Moreton Alarm Services (MAS) Ltd v Revenue and Customs (CUSTOMS DUTY : Classification - nomenclature) [2016] UKFTT 700 (TC)

FTT-Tax
Moreton Alarm Services (MAS) Ltd v Revenue and Customs (CUSTOMS DUTY : Classification - nomenclature)
[2016] UKFTT 700 (TC) · 2016-07-07
[53]“ 53. I start with the general approach to interpretation of the CN.[54]It is clear from the Opinion of Advocate General Kokott in Uroplasty that the court must apply a structured approach. At the first stage it must determine the intended use and material composition of the article. Next the court must make a provisional classification by reference to section and chapter headings. Then the court must make a combined examination of the headings and Notes, applying GIRs 2 to 5 in case of conflict. The interpretation of the headings and EN should be consistent with the HS. Finally the article must be placed under the appropriate subheading. The relevant paragraphs in the Opinion are as follows:42. First, the intended use and material composition of the article must be precisely determined. Next, in the light of the wording of the headings of the relevant sections and chapters a provisional classification must be undertaken according to the article's intended use and material composition. There must then be considered whether on a combined examination of the wording of the headings and the explanatory notes to the relevant sections and chapters a definitive classification may be reached. If not, then in order to resolve the conflict between the competing provisions recourse must be had to Rules 2 to 5 of the general rules. Lastly, classification must be made under the subheadings.43. Classification must proceed on a strictly hierarchical basis taking each level of the CN in turn. The wording of one heading can be compared only with the wording of another heading; the wording of a first subheading can be compared only with the wording of other first subheadings of the same heading; and the wording of a second subheading can be compared only with the wording of other second subheadings of the same first subheading.44. In this exercise the wording of the headings and the explanatory notes of the CN are to be interpreted so as to be consistent with the Harmonised System. The Court has consistently held that the explanatory notes drawn up, as regards the Harmonised System, by the World Customs Organisation, may be an important aid to the interpretation of the individual tariff headings, although they do not have legally binding force.[55]The CJEU emphasised that the determination of the characteristics and properties of the article must be an objective one, and that the wording of the CN must prevail over the EN, which cannot alter the scope of the headings: 40 According to settled case-law, in the interests of legal certainty and ease of verification, the decisive criterion for the classification of goods for customs tariff purposes is in general to be found in their objective characteristics and properties as defined in the wording of the relevant heading of the CN and of the notes to the sections or chapters (see, in particular, Case C-42/99 Eru Portuguesa [2000] ECR I-7691 , paragraph 13; Case C-495/03 Intermodal Transports [2005] ECR I-8151 , paragraph 47; Case C-445/04 Possehl Erzkontor [2005] ECR I-0000, paragraph 19; and Case C-500/04 Proxxon [2006] ECR I-0000, paragraph 21). 41 The Explanatory Notes to the CN and those to the HS are an important aid for interpreting the scope of the various tariff headings but do not have legally binding force. The wording of those Notes must therefore be consistent with the provisions of the CN and cannot alter their scope (see, in particular, Case C-130/02 Krings [2004] ECR I-2121 , paragraph 28, Case C-467/03 Ikegami [2005] ECR I-2389 , paragraph 17, and Proxxon paragraph 22). 42 For the purposes of classification under the appropriate heading, it is important, finally, to recall that the intended use of a product may constitute an objective criterion in relation to tariff classification if it is inherent in the product, and such inherent character must be capable of being assessed on the basis of the product's objective characteristics and properties (see Krings paragraph 30, Ikegami , paragraph 23, and Proxxon , paragraph 31). ”44. Where a product has a principal function and one or more ancillary functions, classification must be made having regard to the principal function. In Hauptzollamt Hannover v Amazon EU Sarl Case C-58/14 the CJEU was concerned with the customs classification of electronic books. It stated as follows: “ 21 The referring court rightly states that the CN does not contain any subheading the wording of which expressly refers to an electrical apparatus whose principal function is that of reading. 22 However, it cannot be concluded that, in default of a subheading in the CN corresponding exactly to the principal function of such an apparatus, the apparatus must be classified under a specific subheading on the basis of one of its ancillary functions. 23 The tariff classification of a product must be made having regard to its principal function. Thus, Note 3 to Section XVI of Part Two of the CN provides that a machine which has a number of functions must be classified according to its principal function. 24 Similarly, the Court has previously pointed out that, for the purposes of classifying a product, it is necessary to take into account what consumers would consider to be ancillary or principal (see, to that effect, judgment in British Sky Broadcasting Group , C-288/09 and C-289/09, EU:C:2011:248 , paragraph 77). 25 A product is therefore classified having regard, not to one of its ancillary functions, but to its principal function, even in a situation such as that at issue in the main proceedings where there is no CN subheading corresponding specifically to that principal function. ”45. It is clear that the reference to a principal function encompasses the principal intended use which may be an objective criterion for the purposes of classification. In British Sky Broadcasting Group plc v HM Revenue & Customs Case C-288/09 the CJEU was concerned with the classification of Sky+ Boxes where customers were purchasing a product primarily for the function of decoding TV signals rather than for its recording function. The CJEU stated as follows:[76]“ 76 It should be recalled that the intended use of a product may constitute an objective criterion for classification if it is inherent to the product, and that inherent character must be capable of being assessed on the basis of the product’s objective characteristics and properties (see Case C-309/98 Holz Geenen [2000] ECR I-1975, paragraph 15; Case C-201/99 Deutsche Nichimen [2001] ECR I-2701, paragraph 20; and Case C-183/06 RUMA [2007] ECR I-1559, paragraph 36).[77]77 In that regard, as the Commission acknowledged at the hearing, it is necessary to take into account what consumers would consider to be ancillary or principal.[78]78 It appears, both from the orders for reference and the observations submitted to the Court, that set-top boxes such as the Sky+ box are sold to television service-providers such as Sky, who make them available to their customers to enable them to access the programmes they offer.[79]79 It therefore seems that consumers subscribe to service-providers such as Sky principally in order to be able to access the television programmes offered and that, in order to do so, they must obtain a set-top box such as a Sky+ box. The television programme recording function which is, in addition, available on that model, is merely an additional service that it offers.[80]80 The interaction between the functions of the Sky+ box described in paragraph 75 of this judgment, which makes the recording function dependent on the reception of television signals, shows that consumers who choose that product are seeking, primarily, not a recording function, but rather a function of decoding television signals, although their choice may be influenced by the fact it has a recording function or the number of hours of programming that can be recorded.[81]81 It follows from all those considerations that the Sky+ box is principally intended to be used to receive television signals and that function is inherent to that apparatus. It therefore constitutes its principal function and the recording function is only secondary. ” 46. We were also referred to the decision of the ECJ in Ikegami Electronics (Europe) GmbH v Oberfinanzdirektion Nurnberg Case C-467/03 . The issues in that case were similar to the issues in the present case, indeed the competing classifications were headings 8471 and 8521. It was cited to us for the principles to be applied rather than any parallel with the facts. Having said that it is necessary to identify the nature of the goods to understand the reasoning of the ECJ. The goods were described as follows:
“ In addition to a keyboard and a built-in glide mouse, the apparatus has a video digitiser board for four video cards with connector ports for up to eight television cameras, image movement control, a main board with a processor and three hard disk slots, a video storage device, sound, LAN, graphics and modem cards, a hard disk and a CDRW drive. The Windows ME operating system, software for the digital recorder, and the software for the CDRW drive are pre-'installed on the hard disk. ”
[47]The ECJ was concerned with Chapter Notes 5(A) and 5(E) of Chapter 84. Note 5(E) was in a slightly different form to that applicable at the time of the present importations but there was no material difference. The question referred was whether a digital recording machine, such as that at issue in the main proceedings, was to be regarded as performing a specific function other than data processing within the meaning of Note 5(E) to Chapter 84 . The ECJ considered that the machine in question had to be regarded as performing a specific function going beyond automatic data processing. It concluded at [31] as follows:[31]“ 31. In the light of all the foregoing, the reply to the question referred for a preliminary ruling must be that a machine which, for video-'surveillance purposes, records signals from cameras and, after compressing them, reproduces them on screen, performs a specific function other than data processing within the meaning of Note 5(E) to Chapter 84 of the CN. ” 48. Mr Baig submitted that a machine supplied with pre-installed software which automatically runs on start up is still a computer. He gave the example of a computer in a public library which automatically defaults to a library catalogue on start up. He submitted that the PC Based Machines should not be viewed as DVRs simply because they came with DVR software which executed automatically on start up. 49. Mr Chapman submitted that a machine could operate both as a computer and as a DVR and that such functions were not mutually exclusive. He summarised his submissions as follows:(1) If the PC Based Machines were not freely programmable then Note 5(A) meant that they could not be classified under Chapter 84.(2) Even if the PC Based Machines were computers within Note 5(A) they could still have a specific function which meant that they were properly classified in a heading other than Chapter 84 by virtue of Note 5(E).(3) If Chapter 85 offered a more specific description of the objective characteristics of the PC Based Machines then it was appropriate to classify them to Chapter 85 by virtue of GIR 3(a).(4) If it was necessary to resort to GIR 3(c) (commonly called the tie-breaker), then classification under Chapter 85 was appropriate. 50. Mr Buttifant’s evidence was that the four requirements in Note 5(A) were satisfied for both PC Based Machines in the state they were in at the time of importation. Following the demonstrations provided during the course of evidence and cross-examination by Mr Baig, Mr Thomas also accepted that the hardware of both PC Based Machines satisfied the four requirements of Note 5(A). 51. In the light of Mr Thomas’ evidence that the PC Based Machines were freely programmable, Mr Chapman did not seek to maintain his first submission. We are satisfied that the PC Based Machines satisfied all the requirements of Chapter Note 5(A). The machines could therefore in principle be classified under heading 8471 as automatic data processing machines. However we must also have regard to Chapter Note 5(E) which provides that machines incorporating an automatic data processing machine which perform a specific function other than data processing are to be classified in the heading appropriate to that function. 52. We must first consider the objective characteristics and the intended use of the PC Based Products; in particular their principal intended use or function. 53. It is significant that the PC Based Machines automatically load the DVR software when started up. The start up process can be re-programmed, but it was clear from Mr Buttifant’s demonstration that to do so is not a straightforward task. Further it is clear from the marketing material that the PC Based Machines are sold as DVRs. The functionality of the IW Machine as a DVR is also indicated by the fascia which contained buttons clearly identifying its intended function as a DVR. 54. The Appellant contends that the small capacity of the SSD is not a hindrance to a classification of the PC Based Machines as computers. They can use the cloud to store and execute software in the same way that the latest notebook and tablet devices operate. 55. We accept that is the case. It is possible to use the PC Based Machines as fairly basic computers. They share many of the basic characteristics of standard PCs. Indeed Mr Thomas accepted that the SA Machine was in essence a standard PC although in his opinion the IW machine was not because of its architecture. However we agree with Mr Chapman that the capability or capacity of the machines does not in the circumstances of this case define their essential characteristics. 56. The fact that the PC Based Machines can be used not only as DVRs but also as computers is not determinative for the purposes of classification. The key issue is to identify the essential character of the PC Based Machines including their principal intended use or function. A machine can be a computer whilst still having the principal function or essential character of a DVR. 57. Mr Baig argued that the fact the PC Based Machines were “locked down” in the sense that they automatically ran the DVR software when started up was relevant only to the question of whether they were freely programmable. Mr Thomas accepted that they were freely programmable so the lock down was not relevant to classification. We do not accept that submission. The fact they are locked down is an objective factor from which, together with other objective factors, we can identify the inherent character of the goods. 58. It seems to us that the following objective factors are most pertinently relevant in identifying the objective characteristics of the PC Based Machines: (1) They are designed to accommodate the DVR card and to run the DVR software. (2) They run an embedded version of Windows which is relatively inaccessible. (3) They are marketed as DVRs. (4) The price paid for the PC Based Machines is greater than a customer would pay for a desktop PC of the same specification.(5) They are intended primarily to function as, and be used as, DVRs. 59. Mr Baig submitted that we should consider the PC Based Machines by reference to the hardware, irrespective of the particular software installed at the time of importation. The hardware of the PC Based Machines was, he submitted, clearly a computer. We were not referred to any authority which would support such an approach. It is the objective characteristics of the goods at the time of importation that we must identify. Those objective characteristics include the goods as a whole. The fact that the PC Based Machines can be reprogrammed to fulfil other tasks of a computer in the way described in Note 5(A) does not alter the fact that their principal intended use is clearly that of a DVR. 60. Mr Baig relied on the ECJ decision in B.A.S. Trucks BV v Staatssecretaris van Financien Case C-400/05 . In that case the ECJ stated the established principles of classification which we have set out above. The case involved heading 8704 which covered dumper trucks with an explanatory note stating that they were generally fitted with off road wheels and could work over soft ground. The wheels and tyres of the vehicles in question were also designed in such a way that they could be used on paved roads. The importer contended that the fact they could be driven on paved roads did not preclude them from having been designed for off-highway use. The ECJ held that the fact the trucks in question were also capable, incidentally, of being driven on roads was not a decisive factor in their classification when they were designed primarily to be driven on uneven ground. 61. Mr Baig argued by analogy that in the present case the fact that the PC Based Machines had software which meant that they could be used as DVRs did not mean that they were to be classified as DVRs. We accept that argument as a matter of principle but in our judgment the PC Based Machines were designed as DVRs. Any intended use by customers as a computer is merely incidental to the principal function and intended use as DVRs. Indeed Mr Buttifant accepted that the principal function of the PC Based Machines was that of DVRs. 62. In the light of our findings as to the objective characteristics of the PC Based Machines and their intended use we consider that their essential character is that of DVRs and as such we would provisionally classify them to heading 8521. There is nothing in heading 8471 or Chapter Note 5(A) which would cause us to reconsider that classification. Indeed it is supported by Chapter Note 5(E). We were not referred to any explanatory notes relevant to classification. In those circumstances we do not need to resort to GIR 3(a) or (c) and there are no competing sub-headings. 63. We find therefore that the PC Based Machines fall to be classified under heading 8521 as video recording or reproducing apparatus. (2) The Nano Machines 64. As stated above, there remains an issue as to whether we should summarily determine the appeal in relation to the Nano Machines. Mr Baig invited us to do so without regard to the evidence or the merits. Mr Chapman submitted that we should still make findings of fact and reach a decision on classification, albeit without the benefit of submissions from the Respondents. 65. Having heard the evidence it seems to us that we can deal with the evidence and the merits quite briefly in any event. We have accepted Mr Buttifant’s evidence that the Nano Machines are digital encoders which convert a source video signal into a digital signal for transmission to a remote location. 66. Mr Baig submitted that the Nano Machines were “other apparatus for the transmission or reception of voice, images or other data” in heading 8517. He submitted that they were within sub heading 8517 62 which refers to machines “for the reception, conversion and transmission of … images, including … routing apparatus”. 67. For the reasons give above, the distinction between heading 8517 and heading 8521 applicable to video recording apparatus involves consideration of the intended use and specific function of the Nano Machines 68. In the light of Mr Buttifant’s evidence, we are satisfied that the Nano Machines are clearly to be classified under heading 8517 62 by reference to their objective characteristics. There is no more appropriate heading. In those circumstances it is not necessary for us to decide the extent of our jurisdiction to determine the appeal summarily. Conclusion 69. For the reasons given above we dismiss the appeal in relation to the PC Based Machines and we allow the appeal in relation to the Nano Machines. 70. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. JONATHAN CANNAN TRIBUNAL JUDGE RELEASE DATE: 21 OCTOBER 2016