subsection 154(2) reads as follows: -

"(2) Subject to sub-section (3), the value of any imported goods shall, for the purposes of the Customs Tariff Act 1966-1976 (except in a case where this Act or that Act provides otherwise) be the amount ascertained in accordance with the Convention Definition of Value."

The Convention Definition of Value is set out in Sch VII, which consists of two parts. Part I is the English text of Annex I - Definition of Value - adopted by the Convention on the Valuation of Goods for Customs Purposes signed at Brussels on 15 December 1950; and Pt II is the English text of Annex II - Interpretative Notes to the Definition of Value. The Convention provisions (to which we refer as the Brussels Definition) were intended for adoption by the customs laws of the signatory powers.

On incorporation into the Australian Customs Act, its application was modified by certain amendments to its terms enacted in sub-s 154(3), but the verbatim incorporation in the Schedule of the Brussels Definition is a clear indication of Parliament's intention to enact, as the basis of Australian customs valuation law, the principles which were commonly accepted by the signatory powers.

Article I(1) of the Brussels Definition provides: -

"(1) For the purposes of levying ad valorem duties of customs, the value of any goods imported for home use shall be taken to be the normal price, that is to say, the price which they would fetch at the time when the duty becomes payable on a sale in the open market between a buyer and a seller independent of each other."

A number of the concepts in this article are expanded in or affected by subsequent provisions of the Brussels Definition but sufficient appears in this article to show that the Brussels Definition postulates a sale in circumstances which may be quite dissimilar from the circumstances attendant upon an actual sale.

When goods are sold by an exporter to an importer in circumstances or upon terms which do not coincide with the circumstances and terms which the Brussels Definition assumes (arts I(2) and III) and presupposes (art II(1)), the variation in circumstances and terms may need to be reflected in a difference between the actual and the "normal" price. If the variation be significant, the difference between the actual and the "normal" price may well be substantial. The Brussels Definition, which provides a uniform international basis for determining the value of goods for duty, is intended for application to goods which may be imported in circumstances and upon terms which are almost infinitely various. In ascertaining the normal price, it is therefore necessary to postulate a notional sale of the goods, and to modify any actual sale of the goods to the importer by eliminating or adding circumstances and terms so that the resulting notional sale is consistent with the assumptions and presuppositions expressed in the Brussels Definition. The notional sale is, of course, artificial and its artificiality will appear the more striking as the circumstances and terms of the notional sale vary from the circumstances and terms of the actual sale. Although artificiality is inevitable if diverse importing transactions are to be brought to a common base, the postulates of the notional sale may seem in some cases to be quite unreal. This is such a case.

It is to be assumed that the Renault vehicles are imported by a buyer who is independent of Renault France and who buys the shipment "in the open market" (Article I(1)). The price which the notional buyer would pay is "presupposed" to be uninfluenced by "any commercial, financial or other relationship" with Renault France (art II(1)(b)), and to be "the sole consideration" for the purchase (art II(1)(a)). The assumptions and presuppositions which characterize the "open market" distinguish it from the real trading situation in which the subject shipment was sold. To ascertain whether the "open market" conditions would occasion an adjustment in the price actually paid, it is necessary to postulate a trading situation where there is no commercial, financial or other relationship between the seller and the buyer. In such a postulated trading situation, the buyer does not have the sole concession for the importation and sale of Renault vehicles, and he competes with others to buy those vehicles in "the open market" (or, to adapt the French text of the Convention, in circumstances of "full competition"). In such a postulated trading situation, the buyer is freed from any continuing obligations to Renault France (eg as to advertising or after-sales service) which would influence the price of the vehicles. Although the notional buyer is assumed to be entitled to market the vehicles which he buys under the Renault trade mark (art III), he does not have an exclusive right to the use of the trade mark; the seller (who may be assumed to be Renault France) is presupposed to sell the subject vehicles on the open market, at a price which does not reflect any obligation not to sell to others in the market or not to permit others to use the trade mark.

The trading situation which is postulated by the Brussels Convention may be conceded to be artificial, but the postulates are sufficiently clear to enable the statutory valuation to be undertaken. If the notional buyer were in competition with other importers of Renault vehicles, he would not undertake the same responsibility for, and incur the same costs of, advertising as Renault Australia now does. Advertising of the same kind would no doubt continue, or substantially continue, but its cost would necessarily be borne by the company which would benefit by the expenditure, viz, Renault France. Renault France, without an Australian subsidiary importer, would undertake the defence and development of the Australian market for Renault vehicles, deriving such assistance as it could from the unrelated importers and from the various dealers. Renault France would seek to recover the cost of its advertising in the price of the vehicles sold to the notional buyer. The Brussels Definition would therefore include in the "normal price" of each vehicle a proportion of that cost of advertising which, in the hypothetical trading situation, Renault France would bear.

This conclusion accords in principle with the conclusion which the courts of the United Kingdom, France and Germany have arrived at in applying laws which, it seems, are similar in concept to s 154. In Rolex Watch Co Ltd v Commissioner of Customs and Excise [1956] 2 All ER 589, the invoice price of Rolex watches imported into England by a sole concessionaire was uplifted to give a "normal price" Which reflected the cost of English advertising. Denning LJ (as he then was) said (at 591):-

"The invoice price, in so far as it reflects the international advertising, is reflecting the value of the goods, but the invoice price does not include the cost of the English advertising. I think that it ought to be increased so as to reflect the cost of the English advertising. It is only as a result of the English advertising, coupled with the international advertising, that the Rolex watches have the value which they have. Therefore (as the referee held), the value of the goods should include the appropriate sum to repay the cost of the advertising spent in making and maintaining the market."

It was no doubt right to say that Rolex watches only had the value that they had because of advertising, but the measure of uplift was not arrived at by enquiring whether the value of each watch was enhanced by a particular piece of advertising. The uplift was arrived at by "including the apporpriate sum to repay the cost of the advertising spent in making and maintaining the market". The unlift is required to reflect the assumption that the cost of advertising incurred in making and maintaining a market for brand goods is a cost which would be borne by the manufacturer of the brand goods and thus reflected in the purchase price paid by the notional buyer. The reasoning is clearly expressed by the Federal Finance Court of the Republic of West Germany, in a judgment (ref No VII 74/58S) delivered on 15 October 1959:-

"Brand advertising is, because of its contents, so strongly focused on an object, ie the branded item alone, and so impersonal in its methods, that it can be done by any firm, even one which is not involved in the marketing process of the article, and is therefore not part of the trading side of it at all, eg advertising agencies, etc. The effect of brand advertising always remains the same however, namely, expansion or maintenance of the market for the branded item and thereby for the manufacturer or trade mark owner. This is evident, for example, when a merchant active in the marketing process (of a branded article) retires from the distribution chain. The success achieved by his previous efforts in the area of brand advertising, remains as expansion or maintenance of the market for the branded article and therefore for the market of the manufacturer or trade mark owner. The merchant has merely taken over the marketing function of the manufacturer or trade mark owner, and without this there would be no point in the latter distributing their goods as branded goods. It is obvious that the economic equivalent of carrying out these guarantee and advertising functions must belong to the normal price of such goods, without considering whether the manufacturer or trade mark owner carries out these functions directly himself, or has them carried out by others, who to this extent take over his functions."

The court considered and adhered to these principles in the following year: judgment - ref No VII 40/60S delivered on 19 October 1960.

It does not follow, of course, that the sum actually expended on advertising by a sole concessionaire who imports branded goods furnishes with mathematic precision the amount which is to be allocated for uplifting the invoice price to the normal price. The facts of the case may, for example, show that the invoice price requires adjustment for reasons other than the recoupment of advertising expenditure, or there may be some expenditure which would not ordinarily be met by a manufacturer or trade mark owner. Or the hypothetical trading situation may require other adjustments which may diminish or offset the uplift for domestic advertising. In the Rolex case, Parker LJ reviewed a referee's assessment which attributed a proportion only of the advertising expenses as proper for inclusion in the normal price. He said ([1956] 2 All ER at 594):-

"To my mind, it is not in every case ... that advertising expenditure of this sort will result in an uplift; still less that it will result in an uplift arrived at by a purely mathematical calculation, applying the full amount of the advertising expenditure to the full amount of the purchases.... if the vendors themselves had borne the cost of advertising in this country, they would have sought to recover at least those costs in the price, as indeed they did with their international advertising, and, although there is no direct finding on the point, having regard to that very wide margin between seller's price and retail price in this country, it seems to me that they would have recovered such expenses. But, quite apart from that, the hypothetical buyers would surely say to themselves 'If the complainants, as sole concessionaires, can afford to pay X by way of invoice price and Y by way of advertising and still make a profit, then surely I can afford to pay X plus Y'. That may be oversimplifying the position, but I see no answer to it."

There may be an answer in some cases if the sole concessionaire is a subsidiary of the exporter and the invoice price has been inflated to direct the whole of the profit immediately into the hands of the exporter; but on the evidence before us that is not the present case. In the present case, the advertising expenditure was incurred in respect of various kinds of advertising which was, in the greater proportion, undertaken by Renault Australia at a national level to promote the Renault trade mark and Renault vehicles. Advertising of this kind, in the notional trading situation postulated by the Brussels Convention, would be undertaken by Renault France. We arrive at this conclusion because we infer that the actual advertising programme was the programme required to make and maintain the market and because, in the notional trading situation, the importer - the notional buyer - would have had no commercial justification for undertaking an extensive campaign to advertise the brand or trade mark. After all, an importer, whose interests are not safeguarded by an exclusive concession agreement, would sharpen competition against himself by extensive brand advertising.

The majority of the expenditure on advertising undertaken by the sole concessionaire of a brand product will usually be reflected in the normal price. The relevant enquiry is whether, in the absence of a sole concessionaire, the expenditure on advertising would be met by the manufacturer (or, in appropriate cases, the owner of the brand trade mark). The same conclusion was reached in France by the Court of Cassation in delivering its judgment on 4 November 1965 allowing an appeal by the customs authorities against the acquittal of one Bertola for understatement of value. The court said:-

"... for advertising expenses to be regarded as having been incurred in the interest of the foreign seller - whether in full or in a proportion which the parties must establish and, in case of disagreement, which the judge ruling on the facts must assess - it suffices for such expenses to have been incurred at national level by the sole distributor who has in fact undertaken to establish or maintain a market for the products and goods sold under the trade mark of the foreign supplier, in the latter's stead, without it being necessary to ascertain or establish that the distributor has derived any profit from such advertising."

We turn now to the specific heads of advertising expenditure incurred by Renault Australia in order to ascertain how much of that expenditure would have been met by Renault France if the goods imported had been sold in the circumstances assumed and upon the terms presupposed by the Brussels Convention. The parties have dissected this expenditure under various heads and, for reasons upon which we are not concerned to comment, the parties have agreed that some items be excluded from consideration in the calculation of an uplift upon the invoice price. Some items have been apportioned so that only a proportion has been excluded from consideration. Where the proportion has been agreed, we adopt it without comment. The questions for our determination relate to the disputed proportion of certain items which, in the applicant's submission, ought not to be taken into account at all or, in the case of some items, ought not to be taken into account to the extent which the respondent proposes. It is necessary to refer to these items seriatim.

Media Advertising

The applicant submits that there is a large proportion of this expenditure which should be excluded, for it is incurred for advertising which, though it contains the Renault "logo" or trade mark or contains a photo or other representation of a Renault vehicle, is calculated to facilitate recognition of the dealer's premises where the vehicles may be inspected and test driven. The test which is implicitly proposed in the applicant's submission is whether the primary objective of the advertising is to promote the trade mark or whether the primary objective is to draw attention to the places where Renault vehicles may be found for inspection and sale. An advertising agent whom the applicant called said that "the availability of the car for inspection is terribly important", and no doubt the inspection of the vehicle at the dealer's premises is a critical step in a purchaser's decision whether to buy. But in the postulated trading situation, this very factor would require advertising of the subject kind to be undertaken, and the manufacturer might reasonably be expected to ensure that it was. The test is not the purpose or objective of the advertising, but whether - the advertising clearly being desirable as an aid to marketing - the cost would be borne in the notional trading situation by the manufacturer who owns the trade mark. Perhaps the uncommitted importer, the notional buyer, might do some advertising of this kind to assist the dealers who buy from him; or perhaps the dealers might contribute a little more than they presently do to regional or national advertising. The respondent contends for the inclusion of 75 per cent of this expenditure, and in our view the proportion should not be less than this.

Co-operative Advertising

Advertising of this kind is in one respect distinguishable from media advertising. It is paid for by a fund to which the dealers contribute the major part, and which has a stronger orientation towards identifying dealers, their premises and services in local areas. In the notional trading situation, the respondent has assumed that Renault France would contribute less to this fund than the Australian subsidiaries contribute, and has excluded 75 per cent from calculation. That assessment appears, in our view, to be generous, but as no more is sought to be included we adopt 25 per cent for uplift purposes.

Brochures, Promotional Displays, Sales Promotion, Exhibitions, Competitions, Audience Testing, Research, Technical Costs and Miscellaneous

The respondent would exclude 75 per cent of these costs, and the applicant seeks to exclude 100 per cent. These costs are more closely related to the marketing activities conducted by dealers. Brochures are handed out by dealers; displays and exhibitions may be organized and staffed by dealers; sales promotions may include programmes "implemented within the dealer network". In the notional trading situation, however, Renault France would necessarily assume the cost of these activities to the extent to which the notional buyer and the dealers would not defray the costs which the Australian subsidiaries now meet. Twenty five per cent of these costs is a conservative estimate.

The costs of competitions, testing, research, technical costs and miscellaneous are costs which the dealers would not bear, and there seems to be little reason for postulating that wholesale importers operating in a fully competitive market, uncommitted in any way to their sellers (except for the payment of a price) would contribute substantially to these kinds of expenditure, and one would certainly not expect that such freelance competitors would contribute 75 per cent.

We therefore decline to reduce the respondent's inclusion of components under these heads in the assessment of the value for duty.

Signs

The Australian subsidiaries contribute to the cost of erecting signs on dealers' premises. These signs no doubt assist in the marketing of Renault vehicles, and they are, one would think, a significant means of bringing potential buyers to the place where they may inspect the vehicles. The expense of assisting the dealers in this way is a normal expense which might be borne - at least to some extent - by a party whose interests consist not so much in selling Renault vehicles by wholesale in competition with other wholesalers, but in promoting the sales of all Renault vehicles irrespective of the wholesaler who supplies them to the dealer. It is reasonable in the notional trading situation to attribute at least some cost of signs to the seller who sells to the wholesaler. Twenty five per cent of the cost is sought for inclusion in the value for duty and we allow this percentage as being well within a reasonable margin.

Before calculating the appropriate percentages of uplift upon the findings we have made, it is necessary to refer to three further matters.

First, the applicant proposes a discounting of the uplift figure to reflect the proportion of total unit sales made through company-owned dealerships. We see no reason supporting such a discounting. The price paid by the notional buyer in the notional trading situation would be quite unaffected by Renault France's ownership of retail dealerships.

Second, it is agreed between the parties that the uplift should be discounted by an agreed percentage to account for the components of the assembled vehicles which are domestically produced. As that agreement leads us to refrain from considering questions which might have been raised with respect to the effect of domestic assembly and part production of brand goods, the Tribunal reserves these questions for consideration if they should in future be canvassed before it.

The third matter relates to the use of the invoice prices of the subject shipment as the basis for the uplift calculation. The parties agreed that the invoice prices, when uplifted by the appropriate percentage, will correspond with the normal price. We do not question that agreement except to note that the uplifting of the invoice price occasions an increase in duty, the burden of which falls upon the notional buyer (art I(2)(c)). It may be thought that the burden of increased duty would affect the price which the notional buyer would be prepared to pay and that, by some kind of circular adjustment, the normal price once arrived at must be treated as provisional only and liable to downward adjustment to compensate the notional buyer for the increased duty. Such a downward adjustment would result in the duty being borne in part by the seller and such a hypothesis is not consistent with the Brussels Definition.

The mathematical calculations which, in the light of our findings, we now make are set out in the sets of corresponding figures provided by the parties to the Tribunal after the close of hearing. Most of those figures are drawn from documents or evidence in respect of which we made an order under s 35(1)(b), and it is unnecessary to reproduce them in these reasons. We accept the agreed figures, noting that the parties agree that the combined Renault and Peugeot figures supply the appropriate bases for calculation. We determine that the appropriate percentage of uplift is 1.84 per cent. The result is that the value for duty should be $110,485 upon which duty is to be assessed at 35 per cent.

The applicant, noting that the respondent contended for an uplift figure of 1.84 per cent, addressed an argument to us which compared the relative situations of an Australian manufacturer who advertises in Australia, and a foreign manufacturer who advertises in Australia or who procures its subsidiary to do so. The goods of the foreign manufacturer bear duty upon the amount expended on domestic advertising, the goods of the Australian manufacturer do not. As it seems to us, that result is intended by the Brussels Definition which would bring to duty the costs of the foreign manufacturer in establishing and maintaining his market in the importing country. The Brussels Definition intends to prevent the foreign manufacturer from avoiding the intended liability by notionally annihilating the particular arrangements by which he may procure a company within the importing country to meet the costs of establishing and maintaining his market in competition with the domestic manufacturer. Whether that conclusion be just is not a relevant consideration for this Tribunal.

In the result, we determine the amount of duty at $38,669.75.

Decision

The Tribunal decides to review the demand made by the Collector for the payment of customs duty amounting to $38,920.57 which Renault (Wholesale) Pty Ltd paid under protest and which was paid in respect of certain ckd cars referred to in warrant No 007161 and determines that the proper duty payable in respect of those goods is $38,669.75.

D C PEARCE

BARRISTER