Report for the Hearing delivered in Joined Cases 277 and 300/85

I — Facts and procedure

The age of electronic typewriters began in 1978 when the first model of an electronic typewriter manufactured by Olivetti was launched on the market. Until then, the market had been dominated by typewriters of the traditional variety, that is to say mechanical and later electromechanical typewriters.

The spectacular breakthrough achieved by the new product completely overturned the structure of the market in typewriters. Within a very short time sales of mechanical and electromechanical typewriters plunged to the lowest level ever recorded, whilst sales of electronic typewriters soared.

In 1982 European manufacturers of electronic typewriters (Olivetti, Olympia and Triumph-Adler) began to feel the evergrowing pressure exerted by Japanese competition which, in their view, was undercutting prices. According to the European manufacturers, Japanese companies were exporting ever-increasing quantities of electronic typewriters at dumping prices in order to take over the European market in that product and to drive out European undertakings.

In order to contend with what they call the Japanese dumping conspiracy, European manufacturers formed an association known as the Committee of European Typewriter Manufacturers (hereinafter referred to as Cetma) which, on 15 February 1984, submitted a complaint to the Commission requesting the latter to initiate an antidumping proceeding against Japanese exporters.

The proceeding initiated by the Commission on the basis of Council Regulation (EEC) No 2176/84 of 23 July 1984 on protection against dumped or subsidized imports from countries not members of the European Economic Community (Official Journal 1984, L 201, p. 1) culminated in the adoption by the Commission of Regulation (EEC) No 3643/84 of 20 December 1984 (Official Journal 1984, L 335, p. 43). That regulation imposed a provisional antidumping duty on imports of electronic typewriters manufactured by a number of companies including Brother Industries Ltd, Canon Inc. (hereinafter referred to as Canon), Sharp Corporation, Silver Seiko Ltd, Tokyo Electric Company Ltd (TEC), Tokyo Juki Industrial Company Ltd and Towa Sankiden Corporation, and terminated the proceeding with regard to Nakajima All Co. Ltd on the ground that the dumping margin established for that company was negligible.

On 19 June 1985 the Council adopted Regulation (EEC) No 1698/85 imposing a definitive antidumping duty on imports of electronic typewriters originating in Japan (Official Journal 1985, L 163, p. 1), which imposed a definitive antidumping duty on all the undertakings that were already subject to provisional antidumping duty. For Canon, the duty was fixed at 35%. That measure was contested by all the parties concerned.

By Regulation (EEC) No 113/86 of 20 January 1986 (Official Journal 1986, L 17, p. 2), the Council declared Regulation No 1698/85 inapplicable to Tokyo Juki as from the date of its entry into force.

By application lodged at the Court Registry on 9 September 1985, Canon France SA, Canon Rechner Deutschland GmbH and Canon (UK) Ltd, Canon's subsidiaries in the Community engaged in the importation of electronic typewriters, brought an action for the annulment of Regulation No 1698/85 in so far as they were affected by it.

Canon brought an action on 4 October 1985. On 7 October 1985, Canon, together with the other applicants, lodged an application for the adoption of interim measures in which it sought an order suspending the application of that regulation to it until the Court had given judgment on the main application. The interlocutory application was dismissed by order of the President of the Court of 18 October 1985.

By order of the Court of 11 November 1985, Cases 277/85 and 300/85 were joined for the purposes of the proceedings and the judgment.

By order of 23 October 1985, the Court granted the Commission of the European Communities leave to intervene in support of the defendant's conclusions.

By order of 19 February 1986, the Court granted the Committee of European Typewriter Manufacturers (hereinafter referred to as Cetma) leave to intervene in support of the defendant's conclusions.

On hearing the Report of the Judge-Rapporteur and the views of the Advocate General, the Court decided, in accordance with Article 95 (1) of the Rules of Procedure, to assign the case to the Fifth Chamber and to open the oral procedure without any preparatory inquiry. However, it requested the parties to provide it with certain information and to answer a number of questions. The parties complied with that request within the prescribed period.

II — Conclusions of the parties

Canon, Canon France SA, Canon Rechner Deutschland GmbH and Canon (UK) Ltd claim that the Court should:

The Council contends that the Court should:

The Commission of the European Communities and Cetma support the Council's conclusions and contend that the applicants should also be ordered to pay the costs incurred by them in their capacity as interveners.

III — Submissions and arguments of the parties

A — Submissions and arguments specific to these joined cases

The applicants (hereinafter referred to by the collective designation Canon) seek the annulment of Regulation No 1698/85 on the ground that the dumping margin was miscalculated and injury was incorrectly assessed.

1. Breach of the basic duty to make a fair comparison between the normal value and the export price; errors in the calculation of the normal value; errors in the calculation of the export price

Canon considers that the method used by the Commission to compare the normal value and the export price was totally distorted and entirely inconsistent with the requirement of a fair comparison at the same level of trade, in accordance with Article 2 (9) of Regulation No 2176/84.

According to Canon, the Commission should have based the normal value on the prices charged by Canon to its Japanese distribution company. Failing that, the Commission should have constructed the normal value or based it on prices charged in a third country. A proper consideration of the facts would have shown that the prices charged by Canon to Canon Sales Company (hereinafter referred to as CSC) were fair and constituted a reliable basis for calculating the normal value. But if that were not the case, the normal value should have been based on the export price to third countries, or should have been constructed in accordance with Article 2 (3) of Regulation No 2176/84, which provides for recourse to such methods if domestic prices are not fixed in the ordinary course of trade. In taking as a basis for its calculation the prices at which the related selling company resold the goods, the Commission infringed the regulation and took a further step away from the ex-factory level, which rendered the calculation of the normal value more complicated and more artificial. That method is of profound importance inasmuch as it leads to the calculation of a much higher normal value because of the combined effect of two factors, namely the higher price resulting automatically from every movement along the commercial chain and the small number of deductions allowed by the Commission.

A further reason which should have induced the Commission to construct the normal value for all the electronic typewriter models taken into consideration lies, according to Canon, in the applicant's small turnover from domestic sales. Exports of the six models investigated by the Commission during the reference period amounted to 49534 units, whereas domestic sales were restricted to two models and were negligible (362 and 330 units respectively). Canon challenges the attitude taken by the Commission, which itself fixed the threshold below which sales are to be disregarded at a level of 5% and made the relevant calculations on the basis not of a comparison between total sales abroad and total sales on the domestic market but of a model-by-model comparison.

In Canon's view, the use of export prices to third countries, for instance the United States, would have yielded less artificial results.

The Commission also departed from the correct approach for calculating the normal value in cases where, in the absence of domestic prices, it should have constructed the normal value. It infringed both Article 2 (3) (b) (ii), which provides for the use of a reasonable margin of profit, and Article 2 (9), which requires that the interpretation of the first mentioned provision should not be inconsistent with the aim of a proper comparison.

According to Article 2 (3) (b) (ii), the constructed value should be based on the costs of production plus the overheads and the profit.

The 47% profit margin attributed to Canon by the Commission was calculated on the basis of Canon's very small domestic sales. The use of domestic sales which were so small is all the more dubious as any other approach would have yielded a much lower profit margin.

Moreover, contrary to its previous practice, as illustrated by the regulation imposing a provisional duty on imports of cotton yarn originating in Turkey (Official Journal L 347, 3.12.1981, p. 19), the Commission took into account, as overheads, not overhead expenses attributable to exports but those incurred in connection with any sales on the domestic market.

With regard to the use of a reasonable profit margin, Canon considers that Regulation No 2176/84 does not require the Commission to use a profit corresponding to the profit made on domestic sales of the same product. It would have been far more appropriate for the Commission to rely, as it could have done, on sales of products in the same general category, that is to say office equipment. This would have avoided the unfairness resulting from the small and special nature of the electronic typewriter sector of the Japanese market. Those sales reveal a much lower profit margin. The practice hitherto followed by the Commission also reveals that the profit margins established did not exceed 10%. In any event, the profit margin used by the Commission was obviously incorrect inasmuch as, by subtracting the costs of Canon and CSC from CSC's price to dealers, the Commission failed to take into account the actual costs borne by CSC in selling electronic typewriters. The particularly heavy advertising costs (26% of turnover) were disregarded, with the result that the profit was substantially overstated.

A gross and aberrant result of the Commission's approach is that, once it had decided to base the normal value on the prices of Canon's related distributor in Japan, the adjustments made to those prices in order to compare them with the export prices inevitably produced a massive and artificial dumping margin which in no way satisfied the requirement of a fair comparison.

The Commission considered that claims for allowances designed to permit a fair comparison could not be accepted unless they satisfied a twofold criterion: (a) the claims had to relate to an allowance expressly provided for by Article 2 (10); and (b) those allowances had to be very strictly interpreted by the Commission.

The Commission's approach is unfair and there is no textual basis for it. The problem, the existence of which is denied by the Commission, has been identified and dealt with in the United States, whose law provides that deductions on the normal value side of the equation must be proportionate to deductions, on the export price side, of a selling subsidiary's overhead expenses.

Finally, Regulation No 2176/84 may authorize the Commission to refuse to make allowances for differences in overheads and advertising costs on the domestic market and the export market, but it does not permit those costs to be deducted from the export price where they are not also deducted from the normal value. Contrary to the Commission's opinion, Article 2 (10) (c) is designed solely to prevent the exporter from requesting an allowance in order to eliminate any differences in its overheads between domestic sales and export sales. The Commission's approach, however, serves not to make an allowance for the difference but to overinflate it.

On the question of allowances, the Commission wrongly gives Article 2 (10) (c) a very narrow interpretation. Moreover, even if all the overheads not directly related to a sale are excluded, it must be acknowledged that, where the sole activity of a domestic company is selling, all of its expenses by definition constitute expenses directly related to sales. The Commission's assertion that the only differences in terms and conditions of sale which justify an allowance being made are differences specified in contracts of sale is inconsistent with the actual wording of Article 2 (10) (c), which includes commissions or salaries paid to salesmen amongst the differences justifying an allowance.

The Commission is also wrong in considering that Article 2 (9) and (10) permit no allowance to be made in order to correct differences in the level of trade. That approach renders Article 2 (10) (c), according to which allowances reflecting differences in the level of trade are permitted in so far as no account has been taken of them otherwise, utterly meaningless.

Although the most controversial aspect of the measures adopted by the Commission was the calculation of the normal value, the Commission's methodology concerning the calculation of the export price was not perfect either.

The Commission systematically constructs the export price where there is a link between the exporter and the importer. In the first place Article 2 (5) of the GATT Anti-Dumping Code indicates that the construction of the export price should not be a routine matter. Secondly, it cannot be argued that the prices charged by an exporter to a related importer may not be used as export prices for the purpose of establishing the existence of dumping, given that such prices are now recognized, after scrutiny, as an acceptable basis for customs valuation. An argument of that kind is all the more astonishing as those prices are audited for income tax purposes in both the exporting country and the importing country. Thirdly, national tax authorities in the Community and in Japan are vigilant in checking intra-group payments, with the result that unlawful transactions are challenged at once.

Amongst many other legal and factual errors, reference should be made to the deduction, on the export price side of the equation, of advertising expenses paid directly by Canon in connection with the launching of electronic typewriters in Europe. It was wrong to allocate the full amount of those expenses to the specific models sold in the countries concerned during the investigation period.

The Council makes the preliminary observation that, as the applicants themselves have acknowledged, the application by Canon in Case 300/85 is substantially identical to the application by its European subsidiaries in Case 277/85. If Canon had wished to take advantage of an extra period in which to submit more detailed arguments, it would have been open to it to submit a single application in the name of the Japanese parent company. The applicants in Case 277/85 have railed to adduce any reason whatever for submitting a separate application.

Accordingly, the Council points out that in Case 277/85 it relies on the same submissions as it made in Case 300/85, and contends that, in any event, the applicants in Case 277/85 should be ordered to pay the costs in those proceedings since those costs were unnecessarily and unreasonably incurred.

In response to Canon's arguments regarding the treatment of domestic sales between associated companies, the Council takes the view that it was manifestly reasonable for the Commission to consider that the prices involved in those sales did not correspond to prices charged in the ordinary course of trade and that it was for the undertakings concerned to prove the contrary.

It is untrue that the Commission's practice is always to disregard prices between related companies. That is shown by the case of Canon itelf, in which the normal value of the products was determined on the basis of the prices paid to Canon's sales company not only by independent distributors but also by distributors associated with Canon.

The Council goes on to state that Regulation No 2176/84 does not require the Commission, if it does not regard the prices between associated companies as prices paid in the ordinary course of trade, to apply either the method of determining the comparable price of the like product exported to a third country or the method of determining the constructed value. Such a solution runs counter to the express terms and the structure of Article 2 (3) of the regulation, and indeed to the very nature and purpose of antidumping legislation. Article 2 (3) (b) provides that the methods referred to therein are to be used when there are no sales of the like product in the ordinary course of trade on the domestic market of the exporting country. Moreover, Article 2 (3) clearly establishes a hierarchy of methods for determining the normal value, starting with the method laid down in Article 2 (3) (a), which involves the use of the price paid for the product on the market of the exporting country. Since the very essence of dumping is to sell a product at a lower price on the export market than on the home market, it would be absurd to ignore sales on the domestic market when there are such sales.

Nor is it true that the Council permits the normal value to be based on the prices charged by persons other than the exporter. In this case, the comparable prices actually paid in the ordinary course of trade are the prices at which the Canon group itself sold its products in Japan to unrelated buyers.

The Commission was obliged to use the export prices in third countries only where there were no sales of the like product in the ordinary course of trade in the country of origin or where such sales did not permit a proper comparison to be made. In this case, however, it cannot be said that there were no comparable prices actually paid in Japan in the ordinary course of trade; such prices were paid, namely the prices at which the Canon Group sold its products in Japan. Taking those prices into account in no way constitutes a new doctrine nor does it reflect a search for higher and higher prices.

A comparison of sales on a model-by-model basis is justified by the fact that, in view of the substantial differences in the specifications of the various models, each model had to have its own normal value. That comparison showed that sales of the models in question largely exceeded the 5% threshold. Moreover, that threshold is not very important, as its sole purpose is to determine the choice of one or other of the methods of calculating the normal value, which should not result in substantially different dumping margins.

The use of the export price for the United States market could not be considered, first of all because it was possible to use prices charged in the ordinary course of trade in the exporting country, and secondly because exports to the United States would probably have been to related importers, with the result that it would have been necessary to construct, for a third country, an export price to be used as the normal value.

With regard to the allegation that, in establishing the normal value, the Commission failed to deduct the distributor's profit margin, the Council submits that the purpose of constructing the normal value is to arrive at a value which is as close as possible to that which would reflect the price payable in the ordinary course of trade on the domestic market. Such a price would clearly include the profit made by a sales department or an equivalent sales company.

Canon's argument to the effect that the selling, administrative and other general expenses should not be included in the normal value would lead to a very different result, depending solely on whether the undertaking concerned sells its products on the domestic market through a sales department or through a sales company which is legally separate but forms part of the same group and has equivalent functions.

With regard to the fact that the overhead expenses relating to exports were taken into account in the Turkish cotton yarn case, the Council considers that in that case the Commission had to use certain costs and expenses of the subsidiary company dealing with exports since the volume of sales on the domestic market was too low to provide a proper comparison. The fact remains, however, that the purpose of constructing the normal value is precisely to arrive at a price which is as close as possible to the domestic price, and the Community authorities were therefore entitled to take account for those purposes of the overhead expenses incurred by the Canon group on the domestic market. It is not inconsistent with Article 2 (9) to take into account certain expenses incurred beyond the ex-factory level, in so far as it is required by Article 2 (3) (b) (ii).

With regard to the profit margin, it would have been misleading to take into account, as Canon suggested, the profit which the applicant made on its sales to CSC and which could simply be the result of the transfer prices used between two parts of the same corporate group.

Nor was it possible to take into account the profit made in the office equipment sector, since the like product within the meaning of Article 2 (2) and (3), the profit on which may be taken into consideration, is defined in Article 2 (12) as one which is identical to the product under consideration. In this case, therefore, it is clear that the only like products are electronic typewriters and not office equipment generally.

The deductions complained of by Canon, in connection with the calculation of the export price, were made in accordance with Article 2 (8) of Regulation No 2176/84, which provides that all costs incurred between importation and resale must be deducted. Moreover, Canon cannot criticize the use of constructed export prices since the prices charged by the parent company to its Community subsidiaries represented intra-group transactions and the applicant did not request that they should be used as export prices.

The Council further submits that the advertising costs incurred in connection with the launching of certain models in the United Kingdom, Germany and France were correctly allocated to the models to which they related on the markets where those models were distributed and were attributed to the period in which they were incurred.

With regard to the profit margin used in the construction of the normal value, the Council points out, in particular, that whilst alleging that the Commission disregarded the actual cost incurred by CSC in advertising and promoting electronic typewriters, Canon has not attempted to show what the actual costs were. The documentation produced by the applicants was either irrelevant or extremely vague and was not therefore, in any event, such as to justify a special allocation of the costs instead of the general allocation normally made. Moreover, it is illogical to accept, as the applicants do, a certain cost element, such as advertising costs, where it is considered favourable, for instance in calculating the costs, and to challenge it where it is considered unfavourable, for instance in calculating the profit margin.

The calculation of target prices for Community manufacturers has nothing to do with the calculation of Canon's profit margin in Japan.

Finally, it would have been inappropriate to use, as the applicants suggest, authoritatively promulgated profit margins for the relevant industrial sector in Japan.

Cetma shares the view of the Council and of the Commission that the methods applied in calculating the dumping margin do not constitute a new development in the Community's antidumping legislation. The provisions on which those methods are based have been in force since the antidumping legislation was adopted and have been applied for more than 10 years without being challenged.

With regard to the calculation and the construction of the normal value on the basis of the prices charged by CSC, Cetma submits that if the costs incurred by the sales company were to be disregarded solely because that company is legally independent, the antidumping proceeding could be manipulated. All an exporter would have to do is give its sales department an independent and separate legal status and then selling, administrative and other general expenses would be excluded from the normal value. It is therefore extremely important, in order to ensure effective protection against dumping, for the manufacturing company and the sales company to be treated as a single economic entity.

Furthermore, no arguments or evidence have been adduced by Canon to show that the price it charged to CSC was a reliable basis for calculating or constructing the normal value.

With regard to the profit margin, Cetma points out that:

2. Incorrect assessment of injury; procedural deficiencies

Canon submits, to begin with, that the Community institutions' presentation of the facts was misleading and selective.

Thus, OEM purchases (Original Equipment Manufacturers purchases, that is to say, Japanese electronic typewriters purchased by European manufacturers and then resold by them under their own brand name) were of valuable assistance to European manufacturers, who were not yet able to make all the typewriters for which there was demand, in making profits and retaining their share of the market at a critical time. As the Commission could hardly argue that those purchases damaged the companies which actually made them, it alleged that every Community manufacturer's OEM purchases damaged the other Community manufacturers. OEM typewriters were not taken into consideration in order to establish the fall in the sales of Community manufacturers. If all those manufacturers' sales had been taken into account, whether or not they made the goods sold, their share of the market would have fallen not from 63 to approximately 51% but by a much smaller percentage. By contrast, Japanese exports, which, according to the Commission, rose from 28 to 39.7%, reflect, excluding OEM purchases, a much smaller rate of increase (from 14 to 21%).

Another factor which was completely overlooked by the Commission is the rapid expansion in the annual sales volume of Community manufacturers, which amounted to 51% over a period of 17 months and which could, according to Canon, have been even greater if problems concerning production capacity had not intervened. The Commission merely stated, in its regulation imposing a provisional antidumping duty, that sales of the Community producers on the EEC market did not increase as rapidly as demand ... . As is clear from the report of an expert, Dr Jackson, which is attached to the application in Case 300/85, a percentage decrease in market share is of little relevance in a rapidly expanding market. In those circumstances, such a decrease does not necessarily indicate a fall in sales or in profits.

In considering the validity of the findings concerning the existence of injury, Canon contends that the Commission, in the first place, failed to discharge its duty under Article 4 (3) to make a careful assessment of all the relevant factors for those purposes, and secondly, failed, contrary to Article 13 (3), to quantify in precise terms the level of injury allegedly caused by dumping. In support of its argument, Canon refers to Dr Jackson's report which, in its view, contains a full and accurate description of the real development of the market over the period from 1982-84 and of the reasons therefor.

That report shows that Olympia and Triumph-Adler, which for decades specialized in the manufacture of electrical or electromechanical typewriters, were taken by surprise when the first electronic typewriters were launched in 1978 and, in view of their inability to accomplish the transition rapidly, suffered huge financial losses as from 1980 at the latest, whereas a company such as Olivetti, which had already acquired some experience in the field of electronics, was able to exploit the new market at once and thus to make substantial profits. The difficulties experienced by Olympia and Triumph-Adler were aggravated by the nature of the market in electronic typewriters, characterized by the very short life cycle of the products, which are constantly replaced by new, technologically more advanced products, with the result that profits for latecomers on that market are much smaller.

Although the problems of the aforesaid undertakings and the causes of those problems were well known, the regulations imposing provisional or definitive antidumping duties disregarded those factors which are of paramount importance, and the Commission made no attempt whatsoever to ascertain whether those factors reflected normal developments.

Canon still considers that, in the absence of any reference to the difficulties experienced by two of the Community manufacturers that made the complaints and to the profits made by the third complainant, it can hardly be said without further explanation that dumping was the sole cause of the injury established. If, in their regulations, the Community institutions had referred to those structural problems, it would have been possible to conclude that they were moderately well informed about the situation and had taken account of the evidence suggesting that there was no injury resulting from dumping by Japanese exporters. However, it is clear from both regulations in general, and from Recital 38 in the preamble to Regulation No 1698/85 in particular, that the Community institutions paid no attention whatsoever to the most important factors affecting this sector of European industry.

During the proceedings, the Community institutions stated that they had examined the complainants' confidential records and had deduced therefrom that dumping by Japanese exporters had caused injury to the complainants' electronic typewriter operations. That contention takes no account of the fact that the symptoms of the injury that was established could not in fact be separated from the structural problems of the two weak companies. A company with huge losses and an uncertain future is not operated in the same manner as a healthy company. Those problems would make it difficult for a weak company to obtain loans, to make investments, to develop its production capacity and to undertake potentially profitable new ventures, and would show up on the balance sheet and income statement. According to Canon, it is almost certain that the Commission did not succeed in disentangling the effect of Japanese competition from the structural difficulties of the European manufacturers; moreover, it manifestly disregarded those difficulties in its regulations imposing antidumping duties.

Nor, according to Canon, did the Commission consider the true causes of the lack of profitability. Moreover, at the provisional stage, the Commission acknowledged that, during the period under consideration, one of the complainants had not made any profits and that since 1982 the profits of the other two complainants had fallen although from a low base in both cases, whilst at the definitive stage the Commission stated, on the contrary, that profitability had declined from a level that was normal for that kind of growth industry. Even on the assumption that there was a fall in the profits of the two complainants in question, such a fall is an absolutely normal phenomenon on the market in electronic products, which is characterized by very high profits in the early stages followed by lower or minimal profits later, as the market becomes saturated.

The 63% fall in consolidated profitability, established by the Council for the period from 1983-84, is almost meaningless if it is borne in mind that Olympia had never made a profit, whereas Olivetti's profits had been very high. It is indeed impossible to establish an average profitability for companies that are so different. However, even if such an average could have been calculated, a drop in profitability from 15 to approximately 5.6% is not considered unusual by Canon for the electronics industry. It should also be borne in mind that the profitability of Triumph-Adler and Olympia, as determined by the Commission, had already been distorted by the structural difficulties referred to earlier. Finally, it is universally acknowledged that the life cycle of a product has an impact on its profitability. Electronic products are affected by rapid technological developments and therefore have very short economic cycles.

As for price competition, the Commission stated, in its regulation imposing provisional duty, that price-undercutting varied from 0 to 48%. At the definitive stage, it stated rather confusingly and without adducing any evidence in support of its attitude, that it did not find it necessary to undertake a detailed examination of price-undercutting by Japanese imports since such undercutting had depressed prices in Europe. However, the fall in prices was also a normal market development, since prices fall as time passes and the product's life cycle advances. From 1982 to 1984, there was a parallel decline in prices for electronic typewriters in the United States and Europe, and the decline in Europe was parallel to the decline in prices of other office equipment.

The Commission took no account whatsoever, in making its findings concerning the existence of injury, of whether or not the European undertakings were efficient. In previous cases, the Commission had based its calculation of what level of duty was necessary in order to remedy the injury sustained not on the situation of all Community manufacturers but on the situation of the most efficient manufacturers. In this case, the Commission gave no justification for departing from its previous practice.

Lastly, Canon challenges the manner in which the Community institutions determined the complainants' production costs and their profit margins, for it was on the basis of those two factors that they calculated the dumping margin. Clearly, the costs of production would have been lower if certain of the complainant companies had not had to contend with structural problems. The Council has not explained why the Community institutions departed from their previous practice of taking account only of the production costs of the most efficient Community undertakings and adopted a practice which is excessively favourable to those undertakings.

Furthermore, the profit margin used in calculating the target price was excessive, since the regulation imposing a definitive duty does not compare the profitability actually achieved by the complainants and the 10% profit margin established by the Commission. As is clear from Dr Jackson's report, a 5% profit is more consistent with the state of a market that has already matured, particularly as some of the complainants had to contend with serious difficulties during the period in question. In reality, the Commission was somewhat confused as to whether or not the profit margin had to be fixed at a level that would make it possible not only to prevent future damage but also to remedy any injury suffered by the Community industry in the past.

The Commission's assessment of the competitive impact of the Japanese exports and its calculation of the dumping margin were utterly misconceived. The Commission took the average of the Japanese manufacturers' estimate of the value of a model and the estimate made by the Community manufacturers, a method which cannot yield reliable results.

Furthermore, the attempt to convert into monetary terms the perceived value of a model's features can only be a source of confusion and inaccuracy. If the Commission was absolutely determined to quantify a value on the basis of the differences between the features of competing models, it should have applied the only objectively ascertainable criterion, that is to say the cost of production of those features. Finally, the profit margin calculated for undertakings such as Olympia, which never made a profit on its electronic products, is twice as high as the estimated profit margin of an undertaking as prosperous as IBM on products similar to electronic typewriters.

Finally, Canon contends that where outsiders do not have free access to the figures and trends relied upon by the Commission, the published regulations are the only means of checking on the Commission's action. Those regulations must therefore be based on a full and convincing statement of reasons. The Commission's reasoning is utterly inadequate in view of its failure to examine the structural causes of the difficulties experienced by the European manufacturers.

The Council emphasizes that certain facts are not as Canon alleges. It points out in particular that:

In response to the applicant's arguments the Council further points out, in the first place, that Article 4 of Regulation No 2176/84 does not require the Community authorities to undertake a comprehensive analysis of the state of the European industry. In fact, under that regulation the Community authorities are obliged to ascertain whether the dumped imports are causing injury, and not to attribute to such imports any injury caused by other factors. The Community institutions discharged those obligations. With regard to the question of profitability, the regulation imposing a definitive antidumping duty states that, from the time when large-scale imports of Japanese electronic typewriters began, there was a sharp decline in average return on sales but, contrary to the provisional finding, it was from a normal level. Improved turnover was also taken into account, and it was established that a higher turnover is not significant when profitability declines or losses increase.

The Community institutions did not state that no factors other than dumping are contributing to the problems experienced by the Community manufacturers, but they did state that it is possible to identify the injury caused to Community manufacturers by dumped Japanese imports and that no other factors contributed to that injury. Evidence of that injury was based not on the overall financial situation of the companies concerned but on specific evidence concerning the effects of dumped Japanese electronic typewriters on the Community manufacturers' sales of electronic typewriters in the Community.

It cannot be argued that it was impossible to isolate the injury attributable to dumping from the effects of the structural problems. The reasons set out in the regulation imposing a provisional antidumping duty, and subsequently in the regulation imposing a definitive antidumping duty, were designed to separate the two issues and did so. In those circumstances it would have been superfluous to point out that Community manufacturers were also beset by difficulties which were not attributable to dumping.

Canon's assertion that the determination of injury was distorted by the fact that the method used did not automatically exclude losses on other products and losses made by other related companies not making electronic typewriters seems only at first sight to be a more concrete argument. Although the approach taken by the Community institutions did not automatically exclude all factors other than dumping which might cause problems to Community manufacturers, it greatly facilitated the exclusion of those factors. Whilst listing the symptoms of the companies in difficulty, Canon did not explain which of those symptoms were exhibited by Olympia or Triumph-Adler in relation to the manufacture of electronic typewriters, or how those symptoms could affect the production costs of electronic typewriters.

No evidence was produced suggesting that structural problems were the cause of increased production costs for electronic typewriters. Hence there were grounds for concluding that structural problems were irrelevant to a finding of injury actually based on the undercutting of prices and production costs.

In response to the applicant's criticism that in Regulation No 3643/84 the Commission failed to acknowledge the European manufacturers' increase in sales, the Council points out that their sales did not increase as rapidly as demand and that, as a result, their market share fell from approximately 63% in 1982 to approximately 51% in 1983-84. An increase in the volume of units sold does not constitute proof of the absence of dumping. In fact, if there had been no dumping, sales by Community manufacturers would have been substantially higher.

The Council also denies, on the basis of the arguments set out in detail in Annex II to its defence, that the decline in profitability is an absolutely normal phenomenon in the development of the market for electronic products. In addition, that fall in profitability was not, contrary to Canon's contention, from a low initial figure. Although the exact figures are confidential, the Council is able to state that, during the period from 1981-84, the Community manufacturers all experienced similar reductions in profitability or increased losses.

It is impossible, and it would serve no purpose, to establish, as Canon seems to demand, what the extent of injury from other factors would have been if the Japanese manufacturers had not undercut the Community manufacturers' prices. Whatever the extent of their losses, the Community manufacturers can never recover any compensation for them. Hence, once the existence of injury has been established, all that has to be determined is the rate of duty that needs to be imposed in order to put an end to the injury, and it cannot be argued that speculation concerning the amount of profit in the absence of dumping would be a more certain or more satisfactory basis for that purpose than the target-price system used by the Community institutions.

With regard to the calculation of the profits, Canon has not adduced any evidence that structural problems affected not only the complainants' overall profits but also their profits on electronic typewriters.

With regard to the undercutting of prices, the Council considers that at the stage of the imposition of the definitive duty a detailed examination of this factor, as an element of injury, would have been futile because the prices of Community manufacturers had been depressed by the low prices of Japanese products. In examining the undercutting of prices, it is indeed possible to isolate the injury attributable to dumping from any other problems experienced by the Community manufacturers. That is precisely what the Council and the Commission did. Although it is true that competition between Community manufacturers exerted downward pressure on prices, the fact remains that the Japanese manufacturers substantially undercut the prices of Community manufacturers.

The fact that some of the Community manufacturers were experiencing difficulties made it all the more necessary to prevent additional injury from being caused by dumping. It is untrue that the Community authorities protect the least efficient Community manufacturers. In fact, they base their calculations concerning injury on an average of the figures relating to each Community manufacturer, with the result that the least efficient manufacturers receive less protection.

The Council denies Canon's contention that no Community manufacturer ever had a profit margin approaching 10%. In fact, two of the complainant companies made profits substantially exceeding 10% before dumping began. In any event, the reasons for calculating a profit margin of 10% were fully explained in the preamble to Regulation No 1698/85 and have not been challenged by the applicants.

Nor is it possible to argue, as Canon does, that a profit margin of 10% was excessive because the product life cycle of electronic typewriters was well advanced by the date of the definitive duty regulation. The experts' statements on which Canon relies are too general to permit such conclusions to be drawn. Thus, when Dr Jackson states that profit margins of 5% are not at all unusual at the end of the growth phase, that comment appears to relate to electronic office equipment in general rather than electronic typewriters. Whatever the merits of that argument, it is clear from the Community institutions' own figures that profit margins, even for electronic typewriters, vary substantially even between Community manufacturers, as Dr Jackson himself acknowledges.

Contrary to Canon's contention, there is nothing in the regulation imposing a definitive antidumping duty to suggest that the level of duty was fixed so as to compensate the Community manufacturers for past losses.

The fact that the price comparisons used for the establishment of target prices were related to the value of the models rather than the cost of production of the special features of those models is not open to criticism either. For the purpose of calculating the rate of duty to be imposed, it was necessary to ascertain what prices buyers would be willing to pay for models with certain features. Accordingly, there was no question of asking two manufacturers to indicate the respective values of competing products, but to estimate, in the light of their experience, how much extra the average buyer would be willing to pay for specific features. Such an estimate can be made, as is evidenced by the fact that for many of the models compared the Japanese exporters and the Community manufacturers did agree on the figures.

However, there is no evidence to support Canon's proposition that a cheaper typewriter will invariably be bought in preference to one that is more attractive, though more expensive. That proposition is not borne out by sales of different models of electronic typewriters.

With regard to the two complaints alleging procedural deficiencies of the injury case, the Council submits, in the first place, that details of the methods used in determining the existence of injury were given to Canon on several occasions; the Commission therefore made every effort, as far as was compatible with the obligation not to disclose business secrets, to provide Canon with all the information relevant to the defence of its interests.

With regard to the criticism of the grounds on which the findings of injury were based, the Council considers that, for the reasons already given, those findings are fully explained in the preambles to the regulations imposing provisional and definitive antidumping duties.

The Commission observes that the principles governing the establishment of injury require the Community institutions to distinguish between the injurious effects of dumping and the injurious effects of whatever other factors are, or are said to be, causing injury. However, the existence of injury due to other factors does not rule out the possibility that dumping is also causing injury, and an antidumping duty may then be imposed even if dumping is not the principal cause of the injury. It is only if the effects of other factors are wrongly attributed to dumping or if it is in fact quite impossible to determine whether the dumping has caused any injury that the finding of injury will be invalidated. The question of the structural difficulties experienced by Olympia and Triumph-Adler is therefore irrelevant to the issues before the Court unless the existence of either of the aforesaid situations is established. In this case it is necessary to ascertain whether the Community institutions had evidence which enabled them to reach the conclusions which they arrived at and whether the reasons given in the regulation are sufficient for the purposes of Article 190 of the EEC Treaty. Those conclusions were based on increased sales and increased market shares of Japanese exports to the Community, on the fact that the prices of Japanese products were lower than the prices of Community products and on a decline in the profits and the market share of Community manufacturers. Those findings have not been validly challenged and should therefore be regarded as correct.

However, the Commission considers that it may be useful to consider how it is possible to determine whether the injury undoubtedly suffered by the Community industry was at least partly attributable to dumping.

There are several reasons for concluding that dumping was causing identifiable injury in addition to the effects of other factors on Community industry.

In the first place, the injury cannot have been caused by any other problems experienced by the European companies, since even the lowest prices charged by Community manufacturers were substantially undercut in most cases by the Japanese exporters' prices.

If the injury to Community industry was attributable entirely to factors other than dumping, clear signs of those factors should moreover have become apparent before dumping began on a large scale. That was not the case on the European market where both Triumph-Adler and Olivetti were still making profits on sales of electronic typewriters in 1982.

Furthermore, only the effects of dumping can explain why the European manufacturers all experienced a broadly similiar decline in revenue at the same time, whether or not they had adaptation problems. The sharp fall in the prices from the Community manufacturers must have been at least largely due to price undercutting by Japanese exporters, which occurred at the same time. Finally, it cannot be denied that if Olivetti, the most successful of the three Community manufacturers, suffered injury owing to dumping practised by Japanese manufacturers, the other Community manufacturers must a fortiori have suffered injury too.

The Commission challenges the allegation that the findings concerning injury are invalidated by the fact that two Community manufacturers had themselves imported Japanese electronic typewriters and should therefore have been excluded from the determination of injury.

In general terms, it should be borne in mind that it may be entirely reasonable for a Community manufacturer either to import certain models in order to supplement its range and to sell them at prices corresponding to its own prices, or to buy dumped goods in order to protect itself and prevent them from being sold at prices which undercut its own prices.

Moreover, the fact that a Community manufacturer imported dumped goods in the past does not preclude it from complaining about injury occurring now. Moreover, such a manufacturer is injured by other imports of those products for resale at low prices just as seriously as if it had never imported those products itself. The only situation in which a Community manufacturer should be excluded from an assessment of injury is where the manufacturer in question imported the dumped goods and sold them itself at low prices, even though it was unnecessary to do so in order to compete with other dumped imports. That situation bears no resemblance to the cases now before the Court. Imports of the goods in question by Community manufacturers never exceeded 11 % of total sales of electronic typewriters in the Community. The European manufacturers which imported Japanese electronic typewriters did so primarily or exclusively in order to complete their own range of electronic typewriter models, and so the imported models did not compete directly with any of their own models. Hence they did not inflict any injury on themselves. However, Tokyo Juki's exports to Olivetti at dumping prices injured Triumph-Adler, which could have supplied Olivetti with a comparable model.

Next, the Commission considers the arguments concerning the use of target prices in order to determine the extent of the injury. It points out, in the first place, that the duty to be imposed must be calculated in such a way as to remove the injury caused by the undercutting of Community prices. Where dumping has already depressed prices, however, it is not sufficient to eliminate the undercutting, since that would merely restore the depressed price level. The possibility of looking at the price level before the dumping began is difficult, or impossible, if the impact of the dumping has been substantial and it has been practised over a long period. To establish what the level of prices would be if dumping had not been practised would then be very complicated. The only remaining possibility is for the Community institutions to construct the price on the basis of the cost of production of the Community industry and to impose a rate of duty enabling Community manufacturers to charge prices that yield a profit margin which, having regard to all the circumstances, is considered reasonable; in other words they should construct a target price. In theory, the Community institutions could base the rate of duty on the cost of production of the most efficient manufacturer or, instead, on that of the least efficient manufacturer, and thereby accord the Community industry a greater or lesser degree of protection, according to its needs. In fact, the Community institutions took as a basis the average cost of production for all the Community manufacturers, which gives the least efficient manufacturer less protection than it needs and exerts pressure on it to become more efficient.

The next question which arises is what profit margin should be used in order to avoid injury from dumping in the future. In that regard, it should be borne in mind that the profit margin should not be fixed so as to provide compensation for injury caused by dumping in the past. Moreover, it should be reasonable, having regard to all the circumstances of the industry in question at the time. In any event, its purpose should be to remove the injury. The question whether such a margin is also likely to attract new investment should not be taken into consideration.

The criticisms directed at the use of target prices, on the ground that the Community institutions failed to take account, in fixing those prices, of the factors listed in Article 4 (2) of Regulation No 2176/84, are unfounded. Those factors are analysed not under the system of target prices but in Regulations Nos 3643/84 and 1698/85.

Furthermore, no comparison with actual prices was possible as those prices had already been depressed by dumping.

Cetma points out that, under Regulation No 2176/84, the determination of injury must be based on three legal principles which Canon has not considered at all, namely:

Only the Commission, which has access to all the relevant data for assessing the injury in accordance with Regulation No 2176/84, can determine the injury in relation to the like product under consideration.

The determination of injury, which is necessarily made on the basis of confidential information, can be challenged only where the Community institutions have made a manifest error, are guilty of a misuse of powers or have clearly exceeded the bounds of their discretion. Canon has failed to establish the existence of any of those defects.

The evaluation of all the factors listed in Article 4 (2) of Regulation No 2176/84 clearly reveals that injury has been caused to Community manufacturers of electronic typewriters. Regulations Nos 3643/84 and 1698/85 consider that aspect in detail.

From 1982 to the end of March 1984, sales of electronic typewriters originating in Japan, including OEM sales, rose from 145227 to 368722 units. Contrary to Canon's assertion, neither Olivetti nor Olympia purchased electronic typewriters on an OEM basis at dumping prices, at least during the reference period. Moreover, even sales at dumping prices to European manufacturers may have caused injury to the Community industry, which also includes undertakings not supplied from Japan.

The substantial increase in imports into the Community reflects the development of an industry, such as the Japanese industry, which exports more than 90% of its production. In view of the impressive increase in Japanese production between 1983 and 1984, it is legitimate to consider that if no antidumping measures had been adopted, the undercutting of prices on a massive scale since 1982 would have endangered the very existence of the established Community industry.

During the investigation period, the Commission established that prices were being undercut on a substantial scale. Prices are frequently undercut by Japanese manufacturers as a means of penetrating the Community market.

As a result of the considerable volume of imports of electronic typewriters at dumping prices, Community manufacturers were compelled to lower their prices still further, and their production costs increased owing to the reduced utilization of existing capacity, which led to a considerable drop in profitability.

The Commission's assessment of injury under Article 4 (2) of Regulation No 2176/84 shows at the same time that the imports from Japan were the cause of the material injury sustained by the Community industry. However, no appreciable influence was exerted by other factors, even though Canon seeks to demonstrate the contrary by means of the study carried out by its expert, Dr Jackson.

Contrary to the view expressed in that study, the Community manufacturers of electronic typewriters had already accomplished the technological transition to electronic typewriters well before Japanese electronic typewriters appeared on the market. Accordingly, it is incorrect to argue that the injury sustained by Olympia and Triumph-Adler stemmed from the fact that they were unprepared for the market in electronic typewriters. On the contrary, such injury stems from a well-defined policy of penetration pursued by the Japanese companies, under the auspices of the Japanese Ministry of International Trade and Industry, and reflected by the fact that most Japanese companies started manufacturing electronic typewriters at the same time, that is to say as from 1980, and by the fact that Japanese industry made provision for a production capacity corresponding to world demand.

Nor is it true that companies which were unable to exploit at once the opportunities offered by the new markets were unable to earn very high profits. In reality, the life cycle of an electronic typewriter is not so short, and substantial, if progressively diminishing, profits are still made in the phase which lasts from the consolidated level of sales to the end of the product's life cycle. That is so except in cases where unfair practices such as dumping and the undercutting of prices erode the price level. Furthermore, Canon's argument is contradicted by the conduct of the Japanese manufacturers, including Canon itself, which invaded the Community market at a time (the end of 1982) when, according to Canon, the profitability of electronic typewriters must already have been very low.

It is untrue that Community manufacturers resorted to OEM purchases owing to their own inadequate production capacity. In fact, Olympia and Olivetti, whilst they had the necessary capacity, preferred to accept OEM offers of compact electronic typewriters on the ground that their own production costs in that sector were higher than those of the Japanese companies and there was a risk that, within a short period of time, the market would be invaded by Japanese products. Moreover, OEM offers were part of a Japanese commercial strategy designed to deter European manufacturers from continuing to make certain types of products. Before the imposition of antidumping duties, moreover, the Community manufacturers had already resumed production of certain compact typewriters or had in any event discontinued OEM Durchases.

Olympia's losses in no way stem from difficulties in convening from the manufacture of mechanical to electronic products. The true reason is the excessive undercutting of prices practised by the Japanese manufacturers in the electronic calculator and copier sectors, which compelled Olympia to cease manufacturing those two types of products.

Nor do Triumph-Adler's losses stem from the manufacturing and distribution of electronic typewriters in the common market, but from the difficulties experienced in another sector of production.

Finally, the fact that Olivetti, which was the first company in the world to engage in the manufacture of electronic typewriters, failed to earn in 1983 the profits it had anticipated, can be explained only by the competition it faced from Japanese companies selling their products at dumping prices.

In the light of those facts, Cetma shares the Council's view that no other factors were found to have been contributory to the injury established.

Next, Cetma submits that the level of the profit margin required for the Community industry and used in calculating the target price was not excessive but far too low. Increased research and development and plant automation costs, higher advertising expenditure, the turnover of specialized staff, and the need for a substantial return on the capital invested in a high-risk sector are all reasons for which a very substantial profit margin is required. That is why Cetma considers the 10% margin fixed by the Commission to be inadequate.

Cetma considers that Canon's criticism of the dumping margins calculated by the Community authorities are irrelevant if it is borne in mind that the dumping margins established were substantially higher than the level of duty imposed. Nor can Canon, which is the most aggressive of the Japanese manufacturers, complain that a high rate of duty was imposed on it.

B — Arguments put forward in the observations common to the applicants in Case 250/85, Joined Cases 260/85 and 106/86, Joined Cases 273/85 and 107/86, Joined Cases 277 and 300/85, and Case 301/85, and in response to those observations

1. Observations common to the applicants

The applicants in the aforesaid cases, including Canon, have advanced in their replies a number of arguments common to all of them which highlight what they consider to be one of the most fundamental defects in the findings of the existence of dumping made by the Commission in this case, namely the fact that the export price and the normal value were not put on a comparable basis. According to the applicants, the high dumping margins attributed to them by the Community institutions are to a large extent the result of the unfair comparison between the export price and the normal value made by the Commission and are inconsistent with both Regulation No 2176/84 and the GATT Anti-Dumping Code on which that regulation is based.

The joint observations are divided into two parts; the first part describes the procedure followed by the Commission, and merely taken over by the Council, to calculate the dumping margin, whilst the second part seeks to show that the comparison made by the Commission is inconsistent with Regulation No 2176/84 and the GATT Anti-Dumping Code.

In their general description of the manner in which a finding of the existence of dumping is made, the applicants emphasize, in particular, the difference between the approach taken by the Community institutions, according to which the calculation of the normal value and of the export price are two separate exercises to which different methodologies should apply, and their own point of view, namely that the purpose of those two calculations is to arrive at two figures, comparison of which must be fair according to Regulation No 2176/84.

Next, the applicants observe that the Commission followed a radically different approach according to whether it was calculating the export price or the normal value. In the first case, it took care to ensure that the export price did not include any expenses incurred in the Community and, in the case of imports made through related sales companies, it deducted all the costs incurred by those companies plus a profit margin. In the latter case, a substantial part of the expenses and an element for the profit related to distribution in Japan were included in the normal value.

In other words, the Commission did not exclude from the normal value any such distribution costs incurred in Japan which were of a kind corresponding to distribution costs incurred in Europe that were not included in the export price with which the normal value was generally compared.

That methodology necessarily yields a high apparent dumping margin even though the exporter sells his products, at the same level of trade, at a higher price in the Community than in Japan and makes the same profit on his export sales as on his domestic sales.

The applicants submit that in adopting that methodology the Community institutions infringed the fundamental requirement that the export price and normal value should be put on a comparable basis, contrary to the provisions of Article 2 of Regulation No 2176/84, which are based on those of Article VI of GATT and of the GATT 1979 Anti-Dumping Code to which the second recital in the preamble to that regulation expressly refers. That requirement is fundamental because it is obvious that a finding that the export price is less than the normal value is justified only if it is based on a fair comparison between the two.

Contrary to what is contended by the Community institutions, the unfair comparison between export prices and domestic market prices made in this case is neither required nor permitted by Article 2 (10) of Regulation No 2176/84.

That provision lays down that due allowance shall be made in each case, on its merits, for differences affecting price comparability and indicates the guidelines which are to be applied for the purpose of determining the necessary allowances.

It would appear from the wording of the provisions of Regulation No 2176/84, of GATT and of the GATT 1979 Anti-Dumping Code that the aforesaid provision is intended to ensure a fair comparison between the export price and the normal value.

To begin with, the Community institutions misinterpreted the expression conditions and terms of sale in Article 2 (10) (c). The reference in that provision to commissions or salaries paid to salesmen shows that the expression conditions and terms of sale cannot be as limited in scope as the Council maintains and cannot refer only to the obligations which may be laid down in the contract of sale or in the general conditions of sale but must also cover the factual conditions of, and surrounding, the sale in question.

Hence the restrictions contained in the aforesaid provision were, according to the applicants, misinterpreted by the Community institutions.

The limitation of allowances to differences which bear a direct relationship to the sales under consideration and the exclusion of any allowances for differences in overheads and general expenses are designed to relieve the Commission, in general terms, of the burden of allocating between domestic trade and exports the general costs of a single organization that is concerned with both domestic and export trade. However, neither of those restrictions applies to a case such as this, where the dispute centres on the failure to allocate to domestic trade the indirect costs of organizations, specifically the Japanese sales companies, that were concerned exclusively with domestic trade.

With regard to differences which bear a direct relationship to the sales under consideration, it should be emphasized that selling the products in Japan entails certain costs that are specifically attributable to the distribution of those products in that country.

Similar considerations apply in the case of overheads and general expenses. A differential allocation of common overheads is irrelevant in the present case.

Further, the expression differences in the level of trade' in Article 2(10) (c) of Regulation No 2176/84 has been misinterpreted, inasmuch as all local marketing and distribution costs were excluded from the export price, whilst significant costs of that kind were included in the normal value. Accordingly, the export price and the normal value were not compared at the same level of trade.

The guidelines should not be applied where their application would lead to an unfair comparison and the list set out therein is illustrative, not exhaustive. It is clear that the first two sentences of Article 2 (10), which require due allowance to be made in each case, on its merits, for differences affecting price comparability, are of a general nature, whereas the guidelines referred to in the third sentence can in no way be regarded as exhaustive. Admittedly, those guidelines apply prima facie, but if their application, on the facts of a particular case, would conflict with the basic principle of fair comparison, there is no doubt that it would be impossible to reject a claim solely on the ground that the case does not fall within one of those guidelines.

The Commission was also wrong in including in the constructed normal value an amount for selling expenses in connection with distribution by related sales companies in Japan.

If the Community institutions had not included in the cost of production the expenses incurred by the exporters' Japanese sales companies, the normal value and the export price would have been on a comparable basis and no question of allowances would have arisen.

The applicants' analysis has the advantage that the likelihood of an exporter being found guilty of dumping will not vary according to whether (i) the normal value is based on actual domestic prices or is constructed, or (ii) export prices are based on actual export prices or are constructed. The principle is always the same: so far as practicable, material elements that are not included or reflected in the export price should not be included or reflected in the normal value.

Moreover, the Community institutions erroneously inflated the constructed value with abnormally high profit margins. The profit margins which the Commission established for certain producers, and the loss established in respect of Tokyo Juki, are simply the result of the Commission's failure properly to allocate costs incurred in connection with the distribution of electronic typewriters.

In determining the profit margin for undertakings selling their products on the domestic market, the Commission took no account of the fact that the advertising costs incurred by those undertakings in connection with their sales of electronic typewriters in Japan were much higher than the advertising costs incurred in relation to their overall turnover.

The loss established for Tokyo Juki stems from the fact that the Commission has disregarded verified accounting data for that company, which showed that Tokyo Juki's domestic sales were profitable. However, the Commission allocated to sales of electronic typewriters an unreasonable amount of Tokyo Juki's distribution expenses for unrelated products or product lines.

The profits used for the determination of the constructed value are thus based on gross errors in the allocation of the relevant costs.

In conclusion, the high dumping margins that have been established are to a large extent the result of an unfair and legally improper comparison rather than any objectively unfair trade practice which exporters may have engaged in.

2. The Council's response

Before replying to the joint observations of the applicants, the Council considers it appropriate to make two preliminary points.

In the first place the Council recalls that for each of the three main elements used for determining whether dumping is being practised (normal value, export price and a comparison between the two), there are precise, distinct and separate rules. It challenges the applicants' assertion that the GATT Anti-Dumping Code requires allowances to be made for all differences affecting price comparability. Apart from the fact that the code does not use the word all as the applicants allege and that the provisions of GATT have never been regarded as directly applicable, as the Court has confirmed in its case-law, it is clear from the text of the code itself that the code represents a compromise, the result of which is a text which is deliberately imprecise and which leaves a considerable margin of discretion to the legislature of each contracting party to decide exactly what allowances should be made.

The second preliminary point concerns the hypothetical example given by the applicants to show that the methodology adopted by the Commission necessarily leads to the establishment of a dumping margin. According to the Council, that example has certain fundamental flaws which render it unusable. It is based on the internal transfer prices between the manufacturing company and its subsidiaries in Japan or the Community, which are inherently unreliable and always subject to manipulation. It omits completely both the expenses and profits of the corporate headquarters company. It considers the domestic sales company as a separate entity, whereas it was found to be an integral part of the corporate structure. It fails to deduct Common Customs Tariff duties. It is incorrectly based on the assumption that the sales price to independent purchasers in Japan is always below the price in the Community. Finally, it does not refer to the constructed normal value.

Next, the Council observes that the applicants' first argument seeks to show that the requirement of a comparable price or of a fair comparison between the normal value and the export price is fundamental, and that the words in Article 2 (10) concerning a fair comparison should override the other conflicting words in that provision. That is contrary to two basic principles of interpretation, namely:

The Council observes that the phrase conditions and terms of sale should be interpreted in the light of the rest of Article 2 (10) (c), which shows that that phrase applies only to differences in terms and conditions which are capable of bearing a direct relationship to specific sales. The only costs which may bear a direct relationship to a sale are those which may be mentioned specifically in a contract of sale and which are likely to influence the mind of the buyer. In a normal contract of sale, it would be unusual to find any clause concerning overheads and general expenses, but not for there to be a clause concerning, for instance, credit and delivery terms.

The price charged in the exporting country and the export price may have different payment, credit, delivery and guarantee terms attached to them. Those prices should be brought on to a comparable footing by means of the operation described in Article 2 (10). That operation is designed not to compare costs, but to compare prices, and the cost element is used only when it is necessary to iron out different conditions attached to prevailing prices. However, even if there were no specific reference to overheads and general expenses, it is clear that such expenses would not bear a direct relationship to specific sales. That interpretation is confirmed by the last clause in Article 2 (10) (c) which is worded as follows: the amount of these allowances shall normally be determined by the cost of such differences to the seller, though consideration may also be given to their effect on the value of the product; that shows that Article 2 (10) (c) is concerned only with costs to the seller which are likely to affect the price of the product on the open market, or with advantages to the buyer which may vary for different purchases of the same type of goods.

The applicants rely more specifically on the expression commissions or salaries paid to salesmen. According to the Council, commissions are clearly expenses directly related to sales. The legislature has added salaries paid to salesmen simply in order to avoid different treatment depending solely on the legal form of the relationship between the manufacturer and the sales staff. Therefore that derogation, made for a very specific and legitimate reason, does not justify the general conclusions which the applicants seek to derive from it.

According to the Council, the applicants' second argument is based on two clauses in Article 2 (10) (c) which they do not contest but which, in their view, are intended only to make it unnecessary to allocate, as between domestic trade and exports, overheads and general expenses of a company's headquarters. The clauses in question read as follows:

According to the Council, those clauses do not have the meaning attributed to them by the applicants. The Commission has already explained in its intervention the reasons why it is often inappropriate or impossible to attempt to allocate overheads as between domestic sales and export sales.

With regard to the statement that the general expenses of a domestic sales company can never be included, even partly, in the general expenses allowed for in the normal value, the Council makes the following comments on the points raised by the applicants in their joint observations:

On the question of the level of trade, the applicants have contended that significant local marketing and distribution costs were included in the normal value and that the resulting level of trade was therefore not before any local marketing and distribution as it was in the case of the export price. The Council observes that the applicants give no reason for the suggestion that the phrase in Article 2 (9) which lays down the principle of comparison at the same level of trade should override Article 2 (10), which provides that no allowances are normally made for overheads and general expenses. Moreover, the applicants' argument rests on a misunderstanding of the expression level of trade. Where two companies sell to both wholesalers and end-users, they should be regarded, unless each category represents very different proportions of the total sales of the two companies, as selling at the same level of trade.

The applicants' argument that the Community institutions should have taken into consideration overheads and general expenses not directly related to sales solely on the ground that the Japanese sales were made by separate sales companies cannot be accepted. It is quite clear that, if the same sales had been made by sales departments, the applicants' argument would be contrary to Article 2 (10) (c) and the important findings that the sales companies formed integral parts of the same economic units or enterprises as their parent companies, and that their functions were similar to those of sales departments, have not been challenged by the applicants.

Next, the Council challenges the applicants' contention that in order to reject a claim, either the institutions must be satisfied that allowance of the claim is not necessary to enable a fair comparison to be made or they must point to something in the regulation which specifically permits them to reject the claim even though it is or may be so necessary.

The Council observes that the general principle of a fair comparison may not be relied upon in order to override the specific terms of Article 2 (10) (c), especially because those terms are the result not of imprecise drafting but of a carefully considered policy for dealing with an inherently difficult problem. Moreover, the applicants do not suggest that these cases are in any way special or unusual. They take the view that their arguments should apply in every case in which the domestic sales were made by a separate company.

Contrary to the applicants' contention, the difference between the ways in which the export price and the normal value are calculated is the natural and intended result of the express wording of Regulation No 2176/84 and does not inherently have any necessarily protectionist effect.

The applicants' argument to the effect that Article 2 (10) (c) is not applicable to a constructed normal value is incorrect for several reasons. In the first place, a comparison always has to be made in any antidumping case between normal value, however arrived at, and export price and in making such a comparison it is always necessary to decide whether allowances need to be made. The applicants' argument is wrong also because it may be necessary to calculate the reasonable amount for selling, administrative and other general expenses on the basis of the real costs of a sales department or sales company selling the same or a similar product in the exporting country at a price containing allowable and non-allowable cost elements. If Article 2 (10) were not applicable, no allowances at all would be possible, and that clearly runs counter to the applicants' argument.

Finally, the constructed normal value would be unaffected by any change in the relative proportions of costs and profit in Japan since the total of the two elements is included in the constructed normal value. The applicants complain about the use of the lower figure for costs only in the calculation of the profit to be used in constructing the normal value. Even if they were right, their argument would lead to an increase in the costs which would be precisely equivalent to the reduction in the profit based on those costs.

3. The Commission's observations

The Commission observes that, under the rules in force, the normal value includes selling expenses in addition to an element for general expenses, that is to say, expenses which do not bear a direct relationship to sales of the product in question. That rule can be justified by arguments of a general nature, including the fact that any effort to relate general expenses to particular sales is likely to be arbitrary.

In the special context of dumping investigations, a further point to be made is that all enquiries by the Commission outside the Community depend on the voluntary cooperation of the companies concerned and that if it were necessary to allocate overheads and general expenses within the headquarters of an exporting company in a nonmember country that would probably raise great difficulties even if adequate information were made available by the exporter to the antidumping authority.

An allocation of overheads in proportion to current sales would require the manufacturer's cooperation and might, moreover, be inappropriate as there is not necessarily a relationship between the proportion of research and development spending or advertising costs and current sales on different markets. No solution has been found so far in the discussions which took place within GATT, both because it was impossible to reach agreement on certain principles and because any rule must, in many situations, inevitably rest on subjective considerations.

Following those preliminary considerations, the Commission considers the treatment of the general expenses of a manufacturing company when the normal value is based on the domestic price. It points out in the first place that, in the case of a manufacturing company which sells on its domestic market only to independent buyers, the normal value is based on the domestic price, with the result that the normal value generally includes overheads and general expenses since Article 2 (10) (c) provides that no allowance will be made for overheads, research and development costs or advertising costs attributable to domestic sales even if they are higher than those attributable to export sales to the Community. The principle that general expenses are not allocated was adopted on practical grounds in view of the huge difficulties involved in allocating overheads satisfactorily.

The problem which arises in this case is how to deal with the companies which sell on their domestic market only through a related sales company (not necessarily a wholly-owned subsidiary), in view of the fact that, in the Commission's view, transfer prices between a company and its subsidiary cannot be regarded as being in the ordinary course of trade.

There is nothing in Regulation No 2176/84 which suggests that the prices charged by a sales company cannot be used at all as a basis for determining the normal value. If it is decided that a proper comparison is possible, the domestic price in the exporting country should be used in preference to either of the alternatives provided for in Article 2 (3) (b). Regulation No 2176/84 gives priority to that criterion, provided that it permits a proper comparison to be made, regardless of whether that comparison is perfect or easier to make than a comparison based on other criteria.

Once it has been established that domestic prices may be used as a basis for calculating the normal value, the question arises of what deductions should be made from the prices charged by the Japanese sales companies.

According to the Commission, the general expenses of a sales company in the exporting country should be treated as far as possible in the same way as the general expenses of a manufacturing company which has a sales department. The formal difference in the corporate structure should not affect the result, if the sales company is effectively controlled by the manufacturing company and if it is fulfilling essentially the same function as a sales department. The Commission established that the Japanese sales companies formed integral parts of the same economic units as the manufacturing companies and that their functions were similar to those of sales departments. On the basis of those findings the Commission concluded that the general expenses of such companies should also be treated in the same manner as those of a sales department. That does not rule out the possibility that in certain cases a sales company might have functions different from those of a sales department. In those circumstances, for instance, many of the expenses would probably be directly related to sales and consequently they would be allowable. In any event, every situation should be dealt with on its own facts.

The Commission considers that similar considerations apply with regard to the profits of sales companies. It would be intolerable if a manufacturing company which exports its products could effectively reduce the normal value which the Community institutions could arrive at under Regulation No 2176/84 merely by having its sales to independent buyers handled by a sales company rather than a sales department. Admittedly, if a sales company also sold goods produced by other manufacturing companies or if it handled distribution down to and including the operation of retail outlets, it would be necessary to apportion its profits. In order to do so, however, reliable information would have to be made available by other companies in the same industry showing the profit margins made by distributors from sales to independent buyers on the domestic market.

In conclusion, the Commission considers that when the normal value is based on the prices of domestic sales companies, it must include both an element of general expenses and an element of profit, just as it would where it is based on the domestic prices of a manufacturing company's sales department. There is nothing in that approach which necessarily leads to a normal value which is higher for producers distributing their products through related companies than it is for those marketing their products through a sales department.

The Commission then deals with the problem of ascertaining what profit margin is reasonable when the normal value is constructed in accordance with Article 2 (3) (b) (ii).

The Commission considers that when interpreting and applying that provision no rule should be adopted which would be likely to lead to the calculation of normal values different from those which would be arrived at by using domestic prices. The word reasonable does not have a fixed meaning, nor does it refer to a percentage which should always be the same; instead, it is necessary to consider the circumstances of the market. More particularly, it is necessary to take into account any findings which the Community institutions have made in connection with domestic prices.

The desirability of ensuring that the two methods of calculating the normal value lead to parallel results makes it permissible, and even necessary, to use any findings concerning general expenses and profit on the domestic market for the purpose of interpreting and applying the term reasonable when constructing the normal value. It would be not only undesirable but also wrong in principle if the establishment of a dumping margin were to depend on which method of calculating the normal value was chosen.

The Commission goes on to consider the applicants' argument to the effect that the Community institutions have contravened the principle of legal certainty by applying Regulation No 2176/84 in a manner which is unforeseeable and which prevents the undertakings concerned from ascertaining what export price needs to be fixed in order to avoid dumping.

The Commission points out, in the first place, that an exporter cannot in any case expect to know with confidence whether dumping will cause injury to Community industry or whether the Community institutions will conclude that it is in the interest of the Community to impose an antidumping duty; no objection can be made on grounds of legal certainty. Nor can the exporter rely on that principle with regard to the methods of calculating the normal value or the export price. The basic antidumping regulation confers on the Community institutions a considerable discretion with regard to the application of the rules which it lays down in particular situations which, as is the nature of things, cannot all be foreseen precisely.

Next, the Commission considers the argument that it is contrary to the principle of legal certainty for the constructed normal value to include an element of profit or of the general expenses which is not based on the individual exporter's own activities because that element cannot be predicted or anticipated by the exporter. According to the Commission, that argument amounts to a denial of the right of the Community institutions to use accurate confidential information available to them and, in practice, a denial of their power to determine what is reasonable in the light of the circumstances of the industry concerned and to use anything other than a standard low rate of profit unless, by coincidence, suitable information is published.

The Commission goes on to consider the problem of the reasonable profit margin to be attributed to a related sales company in the Community under Article 2 (8) (b) of Regulation No 2176/84.

The first question which arises is whether any profit margin should be attributed to a sales company in the Community. The answer to that question should be in the affirmative. The profit margin referred to in the aforesaid provision cannot be that of the exporter because it would not be appropriate to deduct it in order to calculate the export price; nor can it be the independent buyer's profit margin, which would not affect the price to that buyer. The next question is how the Community institutions should decide what constitutes a reasonable profit margin. According to the Commission, the term reasonable does not refer to a profit margin which is fixed and unchanging irrespective of the circumstances, but rather to one which is appropriate to the circumstances of the industry and the market.

The purpose of deducting a profit margin is to reduce the price charged by a related sales company to a level at which it is equivalent to the price which would be charged to independent importers. That is the only correct solution.

To that end, therefore, it is necessary to examine the profit margins of independent importers, if there are any. There is no authority for the view that the maximum profit margin to be attributed to the related sales company is the profit margin based on the transfer price to that company. If independent importers make a large profit margin in the Community, there would be no justification for attributing a small margin to a related sales company merely because its manufacturing parent company had chosen to absorb a large proportion of the profit made by the group in the exporting country.

With regard to the arguments put forward by the applicants in connection with the level of trade, the Commission observes that these cases actually raise three issues:

Unfortunately, the activities of companies do not fall into clearly defined levels of trade. Some companies sell both to wholesalers and to end-users. In that case, unless each category of customer accounts for very different proportions of the total sales of two companies, they should be regarded as being at the same level of trade. The fact that the applicants have not seriously argued that specific allowances should be made may mean that the slight differences between the different categories of customers did not justify any significant allowance.

IV — Answers given by the parties to questions put to them by the Court

In its answer lodged on 4 April 1987, Canon provided the Court with certain information. Furthermore, it denied being a party to any agreement or concerted practice between Japanese manufacturers or following the directions of the Japanese Ministry of International Trade and Industry with a view to penetrating the Community market.

In its answer of 7 April 1987, the Council indicated the dumping margin and the precise level of injury established in relation to the applicant.

1 Language of the Case: English.

2 As Canon inserted in its reply certain observations which it drew up jointly with the applicanti in Case 250/85, Joined Cases 260/85 and 106/86, Joined Cases 273/85 and 107/86, and Case 301/85, it is appropriate to summarize those observations under a separate heading which also includes the Council's response to those observations and the observations submitted by the Commission, which deal exclusively with the problems raised in the joint observations. All those arguments will be set out in Section III B of this report.

3 The Commission's observations are summarized here in so far as they relate to the submissions and arguments set out in the observations common to the applicants.