CO0207
Customs Duty  -  the correct relationship between Rules 1 and 2(b) of the General Rules of Interpretation  -   whether a composite product made of plastic and rubber should be classified as plastic or rubber   -   whether this is resolved by Rule 1, Rule 3(a), 3(b) or 3(c )

LONDON TRIBUNAL CENTRE

	GRACE CONSTRUCTION PRODUCTS LIMITED	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	HOWARD M NOWLAN (Chairman)
						PRAFUL D DAVDA FCA

Sitting in public in London on 24 and 25 October 2005

Paul Lasock QC, for the Appellant 

Owain Thomas for the Respondents

© CROWN COPYRIGHT 2005

DECISION

INTRODUCTION

1.     This was a most interesting case involving the proper Customs classification of a clever and sophisticated material for use in building construction work that is being imported from the United States by Grace Construction Products Limited (“Grace”).      The material in question is manufactured by one of Grace’s U.S. affiliates, and is known as Preprufe.

2.    The material had been classified as a plastic product by the Commissioners of H.M. Revenue & Customs (“HMRC”) in a BTI decision issued on 15 July 2003.   Specifically it was said to fall within Heading 3920 of the Customs classifications of material, by virtue of an application of Rules 1 and 6 of the General Interpretation Rules (“the GIRs”).   As such it attracted duty at the rate of  6.5%.

Grace contended that the product should have been classified as rubber, whereupon the rate of duty would be nil. Grace requested a review of the BTI decision, which HMRC duly conducted. The Review Decision classified the material within Heading 3921, which varied the BTI decision but still classified the material as a plastic product and left the rate of duty at the same 6.5%.

3.    Grace appealed to this Tribunal and contended that the material should be classified as a rubber product. 

THE STRUCTURE OF THIS DECISION

4.    A number of different points are in dispute in this case, and in addition the case involves a dispute about how the GIRs themselves should be interpreted and applied.   

One matter in dispute is whether HMRC have rightly classified the plastic component of the composite product correctly into a particular sub-heading that refers not only to the plastic component, but to that combined with other materials. If that classification is correct, a further important question arises as to whether, on the proper interpretation of the GIRs themselves, Rule 1 then classifies the product as plastic, without Grace having the opportunity to invoke the aid of Rule 2(b) so as to create a competing classification for the composite product by using that rule to treat the composite product also as rubber. In the event that for one or another reason, the product is prima facie classified as both plastic and rubber, the remaining questions will be whether one component gives the composite material its essential character, and if so which that component is.

 In view of some of this complexity we think that the clearest way to lay out this decision is first to concentrate solely on the facts and the description of Preprufe, then to summarise the four Customs headings that have been considered in some way as possibly being appropriate for the classification of Preprufe, then to quote in full the first three GIRs in relation to which there is a dispute, and only thereafter to deal with the contentions of the parties and the actual matters in dispute. 

THE FACTS AND THE DESCRIPTION OF THE MATERIAL

5.     The material was comprehensively summarised in the evidence given, alongside a slide show, by the only witness, Mr. Kevin O’Gorman, Marketing Manager, Europe for Grace. There were also produced two experts’ reports produced by Dr. D.S. Leek on behalf of Grace, and John Clarke on behalf of HMRC, together with an agreed statement produced jointly by the two experts. 

6.     Preprufe is a sophisticated material designed to be laid underneath concrete slabs in below ground building construction situations. Its purpose is to provide a highly reliable barrier to the penetration of water into concrete slabs and concrete foundations and it is particularly suitable where the foundations are potentially subject to higher water pressure than is encountered at or just below ground level. It is thus principally designed for use in basement constructions or commercial structures where there are substantial concrete slabs at levels significantly below ground level; or where penetration by water or dampness would be totally unacceptable. We were told that Preprufe had, for instance, been used in the construction of the new Wembley Stadium, and at what is currently Europe’s largest construction site, namely Heathrow Terminal 5. 

BACKGROUND INFORMATION

7.    Preprufe is most easily described by first describing the traditional water barrier material most often used in ground level construction situations where potential penetration by water is not a paramount consideration. The material in question is polyethylene.     

Polyethylene is generally rolled out over the construction site, with a considerable overlap between different sheets of polyethylene with a view to stopping water penetration. Concrete is then poured over the polyethylene, and the net result is generally an adequate waterproof slab where the concrete is laid at or just below surface level. 

Polyethylene has however a number of characteristics that render it a significantly less than perfect material where either the water pressure is higher because the concrete is to be laid well below ground level or in situations where it is more important that dampness be eliminated. The deficiencies of simple polyethylene are as follows. 

First and foremost is the fact that simple polyethylene does not adhere to or stick to the concrete, and indeed it slightly resists adhesion. This means that if the polyethylene sheet is punctured during the construction process then, particularly where the water pressure is high, water will not only penetrate the concrete at the point of entry, but there may well be lateral penetration over a wide area. In other words the water will pass between the polyethylene and the concrete over an area far greater than the small point at which water actually passes through the polyethylene.      The significance of this is that it is inevitable that there will be cracks in concrete slabs which occur whilst the slabs are drying out, and indeed they occur more significantly the thicker the slabs. The feature thus that a small puncture in a polyethylene sheet will lead to lateral penetration of water means that it is far more likely that that water penetration will extend to one of the many cracks in the concrete and this will enable water or dampness to penetrate the whole thickness of the slab and emerge above the slab. This is not only undesirable in that penetration of water or dampness into certain buildings will be totally unacceptable. Another unfortunate feature is that the point at which water may appear above the concrete slab may well be a considerable distance from the point where the polyethylene was punctured.    Accordingly it becomes extremely difficult to repair the leak by drilling into the concrete slab and injecting water proofing compounds because it is difficult to locate the point where the water is actually passing through the polyethylene. And until that point is located and the breach in the polyethylene sealed, water will either continue to reach the surface above the concrete slab or, if the initial crack is sealed, the water will find another crack and the problem will remain. 

The other unfortunate feature of using polyethylene as the membrane to prevent water penetration is that in the real world it is impossible to use polyethylene without puncturing it in some way. Concrete is always reinforced with steel reinforcing grids which are positioned in the middle (i.e. middle of top to bottom) of the horizontal concrete layer by being held up by small pillars placed on the polyethylene sheeting.   It is common for the construction workers to walk over the steel grids whilst pouring the concrete, and this can easily lead to small punctures in the underlying polyethylene. Aside from inevitable accidents during the construction process, there are further weak points where different sheets are overlapped because the overlapping joints are not properly sealed. And in vertical as distinct from horizontal applications the lack of rigidity of polyethylene makes it difficult to locate the polyethylene.    Also the corner joints are very difficult to achieve with any degree of reliability. 

None of the above deficiencies of polyethylene as a waterproof membrane to be laid below concrete are particularly serious where the slabs are to be laid in ground conditions where water pressure is likely to be low or in construction situations where water or damp penetration is not that serious a consideration. Accordingly polyethylene remains a very common material for preventing water penetration in the situations just indicated because its performance is reasonably satisfactory, particularly when laid skilfully,  and it is relatively cheap. 

THE DESCRIPTION OF PREPRUFE  ITSELF

8.    Preprufe is a far more sophisticated composite material designed to eliminate the deficiencies of simple polyethylene just described, and thus designed to be a suitable waterproof membrane below concrete slabs in all those situations where polyethylene would be unsuitable.

Preprufe is made up of three layers.

The first layer is a layer of high density polyethylene (“HDPE”) which is either 0.75 or 0.4 mm thick, depending on which of two grades of Preprufe is involved. This layer is indisputably plastic for the purposes of Customs classification. 

The second layer is an adhesive layer of pressure sensitive material based on a compact styrene-isoprene-styrene block copolymer. This layer contains proprietary additives and a trademarked bonding mechanism whereby it bonds to freshly poured concrete. It is said to enhance the strength of the HDPE layer. This second layer is generally 0.5 mm thick. This second layer is rubber or synthetic rubber for the purposes of Customs classification. We will refer to it as “the adhesive” or “the adhesive layer”.

The third layer is a protective coating applied above the adhesive layer, so that when laid horizontally on a building site the layers from the sub-soil up are HDPE, the adhesive layer, and then this third layer uppermost. Whilst nothing turned on the composition of the third layer, we were told that it was a protective coating made of polymeric material based on styrene-butylacrylate polymers, though other materials could be used. The third layer is extremely thin, being about 0.1 mm in thickness.    We refer to this third layer as the “protective layer”.  

The function of these three layers in relation to the use of Preprufe in building construction work is as follows. 

The HDPE layer essentially performs two functions.  

Being the layer facing the exterior environment of the eventual concrete slab or building, the HDPE layer is the first and principal barrier to the passage of water or moisture. Assuming that the Preprufe is not punctured during the construction process we understood that the HDPE layer will on its own prevent water or damp penetration into the concrete laid above the Preprufe.

The second function of the HDPE layer is that it is the carrier layer in the sense that during the manufacturing process, HDPE is simply bought in as a fairly standard finished product, and then the adhesive layer and the protective layer are applied to the HDPE layer. We assume that the later two layers are sprayed onto the HDPE layer, though nothing turns on this. It is thus the HDPE layer that gives the total finished product its essential form in that the adhesive layer on its own would simply not be in sheet form, and until applied to the HDPE or carrier layer would have no rigidity. 

The adhesive layer and the protective layer operate together in a novel and sophisticated way.  

The adhesive layer is sticky, and even if the third layer were omitted from the composite product, the adhesive layer would perform its essential function of bonding to freshly poured concrete, so as to lock the Preprufe to the concrete once the concrete has set. Leaving aside the second and third functions of the adhesive layer, the critical point to note is that the feature of binding the HDPE and the Preprufe to the concrete is the vital characteristic of the adhesive layer. This is because by binding the Preprufe to the concrete, there ceases to be that fatal gap or irrigation channel that facilitates the lateral penetration of water where polyethylene alone is used as the damp-proofing membrane. Accordingly if the HDPE layer and the adhesive layer are both punctured during the construction process water will only affect the very small area of concrete around the puncture, and if there are no cracks in the concrete slab at that point, there may be no penetration of water above the concrete slab at all.  And even if the point of penetration is very close to a crack, then at least the construction workers will be able to locate the puncture much more easily than with polyethylene on its own, and eliminate the dampness problem by drilling and injecting the concrete with special damp-proofing materials. 

The above feature of bonding the HDPE layer and the Preprufe as a whole to the concrete and thus preventing the lateral penetration of water between the concrete and the water barrier membrane is undoubtedly the critical feature of the adhesive layer and of Preprufe as a whole. 

The adhesive layer was said to perform two other functions. One was “to strengthen the HDPE layer”; the other was to act as a secondary barrier to the penetration of water. 

We were not told in what sense the adhesive layer strengthened the HDPE layer and nothing turns on whether the adhesive layer somehow affected the HDPE layer itself (which seemed unlikely) or whether the strengthening simply resulted from the fact that the adhesive layer approximately doubled the thickness of the composite product in contrast to simple HDPE, and thus made it considerably more rigid. Whatever the explanation, we were shown samples of Preprufe and we record that the composite material was pliable but it was still far more rigid than simple polyethylene. An important consequence of this greater rigidity is that it becomes far easier to install Preprufe in vertical applications. In situations where polyethylene itself would simply collapse under its own weight and end up in a heap on the ground, it was obvious that Preprufe (whilst pliable) had sufficient rigidity to stand vertically, alongside shuttering, before the introduction of the concrete into a vertical wall. 

As indicated, the third attribute of the adhesive layer was that the adhesive was also resistant to the passage of water, so that the adhesive layer constituted a second barrier to the passage of water. It was certainly  recorded in the reports of the experts that the adhesive layer had some function to perform as a waterproof membrane, but it was also clear that the adhesive layer was a less or even considerably less effective barrier to the passage of water than HDPE itself.  It also seemed somewhat unlikely that there would be that many occasions when the HDPE layer might be punctured during construction work when the adhesive layer would not be punctured so that we did not regard this secondary water-proofing characteristic of the adhesive layer as being that significant. Undoubtedly the critical attribute of the adhesive layer was to minimise (or even eliminate) the significance of a total puncture in the Preprufe by preventing lateral migration of water.

The function of the third layer, the protective layer, was somewhat ancillary but again very clever.   

The protective layer was simply designed to stop the composite material from being sticky to the touch so that during the construction process, workers could walk on the Preprufe without it sticking to their boots. The protective layer was porous however so that when wet concrete was poured over the Preprufe the concrete would adhere to the adhesive layer beneath the protective layer, just as if the protective layer did not exist. In a sense the protective layer was like a peel off layer applied to sticky tape, save that it was unnecessary to peel off the relevant layer. Being porous, the protective layer effectively disappeared automatically when wet concrete was poured over the Preprufe.

Another important characteristic of Preprufe is that it is manufactured with adhesive margins that will stick firmly to adjacent and overlapped sheets. Accordingly it is possible to join sheets together with almost perfectly watertight joins, in contrast to the inevitable gaps that there will be in the joins in simple polyethylene. 

DETAILS RELEVANT TO THE CUSTOMS CLASSIFICATION OF PREPRUFE

9.      For Customs classification purposes Rule 3(b) of the GIRs provides that goods consisting of more than one material that are dealt with under this particular rule “shall be classified as if they consisted of the material or component which gives them their essential character, in so far as this criterion is applicable.” Without at this stage addressing the issue of whether we consider that this Rule is relevant in the present case or not, we will now summarise certain factual matters that might be material to this particular criterion. We will also bear in mind that one of the tests adopted in case law for determining which material gives a composite product its essential character is to postulate the removal of each of the various materials that make up the composite material and ask whether the remainder of the materials or material still perform the basic function of the composite material even when one has been removed.  

The first point to record is that the manufacturing cost of the adhesive layer exceeded the cost of the HDPE layer. 

Whilst the next point is an inference drawn from the facts we imagine that it will be un-contentious to say that the adhesive layer, or even more so the adhesive layer and the protective layer, are the sophisticated components in the composite product.

There was considerable argument and reference to the experts’ reports in efforts to substantiate that in applying the case law test that we have just referred to either the HDPE or the adhesive layer gave the product its essential character.  

In favour of saying that the HDPE gave the product its essential character, it was argued that if one stripped off the adhesive and protective layers, one was still left with a damp-proof and waterproof membrane.  Admittedly, for all the reasons given in summarising the contrast between simple polyethylene and Preprufe, there would be many respects in which HDPE was a less satisfactory product and a product that no construction company would contemplate using for certain building applications, but nevertheless the linguistic point was made that one would still have a product which could fairly be described as a waterproof membrane for use under concrete slabs.     For present purposes we will simply record that the two experts certainly agreed that there would be certain building applications where HDPE could be used, and there were others where it would be so unsatisfactory that no-one would contemplate using it. It seemed self-evident to us that although Preprufe was actually a more expensive product not only than HDPE but also than several other competitive materials also designed to bond to concrete, the extra cost would be a virtual irrelevance in some installations. In other words, in cases where very high water pressure was contemplated, or where resistance to damp was absolutely essential, it would be unthinkable to build a costly building on the wrong damp-proof membrane because once the building is in place one would never have a second chance to upgrade the specification of the membrane beneath the concrete. Accordingly we think it fair to say that although one could say that HDPE and Preprufe could both be described as forms of damp-proof membranes, there will unquestionably be some applications where it would be unthinkable to use HDPE. And these are the situations of course where Preprufe or one of the somewhat cheaper competitive bonding products would be specified. 

In favour of saying that the adhesive layer gave the product its essential character was the argument that HDPE alone failed to have the required attributes because it did not bond to concrete, and so it permitted lateral penetration of water. By contrast it was said that the adhesive layer did still retain, on its own, the essential characteristic of a self-bonding waterproof membrane. This assertion was based in part on the expert evidence which did say that the adhesive layer had some water resistant properties.    Accordingly since it was waterproof and it would bond to concrete, the adhesive layer on its own retained the essential character of the composite material even when the HDPE was stripped off. 

Whilst we accept that the expert evidence indicated that the adhesive layer had some water-resistant characteristics, we note that both expert reports referred to the fact that the water-resistant characteristics of the adhesive layer were inferior to those of HDPE. Dr. Leek’s report admittedly suggested that if the HDPE layer was punctured, but the adhesive layer was not breached, the combined product would not only prevent lateral penetration of water but would prevent the passage of water altogether, but he still referred to the fact that the adhesive layer “has a degree of water-resistance”. In his report Mr. Clarke said that “the HDPE layer is however very efficient in terms of its waterproofing capability particularly when compared to the adhesive layer in the Preprufe. The HDPE layer is thicker, denser and able to withstand higher hydrostatic pressures because of this when compared to the adhesive layer”.  

We consider that the two experts were saying essentially the same thing on this point.   The adhesive layer had some water-resistant characteristics, but the HDPE layer was not only the first barrier to the penetration of water, but it was the superior layer in this context. 

In this context it is also interesting to note that in the slide show produced to us there was one slide which indicated the functionality of Preprufe components, and it drew a distinction between function “During installation/construction phase” and “In place performance”. Under the “In place performance” column the function of the HDPE layer was described as “Provides barrier to water, moisture and gas”.  The function of the adhesive layer was described as “Prevents the migration of any water that has infiltrated the HDPE: Holds membrane in place in case of ground settlement”.    Albeit that this summary was very short, we think that it is of some significance that it made no reference to the secondary water-resistant characteristics of the adhesive layer, on which some stress is laid in the contention that the adhesive layer has the essential characteristic of the composite product.  

Our inferences from the basic facts are thus as follows:

   (i)  there are certain applications where it would be unthinkable to specify HDPE as distinct from Preprufe or one of Preprufe’s bonding competitors;

   (ii)  if the products are described as “water-resistant membranes” one could fairly say that both HDPE and Preprufe are water-resistant membranes, but if the products are described as sophisticated or more relevantly “self-bonding water-resistant membranes”, then Preprufe qualifies and HDPE does not; and 
 
   (iii)  we consider it unrealistic to suggest that the adhesive layer on its own retains the essential characteristics of the composite material. Judged particularly against the standard that Preprufe’s target market is the market where resistance to damp penetration is critical it seems unrealistic to suggest that the adhesive alone, a material with inferior resistance to water penetration than simple HDPE, retains the essential characteristic of the composite material.

THE  CUSTOMS CLASSIFICATION HEADINGS  THAT WERE CONSIDERED

10.     We will summarise the four headings to which consideration was given in the course of classifying Preprufe for Customs classification purposes.

11.     Three of the headings dealt with plastics. 

Heading 3919  

The first of these was one of the sub-headings within CN Heading 3919, which dealt with “Self-adhesive plates, sheets, film, foil, tape, strip and other flat shapes, of plastics, whether or not in rolls”. This initially sounded relevant but had rightly been dismissed because the Harmonised System Explanatory Notes (the “HSENs” or “the Notes”) provided that “the heading is limited to flat shapes which are pressure-sensitive, i.e., which at room temperature, without wetting or other addition, are permanently tacky (on one or both sides) and which firmly adhere to a variety of dissimilar surfaces upon mere contact, without the need for more than finger or hand pressure”.   

Whilst Heading 3919 was rightly dismissed because Preprufe failed to comply with several of the required characteristics of self-adhesive tape just quoted, HMRC did place some reliance on Heading 3919. It was contended for instance that this Heading was a clear example of the fact that plastic continued to be classified as plastic, notwithstanding the addition of an adhesive layer. We gave relatively little weight to contentions based on headings and sub-headings within which Preprufe could clearly not be classified. 

Heading 3920

The second of the “plastics” Codes considered was CN Heading 3920, which dealt with “Other plates, sheets, film, foil and strip, of plastics, non cellular and not reinforced, laminated, supported or similarly combined with other materials”. This heading sounds less relevant since Preprufe is indeed a plastic sheet combined with adhesive rubber (i.e. it is combined on the ordinary meaning of those words with other materials)  until it is appreciated that the HSENs give a special meaning to the phrase “combined with other materials”. They say that “for this purpose “similarly combined” must be combinations of plastics with materials, other than plastics, which enhance the strength of the plastic material (e.g. embedded metal mesh and woven glass fabric, as well as mineral fibres, whiskers and filaments)”.   

The original BTI for Preprufe classified Preprufe under Heading 3920, though the Review Decision later changed the classification to Heading 3921 to which we will turn next.  Prior to doing that however we note that the ground on which the original BTI classified Preprufe under Heading 3920 was presumably that although Preprufe was combined with a rubber adhesive, this was not specifically to enhance the strength of the plastic and it was certainly not to enhance the strength in any of the ways specified in the examples, i.e. embedded metal mesh etc. On the further  supposition that it was assumed that lamination  involved some sort of lamination to enhance strength such that Preprufe could not be said to be laminated either, the original BTI decision must have been based on the notion that Preprufe was plastic sheeting, and that the additional layers did not exclude it from Heading 3920, simply because those layers were not added to reinforce, support, laminate or strengthen the HDPE layer in any realistic sense.

We might additionally note at this point that Heading 3920 would only have applied to the plastic part of the material, such that several further steps would be required in the classification process before the composite material itself would be classified within 3920, but for present purposes the salient point to note is that the basis of classifying the plastic part within 3920 would be on the ground that we have just summarised. 

Heading 3921

The third relevant plastics heading to which we must now refer is Heading 3921, to which reference is only made if Heading 3920 is inapplicable because Heading 3921 refers to “Other plates, sheets, film, foil and strip, of plastics.” “Other” means other than adhesive plastic as contemplated by Heading 3919 and other than plastic sheets etc that were not reinforced, strengthened etc as mentioned in Heading 3920. Thus it covers, and we now quote the HSEN, “only cellular products or those which have been reinforced, laminated, supported or similarly combined with other materials”. 

The Review Decision which, as we have said, changed the classification of Preprufe from Heading 3920 to Heading 3921 explained carefully why it was considered that Preprufe was rightly now said to be reinforced, laminated, strengthened or similarly combined [for strengthening purposes] with other materials. And HMRC advanced the same reasoning in the hearing before the Tribunal.

The basis of the change of heading from 3920 to 3921 was that the plastic was “laminated”. Quoting from the review decision, the Reviewing Officer said the following:

“Whilst I accept that the HSENs state that the other materials should enhance the strength of the plastic, this is guidance for the particular expression “similarly combined”.  I do not consider it provides, by reverse inference, that the expression “laminated” has the same meaning. If it were the intention that laminated materials had to provide strength, then the heading text would not need to specify this particular presentation and could simply state “not strengthened”.  I can find no definition of the term within the Nomenclature. The dictionary definition of “laminate” is “overlay with metal plates, a plastic layer etc; manufacture by placing layer upon layer; a material of layers fixed together to form a rigid or flexible material”. It does not state the layers should provide strength.  Laminated is a specific combination of materials in layers and whilst some layers may provide strength depending on the material used, it is not necessarily always the case.

“Therefore, I am satisfied that the product cannot be classified under heading 3920 as it is a plastic sheet which is laminated with a layer of synthetic rubber, so does not meet the terms of the heading.” 

It is worth noting an important consequence of the change of classification from Heading 3920 to Heading 3921. This is that if the plastic had rightly been said to fall within 3920 as, in short, “non reinforced plastic”, then the heading might have thereby referred to the plastic, but it would not have referred in any way to the other layers.    Heading 3920 simply says “Plastic sheeting, not reinforced”, and no reference is made to the other layers or to the feature that the plastic might be just one part of a composite material. As we will see Rule 2(b) of the GIRs might still operate to treat the composite material as plastic within Heading 3920 (and possibly as rubber as well), but there is nevertheless some considerable significance to the issue of whether the heading itself specifically refers not just to the plastic, but to the critical feature that the plastic can be combined or laminated with other materials. 

By contrast if Heading 3921 is the correct heading, and it is right to say, in accordance with the passage from the Review Decision quoted above, that Preprufe is “plastic sheet laminated with other materials” then the very heading would refer (albeit generally) to the other materials. We will deal with the possible significance of this below.

 We should note in passing that even if the Review Decision was right to move the classification of Preprufe from Heading 3920 to Heading 3921 because it is a laminated material, we must not lapse into saying that the plastic could also be said to be “combined with other materials” in accordance with the normal every day meaning of that phrase. This is because we have no doubt whatever that the meaning of the phrase “combined with other materials” used in the HSENs to Heading 3921 must be the same as in Heading 3920. In other words it must mean “combined for strengthening purposes”. And unless it can be contended that the adhesive layer is added for strengthening purposes, then Preprufe is only classified into Heading 3921 as opposed to Heading 3920 because it is “plastic laminated with other materials”. HMRC did frequently refer during the hearing, however, to the feature that the relevant heading did apply to “plastic in combination with other materials”, and we will make similar references below when we are summarising HMRC’s contentions. 

We should add for completeness that HMRC’s specific contention was that the appropriate sub heading within 3921 was 321 90 90, an “other” category, within the general heading referring to “laminated plastics”.

Heading 4005

12.     The fourth CN Heading to which reference was made was Heading  4005 91 00. Heading 4005 refers to “Compounded rubber, unvulcanised, in primary forms or in plates, sheets or strip”, and sub-heading 91 00 refers to an “other” category from certain irrelevant specified categories, and to “plates, sheets and strip” within that “other” category. 

It was not disputed that the adhesive layer of Preprufe was synthetic rubber and that it was appropriately classified within the above heading. It was also accepted on behalf of HMRC that the adhesive layer was a sheet even though it was not in the form of a sheet until the adhesive material was sprayed on or otherwise applied to the HDPE layer. 

THE CHAPTER NOTES  

13.    We should mention one other matter in relation to the Chapter Notes relevant to Headings 39 (Plastics) and 40 (rubber).

The sub-heading notes to both Chapters included a fairly similar paragraph dealing respectively with “Plastics and textile combinations” and “Rubber and textile combinations”. Neither of the adhesive layer or the protective layer were textiles of course so that these particular paragraphs were not relevant. The point that HMRC contended was significant was that the Plastics Notes went on to deal with “Combinations of plastics and materials other than textiles”, whereas there was no equivalent paragraph in the Notes under Chapter 40. It was thus suggested that there was some significance in the feature that the Notes under the Plastics Chapter were the only Notes specifically to refer to combinations of plastics with other materials.      Whilst we will revert to this point later, we should state immediately that we do not accept the proposition that these particular Notes extend to the type of combining of plastic with other materials that we are concerned with in the present case at all. The relevant paragraphs go on to specify the only four types of combined material with which they are  concerned and it seems absolutely plain to us that none of the four specified combinations addresses the sort of combination that exists in the case of Preprufe. Just to take the first, that refers to “Plates, sheets, etc., incorporating a reinforcement or a supporting mesh of another material (wire, glass fibres, etc.) embedded in the body of the plastics”, and it is plain that Preprufe does not fall within that category of combination. Without troubling to refer to the other three classes of combination we think that it is equally clear that none of the three applies to Preprufe either.

In summary thus we note that there are these further references to Plastics combined with other materials than textiles in the Plastics Chapter but we note that none of the specified combinations covers Preprufe, and we will refer later to the significance that we do attach to these particular Notes dealing with non textile combinations. 

THE FIRST THREE GIRs

14.    This case involved a dispute and considerable argument in relation to the proper inter-relation between Rule 1 and Rules 2 (b) and 3(a)  of the GIRs, and prior to summarising the contentions of the two parties we will quote the relevant rules in full.     They are as follows:

“GENERAL RULES

A.   General rules for the interpretation of the Combined Nomenclature

Classification of goods in the Combined Nomenclature shall be governed by the following principles:

1.   The titles of sections, chapters and sub-chapters are provided for ease of reference only; for legal purposes, classification shall be determined according to the terms of the headings and any relative section or chapter notes and, provided such headings or notes do not otherwise require, according to the following provisions. 

2.   (a)  Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article.   It shall also be taken to include a reference to that article complete or finished (or falling to be classified as complete or finished by virtue of this rule), presented unassembled or disassembled. 

     (b)  Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance, with other materials or substances.  Any reference to goods of a given material or substance shall be taken to include a reference to goods consisting wholly or partly of such material or substance. The classification of goods consisting of more than one material or substance shall be according to the principles of rule 3.

3.   When, by application of rule 2(b) or for any other reason, goods are prima facie classifiable under two or more headings, classification shall be effected as follows:

    (a)  the heading which provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods; 

    (b)  mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3(a), shall be classified as if they consisted of the material or component which gives them their essential character, in so far as this criterion is applicable;

    (c)  when goods cannot be classified by reference to 3(a) or 3(b), they shall be classified under the heading which occurs last in numerical order among those which equally merit consideration. 

THE CLASSIFICATION OF PREPRUFE UNDER THE INITIAL BTI AND PURSUANT TO THE REVIEW DECISION

15.     As already indicated the initial BTI classified Preprufe under Heading 3920, and the Review Decision changed the classification for the reason summarised in paragraph 12 above to Heading 3921. A common feature of the two classifications however was that both based their classification simply on an application of Rules 1 and 6 of the GIRs. For present purposes the significant point is that both proceeded on the basis that Rule 2 (b) was not to be invoked so as to enable the synthetic rubber component to be taken into account as a competing material to plastic for classification purposes, whereupon Rule 3(b) or Rule 3(c) would have governed the ultimate classification. Instead they proceeded on the basis that the case was clearly resolved by Rule 1 and that where a case was resolved by Rule 1, it was inappropriate even to consider or to apply Rule 2 (b).

THE CONTENTIONS ON BEHALF OF GRACE

16.    It was contended on behalf of Grace that:

   (i)  the adhesive layer was plainly rubber, appropriately classified under Heading 4005, and Rule 2(b) should therefore have been applied by HMRC to treat the combined material as both plastic and rubber such that the ultimate classification should be governed by Rule 3;

   (ii)  it was inexplicable that HMRC had ignored Rule 2(b), and no explanation had been given as to why the rule had been ignored;

   (iii)  on a proper application of Rule 2 (b), HMRC should have proceeded to apply Rule 3, whereupon it was Rule 3(b) that should govern the reconciliation between plastic and rubber. The adhesive layer cost more than the plastic layer; the adhesive layer was the sophisticated layer of the combined product; and it was the critical ability of Preprufe to adhere to freshly poured concrete that gave Preprufe its critical, novel, and essential characteristic, such that the combined material should have been classified under Rule 3(b) under Heading 4005 91 00;

   (iv)  alternatively, neither the plastic nor the rubber gave Preprufe a single essential character, in which case the slightly unsatisfactory tie-breaker rule of Rule 3(c) should be invoked, whereupon because rubber was classified numerically after plastic in the Combined Nomenclature, the combined material would again be classified as rubber; and 

   (v)  finally, HMRC could only succeed in its classification as plastic if it could demonstrate both that the combined material did have an essential character, and that it was the plastic that could most appropriately be said to confer that essential character on the material.

THE CONTENTIONS ON BEHALF OF HMRC

17.    It was contended on behalf of HMRC that;

   (i)   Heading 3921 rather than Heading 3920 was the correct heading for the HDPE layer and for Preprufe generally for the reasons given in the passage of the Review Decision quoted in paragraph 11 above;

   (ii)  Heading 3921 applied specifically to the combined material because it referred to plastic in combination with other materials; Heading 4005 by contrast only referred in its terms to the rubber part of the combined material;

   (iii)  Rule 1 alone thus governed the classification of the combined material to Heading 3921 because that heading specifically referred to the combined material (albeit only in a general sense in relation to the material with which the plastic was actually combined), and because it is a general principle of the GIRs that each be applied numerically in turn, Rule 1 alone was sufficient to resolve the case. Rule 2 and in particular in this case Rule 2 (b) should only be applied when Rule 1 did not itself resolve the situation;

   (iv)  alternatively if headings 39 and 40 must both  be considered, Rule 3(b) would still operate to treat the combined material as plastic because it was the HDPE layer that gave the combined material its form, and more relevantly it was that layer that performed the essential function of the material, namely that of being a waterproof membrane; and 

   (v)  Rule 3 (c), the ultimate and unsatisfactorily arbitrary tie-breaker rule should only be applied as a last resort, and every effort should be made to classify combination materials by reference to the essential character of one of the materials under Rule 3(b).

OUR DECISION

18.     This case raises a number of complex points and it is possible that either party may wish to appeal against our decision on one or more of the points involved.   Accordingly we will give our decision on the various different points by addressing the following questions in turn:

   (i)   Is Grace right to contend that Rules 1 and 2 must always be read in tandem, such that resultant conflicts will be resolved by an application of Rule 3, or is HMRC right that Rule 2 and in particular Rule 2 (b) should not be applied at all in a case where one heading refers (albeit in part only generally), as heading 3921 does to the whole material, whereas heading 4005 only refers to part of the material such that it loses all relevance because Rule 1 resolves the situation and Rule 2(b) is never to be applied?

   (ii)  If the answer to the first question is that Rule 2 (b) should be applied as Grace contends, and if HMRC is right to contend that the plastic part of the material is appropriately to be classified under Heading 3921 as opposed to Heading 3920, would the case be resolved by Rule 3(a) on the ground that one of the headings refers to the whole of the composite product, and not just to part, so that Heading 3921 is accordingly “the most specific description”?

   (iii)  In relation to the plastic part of the combined material, should this be classified under Heading 3921 or Heading 3920?

   (iv)  If the case is to be resolved by Rule 3(b), either because Rule 3(a) is inapplicable, or because the appropriate heading, pursuant to the third question is Heading 3920 (which makes no reference to any sort of combination with other materials) rather than 3921, how is the conflict between plastic and rubber to be resolved by Rule 3 (b), or is Rule 3(b) to be held to be inapplicable such that the case is resolved by the tie-breaker rule in Rule 3 (c)?

THE CORRECT INTER-RELATIONSHIP BETWEEN RULES 1 AND 2

19.     The fundamental argument of HMRC was that as a matter of well understood general application, all of the Rules of the GIRs had to be applied in turn, and when a particular heading (such as 3921) applied to the composite product, one never applied Rule 2(b) even though another heading, namely 4005, clearly applied to part only of the combined material. When we asked how this interpretation of the Rules was justified in terms of the actual wording of the Rules, it was suggested that the words in the third line of Rule 1, namely “provided such headings or notes do not otherwise require” should perhaps be read to mean something like “provided such headings or notes do not render it superfluous to refer to the later provisions because Rule 1 can produce a total solution”. On that construction if one of the headings did apply aptly to cover the composite product, then Rule 1 alone would apply, and it would be unnecessary and thus wrong to invoke Rule 2(b) at all.  

20.    Our decision is that HMRC’s construction is wrong.    

We entirely accept that most of the GIR rules are to be applied sequentially, and this is because the three sub-headings within Rule 3 specifically say so, and Rule 6, with which we are not otherwise concerned, expressly contains a similar notion.  

Nothing however specifically says that Rule 2(b) is not to be applied until it proves impossible to classify a product, or perhaps more relevantly a composite product under Rule 1 at all. On the perfectly straight-forward reading of these rules, the opening line requires classification to be governed “by the following principles” and that seems apt to refer to all of the principles, save where they expressly include a rule that requires one rule to be applied before another. 

Much more relevantly, Rule 1 provides that “classification shall be determined according to the terms of the headings, … and ……according to the following provisions”.  Rule 2 (b) is manifestly one of “the following provisions” so that Rule 1 appears to require Rule 2(b) to be taken into account in determining classification.     We have admittedly omitted some vital words because Rule 1 actually states that classification is to be “determined according to the terms of the headings … and, provided such headings … do not otherwise require, according to the following provisions”. 

The natural meaning of that phrase “provided such headings do not otherwise require” seems to us to be self-evident. 

 If a heading refers to part (say rubber)  of a composite product but the heading  or indeed the Notes specifically refer to “rubber but not when combined with other materials”, then that heading would require that Rule 2(b) should not be applied.    Rule 2(b) would ordinarily treat rubber and another component as constituting rubber (and quite possibly the composite product would be treated as the other component as well), but as in this example the terms of the heading would preclude a composite product, part of which was rubber, from being treated itself as rubber, then Rule 2(b) would be dis-applied.  

This interpretation of the phrase in the last line of Rule 1 seems to us to conform precisely to what the words actually say, and to make perfectly good sense. The competing interpretation of the phrase, which gives priority to Rule 1, interprets it to mean something along the lines of “providing that the headings or Notes themselves are not so clear that it is unnecessary to apply the following principles” and that interpretation appears to bear no relationship to what the words actually say. 

Further support for the above preferred interpretation is found in Rules 2(a) and (b).    They both commence by saying that “Any reference in a heading to an article shall be taken to include a reference to ……. [either the finished article or the composite product]”. They appear to say this quite generally and they do not say that one first tests the meaning of the headings in one way and then possibly at some later point interprets them in the way specified in Rules 2(a) and (b). 

The last sentence in Rule 2(b) also makes perfectly good sense alongside our preferred interpretation. We suggest that the sentence which says that “The classification of goods consisting of more than one material or substance shall be according to the principles of rule 3” would make rather less sense on the other interpretation where the words should be followed by the phrase, “unless of course the situation, albeit still involving goods consisting of more than one material or substance, has in fact been resolved by Rule 1 so that neither Rule 2(b) or any of the rules of Rule 3 is relevant”.   

Rule 3 also supports this interpretation. It contemplates that goods might be “prima facie classifiable under two or more headings”. This might be by the “application of Rule 2(b) or for any other reason”. Rule 3 then lays down three perfectly coherent tests which must be applied in turn for deciding between the two or more competing headings. 

The first point worth noting here is that  that Rule 3 does not commence with wording along the lines of “Where goods are prima facie classifiable under two or more headings, apart from the situation of course where goods are so classifiable but nevertheless it is possible to reconcile the conflict by applying simply Rule 1, ……”       Rule 3 appears to contemplate that it applies whenever (to quote the Rule precisely) “goods are prima facie classifiable under two or more headings”. This is not entirely surprising in the light of the last sentence of Rule 2(b) just addressed. 

A second note-worthy point in relation to Rule 3 is that it does, to state the obvious, contain rules for reconciling the conflict between two competing classifications. If Rule 1 is meant to reconcile half of the cases of conflict between two headings and conflicts where products consist of more than one material, whilst Rule 3 is meant to deal with the other half (maybe the more borderline cases) then Rule 1 appears to lack any guidance as to how the conflict should be resolved. This seems rather unsatisfactory, albeit that the practical suggestion as to how conflicts are resolved under Rule 1 appears to bear a startling resemblance to the actual test stated in Rule 3(a).  

Another significant point to note on the wording of Rule 3(a) is that it is dis-applied when the headings (and here the reference to the headings must be a reference to the actual wording before applying the terms of rule 2(b)) all apply to part only of the composite goods. Implicitly thus it can only apply in one of two situations. One might be the case where two headings were potentially relevant, and Rule 2(b) had had no remote application to either. The other would be precisely the situation that we have here, namely that there is conflict because one heading, by referring to “plastic in combination with other materials” refers to the whole composite product, whereas the other refers, until the operation of Rule 2(b), only to the rubber part of the composite product. We think that there is the strongest indication that Rule 3(a) can apply in a case such as this, and that can obviously only be so if we were right to conclude that the fact that one heading (3921) refers to the composite product in general terms does not preclude the operation of Rule 2(b) in relation to the rubber component, where heading 4005 refers only to rubber in isolation. 

21.    It was suggested by HMRC that there was authority for the proposition that Rule 1 alone resolved this case, and we were referred to the judgment of `Mr. Justice Collins in Vtech Electronics (UK) PLC and The Commissioners of Customs & Excise [2003] EWHC 59 (Ch) in support of this proposition.  We accept that in that case the proper classification was resolved by an application of Rule 1, though at some points in the judgment, Mr. Justice Collins contemplated that a similar result would arise under either Rule 1 or Rule 3.  Even however on the basis that the case was resolved by Rule 1, the situation was very different in that case in that it was held that one candidate heading was much the most appropriate and another more tenuous, and the case was anyway not one essentially in relation to composite materials and the particular type of conflict that we have here. We are not suggesting, by our decision in paragraph 20 above, that Rule 1 will inevitably only apply when there is no conceivable conflict. There will certainly be cases where one heading is much the more relevant and specific, and another only tenuous. Whilst we would suppose that Rule 3(a) would then generally apply to resolve the case in a similar manner, and indeed by reference to a carefully framed test, we accept that there will be many cases where manifestly the most obvious heading is treated as applicable under Rule 1.    All that we are deciding in 20 above is that Rule 2(b) is to be applied concurrently in operating Rule 1 in cases involving composite materials and products made up of substances classified under different headings, and if this leads then to there being two prima facie headings in contention, then Rule 3 must operate, exactly as it contemplates in express wording.    

 We might observe immediately that the significance of this construction is not particularly startling because it seems to us that Rule 3(a) will generally lead to a similar result to that that would arise under Rule 1 on the other construction of the GIRs. 

HOW IS THE CLASSIFICATION TO BE RECONCILED IF RULE 2(b) MUST BE APPLIED BUT HMRC IS RIGHT TO CONTEND THAT HEADING 3921 IS THE APPROPRIATE HEADING WITHIN THE PLASTICS CHAPTER?

22.    The import of this question is that if Heading 3921, rather than Heading 3920, is the correct heading for the plastic component, then that heading will refer to “plastic in combination with other materials” without any reference to Rule 2(b). By contrast Heading 4005 only refers to rubber, and it is only following the application of Rule 2(b) that it is to be interpreted to refer to the whole of the composite material.  Is this contrast significant, and specifically does it potentially bring Rule 3(a) into operation?

23.    Before addressing this question we ought just to observe that we have phrased matters wrongly in paragraph 22 above, and whenever we have referred to HMRC’s contentions because, when classifying plastic into Heading 3921, as opposed to Heading 3920, this was done on the basis that the plastic was laminated with other materials. The phrase “similarly combined” must, we have already decided, have the same meaning in Heading 3921 as in Heading 3920, and it must thus mean “combined for strengthening purposes, for instance by insertion of a wire mesh etc”. On the reasoning that the Review Decision only switched the classification of Preprufe to Heading 3921 on the contention that it was laminated, and not that it was “similarly combined”, we think that HMRC was wrong to refer repeatedly to the proposition that Heading 3921 included plastics “combined with other materials”. What is (on their contention at least, as we understood it)  is that it covers “plastics laminated with other materials”.

24.   Having made that presently semi-irrelevant point, we nevertheless consider that in the circumstances postulated in paragraph 22, where one heading specifically refers to combinations or laminations of plastic with another material, and the heading for rubber only does so when interpreted in accordance with Rule 2(b) then the resultant case is one that might well be resolved by the test in Rule 3(a).     

Accordingly we decide that if the plastic component or indeed Preprufe was rightly to be classified under Heading 3921 rather than 3920, that heading would refer generally to the whole of the composite product, and not just to part of the composite product. Thus Rule 3(a) could potentially apply, and we then consider that the right conclusion here would be that under Rule 3(a) Heading 3921 would provide a more specific description of the composite product than Heading 4005, and we would classify Preprufe itself under Heading 3921.

SHOULD PREPRUFE BE CLASSIFIED UNDER HEADING 3921 OR HEADING 3920? 

25.    The last question was predicated on the assumption that the Review Decision and the arguments before us on behalf of HMRC in supporting the classification under Heading 3921 are right. The previous question was only relevant in that situation. We consider that the plastic component in Preprufe should in fact be classified under Heading 3920, and not 3921, and that the original BTI classification was right to apply Heading 3920 to the plastic component, and that the Review Decision was wrong. 

For Heading 3921 to be the right classification for the plastic component, it must clearly be shown that the plastic is either;

   (i)    reinforced,

   (ii)   laminated,

   (iii)  supported, or

   (iv)  similarly combined with other materials. 

It will be remembered that the phrase “similarly combined” means “combined for strengthening purposes”. 

The only argument so far advanced in support of the proposition that the plastic contained in Preprufe satisfies the above  wording is the argument advanced in the Review Decision that we quoted in paragraph 11 above. In the interests of testing the proper classification of the plastic under Heading 3921 we will, however, test the two propositions, either that the plastic is laminated with the other layers, or that the plastic is in some way strengthened by the adhesive layer. We consider that neither is tenable, though if anything we consider it is less appropriate to suggest that the plastic is laminated than that it is in some way strengthened by the other layers. 

26.    The relevant composite phrase concerning reinforcements etc refers to three specific matters, and then there is a general reference to the plastic being “similarly combined with other materials”. To quote that definition in full again n, “similarly combined” means that there must be “combinations of plastics with materials, other than plastics, which enhance the strength of the plastic material (e.g. embedded metal mesh and woven glass fabric, as well as mineral fibres, whiskers and filaments)”.

It follows that the general sweep up category of similar combinations must have the attribute of strengthening the plastic. And without any dispute a material that reinforces plastic or that supports it also has the attribute of strengthening it. So is it realistic to say that there is however an exception to the list of strengthening characteristics and that a lamination of plastic and some other material has a different meaning, and can mean “whether strengthening the plastic or not”?

In approaching this question the first point that seems manifest is that the sweep up expression referring to the plastic being “similarly combined” would be inappropriate if it meant:

“strengthening the plastic in a similar manner to that in which reinforcing materials and supporting materials strengthen plastic, but in a manner that may or may not be similar to the function of laminating the plastic with other materials, because it is entirely possible that the laminated material might strengthen the plastic or it might not do so”        

Contrary thus to the passage that we quoted from the Review Decision we consider that there is the strongest implication from the definition of “similarly combined” that the word “laminated” must be read in this context to mean “laminated to enhance strength”. 

We next ask whether the word “lamination” can reasonably be read, even out of the above very clear context, to have the common connotation of strengthening. And the answer to that  is that lamination very often strengthens materials. Relatively thin sections or wood, often curved, are often glued together to create an extremely strong section of wood. Admittedly the concept can be confusing because in materials such as Formica laminates, some of the materials will be added for various different functions. However we consider that the concept of lamination to achieve strength is so fundamental that when the word is used in conjunction with two other words, and with a sweep up provision, all of which have or must have (in the case of the sweeper) the connotation of “strengthening” the plastic that the word “laminate” must have a similar meaning.  

We referred above, in paragraph 13, to the Notes in relation to “Combinations” of both plastics and rubber with textiles, and we referred, as HMRC did on several occasions, to the fact that the Plastics chapter, Chapter 39, alone had a following paragraph dealing with “Combinations of plastics and materials other than textiles”.    Whilst HMRC referred to this paragraph as support for the critical proposition that Chapter 39, in contrast to Chapter 40, expressly contemplated “Combinations of plastics and materials other than textiles”, we actually consider that the relevant paragraph undermines HMRC’s argument. It deals with four types of combination and on no interpretation can Preprufe be encompassed within any one of the four exclusive categories of combinations of plastic with some other material. 

27.    We now turn to the issue which no-one advanced, namely that it might be argued that the plastic was reinforced, or strengthened by the addition of the adhesive layer. As a factual matter two points are clear, namely that the addition of the adhesive layer did strengthen the composite material as against the strength of HDPE on its own, and secondly this consequence was not completely irrelevant and coincidental. After all we were told that one of the good attributes of Preprufe was that it was more self-supporting than simple HDPE, and thus it was easier to install in vertical situations.

We consider however that it is not appropriate to say that the plastic is reinforced or similarly strengthened in any of the material senses. The first reason for this is that the addition of the adhesive layer is primarily intended to facilitate bonding to concrete, and this is unquestionably why the adhesive layer is added to the HDPE layer.    Perhaps more relevantly, and we admit that this point was not demonstrated either way in evidence, we strongly suspect that the end material would have been stronger still if instead of applying the adhesive layer to the HDPE layer, the manufacturing process had simply produced a single layer of HDPE, but with a thickness equal to Preprufe.  In other words the application of the adhesive layer may actually weaken the composite product, in contrast to HDPE of the relevant increased thickness, which is of course irrelevant because the function of the adhesive layer is primarily to achieve bonding, and it is enough that it adds a bit of strength to the HDPE to facilitate vertical installation, albeit that this would be better achieved by increasing the thickness of the HDPE.

Since it was not contended that Preprufe was appropriately classified under heading 3919 by virtue of any strengthening characteristics of the adhesive layer, and since we think that it is inappropriate in any event to say that it is strengthened by this layer in the required manner, we conclude that the classification under heading 3919 is entirely dependent on the interpretation of the word “laminated”. 

We accordingly decide that the plastic in this case should be classified, as in the original BTI decision, into heading 3920, and not heading 3921 at all. It follows of course from this that the suggestion that the relevant heading for plastics specifically contemplates combinations drops away altogether because that would only have been so had we agreed with the interpretation of  the word “laminated” adopted in the Review Decision, and the resultant classification to heading 3921.

28.    The next question that arises is whether classification of the plastic under heading 3920 actually precludes the application of Rule 2(b) in relation to the plastic because that heading requires the plastic neither to be cellular nor to be combined with other materials. Since however the meaning of combinations with other materials relates only to strengthening, it is clear that nothing ousts the potential application of Rule 2(b) in relation to the plastic part of the material being combined, in a non-strengthening sense, with other materials.    

29.    It follows that in our opinion headings 3920 and 4005 are to be applied in a similar matter. Both apply to part only of the composite material. Rule 2(b) potentially applies to both so that prima facie the composite material is to be treated as falling within both headings 3920 and 4005. Rule 3(a) cannot be invoked because it is clear that both of  the relevant headings, interpreted at this point necessarily without the intervention of Rule 2(b), apply only to part of the composite material.    Accordingly the correct classification of the composite product is to be determined by Rule 3(b).

CLASSIFICATION OF PREPRUFE UNDER RULE 3(b)

30.     We set out in paragraph 8 above a number of factual matters that are potentially relevant, in applying Rule 3(b). Our task now is to decide whether the criterion of identifying one of the materials as the one that gives the composite product its essential character is applicable in this case, and if so which of the two materials has that attribute.

We have found this question difficult and finely balanced, but we have decided that the plastic component is the material that gives the composite product its essential character. 

The essential reason for this decision is that Preprufe is a waterproof membrane designed to be laid under concrete, and we think that it is the HDPE layer that performs the essential functions of being the first barrier to the passage of water through the composite product, and of being the fundamental water-proofing material. 

We say that this decision is finely balanced because we entirely accept that:

   (i)   the adhesive and the protective layers are the sophisticated, novel and more expensive parts of the composite product;

   (ii)   without the adhesive layer the HDPE layer might be serviceable in different applications than those at which Preprufe is actually targeted, but HDPE alone would be useless commercially speaking as a competitor to Preprufe in all those situations at which the more sophisticated material is targeted;  and 

   (iii)  the function of bonding  the material to concrete is the vital characteristic of Preprufe that distinguishes it from HDPE and its more direct competitors.

We consider however that our enquiry should not address  the question of  what distinguishes Preprufe from other simpler waterproof membranes; nor is the objective to decide the extraordinarily unlikely proposition that if one strips away one or two of the materials from the composite product that has three layers, that the function of the composite product will continue absolutely unimpaired. It must be obvious that with any composite product it will be rare for that proposition to be satisfied. Indeed a child’s carry seat would hardly be as satisfactory with the steel reinforcement removed even though the fabric part of the seat could appropriately be said to give the composite product its essential character. 

In this case the adhesive layer on its own would be almost as difficult to visualise as the sticky layer of Sellotape without the existence of the tape itself. It could not be applied to the concrete because it would have no form. Even if we ignored this feature and supposed that it had been satisfactorily laid beneath concrete, we did not understand the experts to suggest that the adhesive layer on its own would have produced a satisfactory water barrier, particularly under the extreme pressures for which Preprufe has been designed.   

By contrast the HDPE layer can fairly be described as the fundamental waterproof component in Preprufe. And the essential character of Preprufe is that of being a waterproof membrane. We accept that the adhesive layer performs an utterly vital function, in rather the way that the metal strengthening components doubtless performed a vital function in the case of the child’s carry chair. But it is still, admittedly by a fine margin in what remains a very difficult question, the HDPE layer that gives Preprufe its essential character.

Whilst we imagine that nothing in particular turns on the precise sub heading into which Preprufe should be classified, within heading 3920, it does of course follow from this decision that we consider that the original BTI classification was right, or that at least the different classification in the Review Decision, and the arguments in support of classification under Heading 3921 are all wrong

31.    Whilst, accordingly, we have rejected several of the contentions advanced by HMRC, we nevertheless consider that HMRC’s contentions in relation to the application of Rule 3(b) are correct, and for that reason, this appeal is dismissed.    

COSTS

32.    No order was requested as regards costs and none is made. 

HOWARD M NOWLAN
CHAIRMAN

RELEASED: 2 December 2005

LON/04/7030
££Grace Construction Prtoducts Ltd v Revenue and Customs [2005] UKVAT(Customs) C00207 (02 December 2005)