Review of decision to publish countervailing duty notice in respect of certain brandy exported from France

 

12 July 2007

Certain Brandy imported from France – Countervailing Duties – Review of a Ministerial Decision under section 269ZZK of the Customs Act 1901 (the Act)

  1. By notice dated 7 March 2007 published in Commonwealth of Australia Special Gazette No S 44 of Thursday 8 March 2007, the Minister for Justice and Customs declared that section 10 of the Customs Tariff (Anti Dumping) Act 1975 applied to brandy imported from France after 28 November 2006.  In so doing, the Minister accepted the recommendations of the Australian Customs Service (Customs) that the production of the brandy concerned was being subsidised by the European Community authorities, that the imports of subsidised brandy were causing material injury to the Australian industry producing like goods and that the subsidy was countervailable.  These recommendations were made subsequent to an application for the publication of a countervailing duty notice being lodged by Angoves Pty Ltd (Angoves), an Australian winemaker and distiller.  The report of the Customs inquiry into the matter and its recommendations to the Minister are contained in Trade Measures Report No 117 – Certain Brandy from France (TMR 117).
  2. I received applications for review of this decision from Pernod Ricard Pacific (PRP) and also from the Fosters Group Ltd (Fosters).  Both PRP and Fosters are interested parties in terms of the definition in section 269ZX of the Customs Act 1901 (the Act) in that they are persons likely to be directly concerned with the importation into Australia of the goods the subject of this review.  I was satisfied that both applicants established that there were reasonable grounds to warrant the reinvestigation of various findings in TMR 117 and accordingly I published a notice under section 269ZZI of the Act stating that I proposed to conduct a review of the decision.  That notice was published in the Australian Financial Review newspaper on 18 May 2007.  In the course of the review, I received submissions from the European Commission and from a representative of the Australian industry.
     

    Application by Fosters

  3. Fosters first says that Customs should have exercised the power available to it under subsection 269TC(1) of the Act to reject the application by Angoves, and that there were grounds to do so.  In particular they say that bottled brandy and bulk brandy are different products, and that investigations regarding the two products should have been conducted separately, as has been the case in past examinations of the brandy industry.
  4. Subsection 269TC(1) of the Act provides as follows:
    1. (1)  The CEO shall, within 20 days after Customs receives an application under subsection 269TB(1) in respect of goods, examine the application and, if the CEO is not satisfied, having regard to the matters contained in the application and to any other information that the CEO considers relevant:

      (a)   that the application complies with subsection 269TB(4); or
      (b)   that there is, or is likely to be established, an Australian industry in respect of like goods; or
      (c)   that there appear to be reasonable grounds:
      (i)    for the publication of a dumping duty notice or a countervailing duty notice, as the case requires, in respect of the goods the subject of the application; or
      (ii)   for the publication of such a notice upon the importation into Australia of such goods;

      he or she shall reject the application and inform the applicant, by notice in writing, accordingly.
  5. The first issue is whether the Angoves application complied with the requirements of subsection 269TB(4).  That subsection provides:

    (4)  An application under subsection (1) or (2) or a notice under subsection (3) withdrawing such an application must:
        (a)   be in writing; and
        (b)   be in an approved form; and
        (c)   contain such information as the form requires; and
        (d)   be signed in the manner indicated in the form; and
        (e)   in the case of an application under subsection (1)—be supported by a sufficient part of the Australian industry.

    The application lodged by Angoves on 22 June 2006 was in writing in the approved form.  It also contained the information that the form required and was signed in the matter indicated by the form.[1]  The evidence showed that Angoves was the largest producer of brandy in Australia, accounting for around 50% of domestic production.  Tarac and Hardys, which supported the application accounted for almost all the remainder of domestic production.  Accordingly, the application was supported by a sufficient part of the Australian industry in terms of subsection 269TB(4) of the Act.
  6. Central to Fosters’ submission is the contention that there are clear and distinct differences between bulk and bottled brandy, including in relation to volumes on import, alcohol content, production, customers and markets, pricing and competition and marketing.  Fosters say that these differences mean that any evaluation of the Australian brandy market must distinguish between bottled and bulk brandy and any analysis must be conducted separately in recognition of those differences.  Whilst it may readily be accepted that these differences exist between bulk and bottled brandy, that did not in this case furnish a reason for Customs to reject the application.  As indicated, the application complied with the technical requirements of the Act as to form and content, it demonstrated that there was an Australian industry producing like goods, being brandy in bulk or bottled form, and it presented a case that there were reasonable grounds for the publication of a countervailing duty notice.
  7. Fosters’ second submission was that Customs did not correctly identify like goods produced by the Australian industry.  They reiterate that bulk brandy and bottled brandy are not sufficiently similar products, having different alcohol contents, lacking commercial interchangeability, and being used for different purposes – bulk for blending and bottling and bottled brandy for sale to consumers.  Customs stated that the principal difference between bulk and bottled brandy was the higher alcohol content of the former, and noted that this was transitory, as during the bottling process it would be diluted to the alcoholic strength permitted to be marketed in Australia.  I am not satisfied that Fosters has made out a sufficient case for not treating bulk and bottled brandy as like products, albeit that the products have separate end uses.
  8. Fosters’ third submission is that Customs has defined the Australian industry too narrowly, and that it should include bottlers of brandy.  They say that the process of bottling involves the creation of an article that is physically and commercially distinct from its parts or ingredients.  Customs published an issues paper on this matter on 7 August 2006.  Angoves, Tarac and Hardys submitted that blending and bottling could not be characterised as part of the production process, because the brandy had been produced well before those processes were undertaken.  The bottling did not change the intrinsic character or vital qualities of the brandy.[2]   Maxxium Australia Pty Ltd and Fosters noted that the costs associated with blending and bottling brandy are a significant component of the cost of the finished product.  They also noted that bottlers were subject to a complex and onerous regulatory scheme administered by Customs and the Australian Taxation Office and that this would not be necessary if the bottling activity were not substantial.
  9. In relation to the suggestion that the complex regulatory framework made the process of bottling substantial, Customs observed that this was not a matter going to the substantiality of the processes carried out by the bottlers, but rather was due to the high tax nature of brandy, a characteristic it shares with other alcohol products.  In relation to blending operations, Customs observed that all the blending operation entailed was the mixing of brandy stock, the addition of water and, in some instances, caramel for colour.  The bulk brandy imported from France remains French brandy after it is bottled.
  10. I agree with Customs’ analysis.  The Macquarie Dictionary defines “manufacture” as the making of goods either manually or by machinery.  Brandy is made from the distillation of wine grapes.  On one view, bottling cannot be said to be a manufacturing process as it does not result in the making of anything.  The manufactured product, brandy, already exists, and all that is being done is that it is being placed in containers for sale.  Similarly, one of the definitions of “substantial” is “relating to the essence of a thing; essential, material, or important”.  Bottling does not change the essence of the brandy – it has no effect on the brandy at all.  The blending that occurs prior to the bottling process also cannot be viewed as changing the essence of the product.  Brandy with high alcohol content is no less brandy when it is diluted to lower the alcohol content.
  11. Fosters then makes a number of submissions about the nature of the aid schemes established by European Union regulations.  Before considering their submissions, it is necessary to set out in general terms the nature of the European schemes under review.  Primary distillation aid, available under article 29 of European Council Regulation (EC) No 1943/1999, sets a legislated buy-in price for wine.  Secondary distillation aid, available under the same article, takes the form of an optional direct payment to distillers to cover storage costs of the distilled product.  Compulsory distillation aid provides for direct aid in respect of product volumes distilled, or, alternatively, for the option of delivering the product to a Government agency to receive a guaranteed price.
  12. Fosters say that primary distillation aid has a neutral effect on input for brandy producers as they are required to pay an artificially inflated price for wine.  They also say that it is has not been established that the aid has been passed through to exported brandy, and therefore these amounts should be excluded from the calculation of countervailing duties.
  13. In relation to secondary aid, Fosters claim that it is examined on the basis that brandy is held in storage for 12 months, whereas a realistic commercial time frame for storage in oak is six months.  Again, it is stated that Customs has not established the extent to which this storage aid has been passed through to exported brandy.
  14. In relation to compulsory distillation aid Fosters say it is not countervailable because the by products from the wine making process cannot be used in making brandy.  Even if it could be considered as a countervailable subsidy, Customs has treated the aid as cumulative rather than as alternatives which apply to different source materials for the distillation process.
  15. In relation to the first of these points, TMR 117 Customs stated:

    It is clear to Customs that any distiller who claims the aid is better off than a distiller who did not claim the aid.  Moreover, there would not seem to be any motivation for a wine grower to sell their productive input for distillation at less than the set price and that a distiller would not be able to conclude contracts other than at the set price.  Customs is satisfied that a benefit is conferred to the distilled goods under the operation of the intervention scheme.[3]
  16. I agree with this analysis, and I am not persuaded that the effect of the primary aid is only to offset the cost of the wine they purchase for distillation.  The issue of pass through is dealt with in the qualitative analysis presented on page 34 of TMR 117.  As Customs indicates, the price of wine spirit would be lower but for the presence of the subsidy payments.  If the distiller did not pay the set price for the wine spirit and receive payments of aid, the stated purpose of the scheme, as set out for example in paragraph (38) of the Preamble to Commission Regulation (EC) No 1491/1999 of 27 May 1999 [4] would be frustrated.
  17. In relation to secondary aid for storage of wine spirit, the regulations governing the payment of this aid are set out in article 64 of Commission Regulation (EC) No 1625/2000.[5]  The regulation specifies that secondary aid may be paid for at least six months, but at most 12 months from 1 December in each wine year.  The regulation further provides that distillers may terminate storage as of 1 June provided the Commission so authorises in the light of the situation in the sector. 
  18. Fosters’ submission on the matter of storage time might be valid in an industry where market forces were operating free of a regulatory framework of a kind that the EC regulations create.  But as is obvious from a reading of Commission Regulation (EC) No 1625/2000 storage aid is paid for at least six months – the minimum time that brandy is required to mature in oak – but no more than 12 months.  The distillers, however, are not at liberty to dispose of product in storage at the end of six months unless the Commission authorises this to be done.  I do not consider a case has been made out for reducing the aid amount of €0.153 per litre of absolute alcohol (LAL) by at least 50% to reflect a more realistic storage period.
  19. Fosters’ third point is similar to a submission made by the European Commission that because wine lees and grape marc cannot be used in the production of brandy, compulsory distillation aid is not countervailable.  Customs dealt with this matter in TMR 117 as follows:

    Customs maintains the satisfaction that this subsidy is paid with the express intention of discouraging over pressing of grapes, and provides French wine-makers with a disposal option for by-products that, although not directly relevant, is not available to Australian producers.  In a situation where the [brandy production] operation is integrated, the French brandy producer is not only given the benefit paid on the brandy production (from the wine produced) but in addition has the benefit of also being subsidised for the disposal of the by-products (from the wine produced that made the brandy).[6]

    I concur in this assessment.
  20. Fosters next says that Customs has used internal financial data provided by parties during its investigation, and that the use of such data is highly questionable without a comprehensive and accurate understanding of the accounting treatment of costs and revenues relevant to the derivation of sales.  In my view, there is no reason to doubt the accuracy of the data relied upon by Customs in its price undercutting analysis.  Nor is there anything unusual in relying on data of the kind supplied by various parties that were involved in the investigation.  In relation to the AC Nielsen data about retail brandy prices which was provided by Fosters, that data reflects sales at the retailer to customer level, not the manufacturer to retailer level, with which Customs was concerned in this investigation.
  21. Fosters say that changes in the market are attributable to the actions of Coles and Woolworths, major retail chains that occupy a dominant position in the liquor market.  They say that the strategy of both major retailers has been to increase the focus on controlled and private labels to drive profits at the expense of manufacturer owned brands.  By dealing directly with the manufacturer, the retailers can drive down sourcing costs.  Further, where they have their own brands, they can confer advantages on them such as prime shelf position and inclusion in their promotional programs.  However, these activities have not arrested the decline in the overall market for brandy over the period, or the loss of market share experienced by the Australian industry.
  22. Finally Fosters say that Customs erroneously concluded that subsidised brandy imported from France would be likely to cause injury to Australian industry in the future.  They draw attention to a press release from EU Agriculture Commissioner Mariann Fischer Boel stating that aid schemes in relation to distillation and storage would be abolished in legislation that would be brought forward in January 2007.  Customs dealt with this matter by indicating that there have been calls for reform of the European Common Agricultural Policy for a considerable period of time and those changes could only be made on the basis of consensus within the European Community.[7]  Customs concluded that the prospect of the aid schemes being removed was uncertain and that in any event, future exports of brandy would be likely to benefit from existing schemes for at least the next two years.[8]  I agree with Customs’ assessment and see no reason for this issue to be reconsidered.
  23. I conclude that Fosters has not established that there are reasonable grounds for recommending to the Minister that the findings in TMR 117 be reinvestigated.
     

    Application by PRP

  24. PRP’s application covers many of the same issues as the Fosters application.  PRP say that they import certain brandy from France at a price that is well above the non-injurious price that Customs has determined.  However, no evidence of this was provided to me, nor could I find in the relevant Customs file[9] any material that would support that claim.
  25. PRP also says that Customs had insufficient information to demonstrate that distillation aid under the relevant European Commission (EC) rules was a subsidy that could be made subject to countervailing duties.  However, no convincing reason is advanced for this claim and a plain reading of the relevant European Commission rules leaves me in no doubt that subsidies are paid to distillers as part of a scheme to ensure that otherwise unviable wine producers are able to continue in business.
  26. PRP makes a similar assertion in relation to material injury to Australian industry namely that the Minister had insufficient information on which to determine that there had been injury.  No compelling reasons are advanced for this assertion.  PRP in common with Fosters claims that the AC Nielsen data about retail sales contradicts Customs’ conclusions about transactions at the supplier to retailer level.  However, as noted above, the retail price data is concerned with the retailer to consumer level of transaction, not the manufacturer/supplier to retailer level.  I consider that PRP has not established that there are reasonable grounds to recommend to the Minister that the findings in TMR 117 be reinvestigated.
     

    Submission by the European Commission

  27. The EC in its submission reiterates a point it made on a number of occasions throughout the investigation namely that the purpose of the aid scheme was to support the winegrowing industry, and that the distillers did not benefit because they had to pay a fixed price for their inputs.  I have dealt with these issues in paragraphs 11 to 19 above and it is not necessary to repeat what is there said.
  28. The EC states that in its view, the Statement of Essential Facts (SEF) of 30 October 2006 and the Preliminary Affirmative Determination (PAD) of 8 November 2006 did not constitute an appropriate disclosure of the facts as required by article 12.8 of the Agreement on Subsidies and Countervailing Measures.  That article provides:

    The authorities shall, before a final determination is made, inform all interested parties of the essential facts under consideration which form the basis for the decision whether to apply definitive measures.  Such disclosure should take place in sufficient time for the parties to defend their interests.

    The EC says that in its PAD, Customs explicitly acknowledged that its final assessment had not yet been made, and accordingly therefore there was no document outlining the totality of the definitive conclusions available to interested parties.  It is not surprising that Customs stated in the PAD that it had not completed its final assessment as a PAD is just that, a preliminary determination that may change.
  29. This submission must be rejected.  Section 269TDAA of the Act requires Customs to publish a SEF within 110 days of the initiation of the investigation.  Section 269TD enables a PAD to be made no earlier than 60 days after the commencement of the investigation.  Commonly, insufficient information is available to enable a PAD to be made as early as 61 days into the investigation, and in this matter the PAD was published after the SEF.  The SEF and the PAD in this matter are not dissimilar documents and give quite a clear indication of the trend of Customs thinking on the evidence that was placed before it. 
  30. The report itself does not depart substantially from the SEF or the PAD.  The investigation was clearly conducted in accordance with the Act and interested parties such as the EC had ample opportunity to defend their interests as contemplated by the Agreement on Subsidies and Countervailing Measures.  Customs received very little cooperation from brandy producers during the investigation.  As TMR 117 states:

    Customs also sent questionnaires to all known exporters of brandy from France but did not receive any completed (or even partially completed) responses.  Most parties contacted also declined to provide any other information to the inquiry.  The exporter Camus Cognac, the Federation of Wines and Spirits Exporters of France and the Federation Francaise Des Brandies provided limited information and this was placed on the public record.[10]

    Submissions by Roger D Simpson and Associates Pty Ltd
  31. Roger D Simpson and Associates Pty Ltd acting on behalf of the Australian industry made two submissions to me outlining the reasons they considered that the findings contained in TMR 117 should be left undisturbed. 
  32. It is unnecessary for me to refer to these submissions as it is my intention to recommend to the Minister for Justice and Customs, in accordance with subsection 269ZZK(2) of the Act, that the findings in TMR 117 should be affirmed.

Mark A Zanker
Trade Measures Review Officer

 

1 See file C06/11065 ff 1-166

2 See Statement of Essential Facts No 117 (SEF 117) p 14 and TMR 117 at p 17

3 TMR 117 at pp 31 and 32

4 Paragraph 38 states “certain parts of the potable alcohol sector constitute an important traditional outlet for wine distillates and other wine based products; there should therefore be Community support for distillation of table wine and wine suitable for yielding table wine to supply this market, in the form of a primary aid paid for distillation of such wines and a secondary aid for storage of the resulting distillate”.  See Official Journal of the European Communities L179 of 14 July 1999.

5 Official Journal of the European Communities L194 of 31 July 2000 at pp 45-99

6 TMR 117 at p 40

7 TMR 117 p 71

8 In a speech given to the Agriculture Committee of the Portuguese Parliament in Lisbon on 24 May 2007 Commissioner Boel again indicated her support for abolishing distillation subsidisation, stating that the support was “dead end” and indicating an intention to bring forward legal proposals on 4 July 2007.  However, this announcement does not make it any more likely that the distillation aid schemes dealt with in this case will be abolished in the foreseeable future.

9 C06/13872

10 TMR 117 at p 10