England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
THE HONOURABLE MR JUSTICE NEWEY
FTC/59/2012

		Royal Courts of Justice Strand, London, WC2A 2LL
		27th March 2014

Lord Justice Vos:

Introduction

1. In this appeal, the appellant, Asda Stores Limited ("Asda"), argues for a broad purposive construction of certain central provisions of the regime concerning customs duties applicable to goods imported into the European Union ("EU"). In doing so, Asda seeks to overturn the decision of the Upper Tribunal (Newey J) dated 8^th May 2013.
2. The case concerns the importation by Asda of clothing together with clothes hangers and ancillary items (together "hangers"). Asda buys the clothing and hangers from the clothing supplier on terms that the supplier will source the hangers from sub-suppliers (which I will call the "hanger suppliers") specified by Asda at specified prices. Asda pays the clothing supplier the price agreed for the clothing together with the price it (the clothing supplier) has paid for the hangers to the nominated hanger suppliers. Unknown to the clothing supplier, however, Asda has agreed with the hanger suppliers that the true value of the hangers is less than the price actually charged by the hanger suppliers to the clothing supplier, and that the hanger suppliers will rebate the difference to Asda (the "rebate"). In these circumstances, Asda contends that the customs value of the imported clothes and hangers should be the price paid to the clothing supplier less the rebate, whilst HMRC contends that the customs value should be the full sale price paid by Asda to the clothing supplier for the clothes and the hangers without regard to the rebate returned by the hanger suppliers to Asda.
3. The First-tier Tribunal (Judge Kevin Poole, Judge Timothy Herrington, and Mr Richard Law FCA CTA) (the "FTT") agreed with one particular contention put forward on behalf of Asda, but the Upper Tribunal over-ruled the FTT on that ground and held that the customs value was the full transaction value paid by Asda to the clothing supplier.
4. Article 29 of Council Regulation (EEC) No 2913/92 of 12 October 1992 establishing the Community Customs Code (the "Code") defines the customs value of imported goods, upon which customs duties are charged. It provides by article 29(1) that the customs value of imported goods "shall be the transaction value, that is, the price actually paid or payable for the goods when sold for export to the customs territory of the Community, adjusted, where necessary, in accordance with Articles 32 and 33 …". Article 29(3)(a) then defines what is meant by the "price actually paid or payable" as "the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods and includes all payments made or to be made as a condition of sale of the imported goods by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller …".
5. The FTT decided in favour of Asda on the basis of the CJEU decision in Hauptzollamt Itzehoe v. HJ Repenning GmbH (Case 183/85) [1986] ECR 1873 (the "Repenning case"), which the FTT had itself identified as relevant after the 2-day hearing had concluded. The FTT said (at paragraph 80) that the Repenning case provided "good authority for the proposition that where there is clear evidence that the actual value of the relevant goods on import is less than the amount actually paid by the buyer to the seller, the lesser value is to be adopted for customs value purposes" even where the reduction is reflected in a payment which the buyer received from a third party. Accordingly, the FTT found that the rebate reflects "a true reduction in the actual customs value on importation of the goods in question, based on the real commercial effect of the tripartite arrangements between Asda, the clothing suppliers and the hanger suppliers", so that if the rebate were not deducted, the resultant customs values would be "arbitrary or fictitious". In the alternative, the FTT (at paragraph 85) interpreted "seller" in article 29(3)(a) of the Code as applying separately to the hanger suppliers and the clothing supplier, so that the rebate operated to reduce the customs value of the hanger supplies.
6. The Upper Tribunal (at paragraphs 20-21) held that the FTT's application of the principle in the Repenning case ignored the words "to or for the benefit of the seller" in article 29(3)(a), so that the "price paid or payable" by Asda was the total amount payable by Asda to the clothing supplier.

Asda's grounds of appeal

7. Asda raised four main grounds of appeal (for which permission was granted by Patten LJ). I have re-ordered them, and adjusted them to reflect the way in which they were argued orally by Mr Roderick Cordara Q.C., counsel for Asda, as follows:-

i) The Upper Tribunal and the FTT ought to have adopted a purposive construction of the Code so as to avoid the conclusion that duty can be charged on values in excess of the net sums paid by Asda, so as to give effect to the aims and objectives of the General Agreement on Tariffs and Trade ("GATT") (the "purposive construction argument").

ii) The FTT was right to hold that the Repenning case required the customs value of the transaction to be reduced by the amount of the rebate in order to avoid setting arbitrary or fictitious values (the "Repenning argument").

iii) The Upper Tribunal and the FTT ought to have held that the clothing supplier did not sell hangers to Asda, but that the sale of hangers was by the hanger suppliers directly to Asda, so that the customs value of the hangers supplied by the hanger suppliers to Asda should be reduced to take account of the rebate (the "hanger sale argument").

iv) The Upper Tribunal and the FT should have adopted an alternative method of valuation under articles 30 or 31 of the Code instead of the transaction value method under article 29 (the "alternative valuation argument").

Factual findings of the FTT

8. There has never been any appeal against the factual findings of the FTT. Accordingly, the Upper Tribunal was, and this court is, bound by them. I have already sought to set out the main elements of those findings, but it should be noted that they were based upon the evidence that the FTT heard in addition to an agreed set of facts that the FTT recited at paragraph 10 of its decision.
9. Asda seeks to place special reliance on certain aspects of these agreed facts as follows:-

i) That the hanger suppliers (as agreed with Asda) charge the clothing supplier a "provisional price" for the hangers.

ii) That Asda subsequently purchases the goods (i.e. clothes and hangers) from the clothing supplier, which recovers, in the amount paid by Asda, the amount it (the clothing supplier) has paid to the hanger suppliers.

iii) Asda is, in due course, entitled to receive a payment on such supplies to take account of the high volumes involved.

10. It may be commented immediately that there was actually nothing "provisional" about the price that the hanger suppliers charged the clothing supplier for the hangers. That price never changed. As appears below, all that happened was that the hanger suppliers later rebated a pre-ordained amount to Asda.
11. The following factual findings by the FTT, supplementing the agreed facts, are also relied upon by Asda:-

i) Paragraph 3: Asda requires the clothing supplier to source all the necessary hangers from the hanger suppliers, and fixes the prices to be paid for the hangers by the clothing supplier to the hanger suppliers. The clothing supplier simply recharges to Asda, as part of the overall price which Asda pays for the finished clothing and without any mark-up, the price which it has paid to the hanger suppliers for the hangers. In effect, the cost of the hangers is therefore simply a "pass-through" cost of the clothing supplier which is closely controlled by Asda.

ii) Paragraph 5: The rebate paid by the hanger suppliers to Asda reflects the fact that, in the context of their overall commercial relationship, they have agreed that the true value for the hangers is less than the price actually charged by the hanger suppliers to the clothing supplier at Asda's direction.

iii) Paragraph 6: The original purpose of this arrangement was to conceal from the clothing supplier (and, ultimately, from the competitors of both Asda and the hanger suppliers) the real prices which Asda and the hanger suppliers have agreed for the "Asda" hangers which the hanger suppliers supply to the clothing supplier. That pricing information is regarded as commercially sensitive, both for the hanger suppliers and Asda. To some extent, as the market has coalesced into fewer and larger suppliers, that original purpose has fallen away, but the arrangement itself is still firmly embedded in Asda's overall buying processes with the relevant suppliers (which are largely computerised).

iv) Paragraph 7: Asda and the hanger suppliers agree in advance on both the "notional" selling price for the hangers which is charged to the clothing supplier and the "true" selling price which forms the basis of the rebate calculation. Thus, in most cases, an artificially inflated price is initially charged by the hanger suppliers to the clothing supplier and is then passed through to Asda by the clothing supplier. The subsequent price correction (the rebate) is dealt with directly between Asda and the hanger suppliers. The clothing suppliers usually know that this arrangement exists but do not know the details of it.

v) Paragraph 14(1): Both the "notional" and "true" values for every relevant supply from the hanger suppliers were agreed in advance.

vi) Paragraph 83: The rebate reflects a true reduction in the actual customs value on the importation of the goods in question, based on the real commercial effect of the tripartite arrangements between Asda, the clothing supplier and the hanger suppliers.

12. This last supposed factual finding does not seem to me to be a finding of fact at all, but rather an application of the law as to the proper meaning of "customs value" as the FTT held it to be to the facts of this case.

Other relevant provisions

13. Mr Kieron Beal Q.C., leading counsel for HMRC, drew attention to the fact that, under the Code, all goods intended to be placed under a customs procedure are to be covered by a declaration (article 59 of the Code), and the relevant date to be used for the purposes of all the provisions governing the customs procedure for which the goods are declared is the date of acceptance of the declaration by the customs authorities (article 67 of the Code). The goods are "released for free circulation" once the declaration is accepted (article 73 of the Code). That release gives the goods the status of "Community goods" (article 79 of the Code), and the customs debt on importation is incurred through the release of the goods for free circulation (article 201 of the Code).
14. Before dealing with Asda's four arguments, I should mention the relevant articles of Commission Regulation (EEC) No 2454/93 of 2 July 1993 laying down provisions for the implementation of the Code (the "Regulation"). Article 145 of the Regulation makes provision for the situation where goods are shown to be defective when the customs declaration is accepted by the customs authorities, as was the case in the Repenning case (which was heard just before an equivalent predecessor article was in force). Article 147 deals expressly with successive sales before valuation providing that "only the last sale which led to the introduction of the goods into the customs territory of the Community, or a sale taking place in the customs territory of the Community before entry for free circulation of the goods" should constitute an adequate indication that the goods were sold for export to the customs territory of the Community. Article 147 then says that where a price is declared which relates to a sale taking place before the last sale on the basis of which the goods were introduced into the customs territory of the Community, it must be demonstrated to the satisfaction of the customs authorities that this sale of goods took place for export to the customs territory in question. These articles are not directly relevant to what we have to decide, but were in issue in several of the authorities that we have been referred to; more importantly, they show that the Regulation expressly deals with the relevant transaction where there are chains of sales leading to importation of goods.

The purposive construction argument

15. It seems to me to be sensible to start with this contention, even though Mr Cordara placed it third in his skeleton argument. It underlies Asda's entire approach to this case and indeed to the Code in general.
16. Asda has argued at every level that a purposive construction of the Code should be employed. The Upper Tribunal and the FTT accepted that submission, but the Upper Tribunal did not find that, even adopting a purposive construction, it was led to the conclusion that Asda wished it to reach. Asda contends that the purposive construction of the Code would have allowed the Upper Tribunal to avoid the conclusion that duty can be charged on values in excess of the net sums paid by Asda, and thus to give effect to the aims and objectives of the GATT.
17. I should start, therefore, by setting out the passages from the Agreement on implementation of Article VII of the GATT 1994 on which particular reliance is placed:-

i) The first paragraph of the general introductory commentary recites that "[t]he primary basis for customs value under this Agreement is "transaction value" as defined in Article 1 [now article 29 of the Code]. Article 1 is to be read together with Article 8 [now article 32 of the Code] which provides inter alia for adjustments to the price actually paid or payable in cases where certain specific elements which are considered to form a part of the value for customs purposes are incurred by the buyer but are not included in the price actually paid or payable for the imported goods".

ii) The third recital recognising the need for "a fair, uniform and neutral system for the valuation of goods for customs purposes that precludes the use of arbitrary or fictitious customs values";

iii) The fourth recital recognising that "the basis for valuation of goods for customs purposes should, to the greatest extent possible, be the transaction value of the goods being valued".

iv) The fifth recital recognising that "customs value should be based on simple and equitable criteria consistent with commercial practice …".

18. Mr Cordara focuses on the need to preclude the use of arbitrary or fictitious customs values, and points to support for that approach in Unifert Handels GmbH, Warendorf v. Hauptzollant Munster (case C-11/89) at paragraph 35 in the judgment of the Court of Justice (the "CJEU"). He refers in this context to the Repenning case (to which I shall come in due course) to suggest that when the words "to or for the benefit of the seller" in article 29(3)(a) get in the way, it is appropriate to jettison them.
19. I agree with both the FTT and the Upper Tribunal that a purposive construction is appropriate in construing the Code, but I do not agree that the clear words of the Code can simply be ignored or jettisoned as Mr Cordara seems to suggest. As will become apparent, I do not think that was what the CJEU was doing in the Repenning case. For these purposes, however, it is important to understand the nature of "arbitrary or fictitious customs values" that one is seeking to avoid. It seems to me that an "arbitrary value" would be one that was imposed from outside the transaction between buyer and seller and bore no relation to the commercial dealings in question. It could not really be suggested that the customs value adopted in this case, which was the amount actually paid and payable by Asda to the clothing supplier was, in any sense, arbitrary. The word "fictitious" implies something that is unreal or made up. Mr Cordara seeks to point to the overall commercial reality to argue that the fact that Asda's net cash outflow was less than the transaction value leads to the conclusion that it is "fictitious" to adopt the price paid and payable by Asda to the clothing supplier as the customs value. This approach seems to me to give the word "fictitious" too broad a meaning. Even a purposive construction must pay some regard to the terms of the Code that is being construed. The search is for the appropriate "customs value" for the imported goods. The Code gives, in this situation, three possible ways of establishing that value. It does not seem to me that the result of applying the "transaction value" approach in article 29 should be regarded as fictitious without strong grounds for doing so. As appears hereafter, I am not satisfied that any such strong grounds exist in this case.

The Repenning argument

20. The argument here is that the FTT was right to hold that the Repenning case required the customs value of the transaction to be reduced by the amount of the rebate in order to avoid setting arbitrary or fictitious customs values. But in my judgment, this misunderstands the Repenning case. In that case, the question was whether the customs value of beef imported from Argentina should be reduced below the "transaction value" because it had been damaged by thawing during loading in Argentina. The CJEU recited at paragraph 16 the need to adjust the price actually paid or payable where that was necessary to avoid the setting of an arbitrary or fictitious customs value, and then referred at paragraph 17 to article 4 of the Commission Regulation No 1495/80 (the predecessor of article 145 of the Regulation) which provided for such an adjustment where the price paid or payable related to a quantity of goods purchased which was greater than the quantity declared. The CJEU then gave its reason for its decision in paragraph 18 to the effect that "[f]or the same reasons, where the goods to be valued were bought free of defect but have been damaged before their release for free circulation the price actually paid or payable must be reduced in proportion to the damage suffered". This reasoning simply demonstrates that, where more goods are imported and a higher price is paid, duty is levied on that higher price, and where damaged goods are imported so they are of lesser value, commensurately less duty is paid. It draws attention to the fact that what the Code is doing is valuing the actual goods.
21. This case concerns the commercial dealings between an importer and its overseas trading partners, not any changes to the nature of the goods imported or even the quantities of goods imported. It does not seem to me that the Repenning case is, therefore, of any more than marginal relevance. It is true that the CJEU referred to the need to avoid "arbitrary or fictitious customs values", but it did so in a context that is wholly distinguishable from the present case.
22. In my judgment, as the Upper Tribunal held, the Repenning case cannot be applied to the situation in this case because of the clear words in article 29(3)(a). The scheme of the Code is to provide successive methods of determining the customs value of imported goods (in articles 29, 30 and 31 of the Code). First and foremost amongst those methods is the "transaction value" method in article 29. Only if the customs value "cannot be determined under Article 29" can you move to consider the alternative methods of valuation referred to in article 30 and then article 31 of the Code.
23. Article 29 is plainly intended to provide a straightforward and easily applicable method of ascertaining the customs value in a wide variety of cases. It will avoid wherever possible the need for complex or detailed investigations by the importer or the customs authorities. It provides that the "transaction value" is the "price actually paid or payable for the goods when sold for export to the customs territory of the Community adjusted, where necessary, in accordance with Articles 32 and 33". Article 29(3)(a) then defines what is meant by the "price actually paid or payable" as the "total payment made … to or for the benefit of the seller for the imported goods" including payments made "by the buyer to a third party to satisfy an obligation of the seller". It cannot be suggested that any such payment was made by Asda in this case.
24. The regime expressly provides for additions that must be made to the price, ascertained under article 29, in article 32 of the Code, and for deductions of certain separately itemised charges in article 33 of the Code. It is now common ground that the rebate does not fall within any of the categories of additions or deductions contained in these articles of the Code. Additions specified in article 32 include certain commissions and packaging costs, materials supplied by the buyer at reduced cost or free of charge, design work, and transport costs, but article 32(3) expressly provides that no additions shall be made to the price actually paid or payable "except as provided in this Article". Likewise, article 33 provides only for deduction in respect of certain specific separately itemised charges including, for example, buying commissions, interest and costs of transportation after import. In my judgment, the very specificity of articles 32 and 33 make it clear that other deductions are not to be made, when considering "the price paid or payable", in order to ascertain the transaction value under article 29 of the Code.
25. I come back, therefore, to the clear words of article 29(3)(a) that provide for the price paid or payable to be the "total payment made … to or for the benefit of the seller for the imported goods". Construed purposively, these words mean that the regime intends the commercial transaction between buyer and seller to be the one that determines the customs value for the imported goods. There is no room for deducting anything outside article 33. Moreover, the CJEU has made clear in the Unifert case that the choices made by an importer may affect the incidence of customs duty (see paragraph 26). In Unifert, the issue concerned sub-sales within a group of companies and the application of the predecessor of article 147 of the Regulation, the argument being that inclusion of a buying commission in the customs value (paid on the sub-sale within the group of companies) would undermine the neutrality of the customs valuation system. The CJEU said that any inequality in that sphere was a result of the choice made by the importer, not of the Regulation.
26. In my judgment, the rebate made by the hanger suppliers to Asda cannot be taken into account under the regime established in articles 29, 32 and 33 of the Code. It is a commercial arrangement that does not affect the "transaction value" or the "price actually paid or payable for the goods when sold for export to the customs territory of the Community". Neither the principle in the Repenning case, nor a proper purposive construction of the relevant articles of the Code permits a deduction to be made for the rebate. The fact that the net outflow of cash from Asda in respect of the imported goods is reduced by the rebate is, in my judgment, nothing to the point. The regime of the Code does not look to such a net outflow; indeed it does not ask what the net expenditure of the importer was at all. It requires a consideration of the much simpler and more certain "price actually paid or payable" to or for the benefit of the seller under the transaction in question.
27. I would, therefore, reject Asda's Repenning argument to the effect that the FTT was right to hold that that case required the customs value of the transaction to be reduced by the amount of the rebate in order to avoid setting arbitrary or fictitious values.

The hanger sale argument

28. This argument had originally been at the forefront of Mr Cordara's case, as it had before both the FTT and the Upper Tribunal. But by the time of the oral argument, it had been adjusted quite significantly and taken something of a back seat.
29. The argument now depends on it being held that the clothing supplier did not sell hangers to Asda, but that the sale of hangers was by the hanger suppliers direct to Asda, so that the price of the sale of hangers by the hanger suppliers to Asda should be reduced to take account of the rebate. If that were correct, of course, the "price actually paid or payable" by Asda to the hanger suppliers would have to take account of the rebate made by the hanger suppliers to Asda which would be directly attributable to that sale. The total payment made by Asda to or for the benefit of the hanger suppliers for the imported hangers would obviously only amount to the net price paid. This could be achieved under article 78 of the Code which allows for amendments to the declaration after release of the goods where it is necessary to regularise the situation taking account of new information. The new information here would be the rebate relating to the volume of sales made at the end of a trading period. It does not seem to me that this argument any longer depends on article 32 of the Code, which, as I have already said, is concerned with specific additions to the price actually paid or payable.
30. I have no doubt that the argument that the transaction in this case is to be construed as, in part, a sale of hangers by the hanger suppliers to Asda is unsustainable. I am conscious that the FTT held in the alternative that the term "seller" in article 29(3)(a) should be construed as applying separately to the hanger suppliers (in relation to the hangers) and to the clothing suppliers (in relation to the clothing). It did so in order to avoid what it thought would be an "arbitrary or fictitious customs value". In my judgment, this approach was not open to the FTT. The word "seller" in article 29(3)(a) of the Code is a clear unambiguous term understood by commercial men in the UK and across the world. It cannot be salami sliced in the way the FTT suggested. The seller of a consignment of goods is the person selling those goods to the buyer. In this situation, there were three separate transactions which ought not to be elided or confused: (a) the sale of the clothing and the hangers by the clothing supplier to Asda, (b) the sale of the hangers by the hanger suppliers to the clothing supplier, and (c) the agreement between Asda and the hanger suppliers whereby they rebate to Asda a part of the purchase price of the hangers paid to them by the clothing supplier. The transactions may be inter-related, but transaction (b) is clearly a free-standing purchase by the clothing supplier before the goods are either sold to Asda or imported into the customs territory of the EU.
31. In these circumstances, the sale of the clothing and hangers by the clothing supplier to Asda is the relevant import transaction that results in a customs declaration, a customs debt and the ultimate release of the goods for free circulation in the EU. There is nothing arbitrary or fictitious about construing the transactions I have described in this way. Indeed to construe them as the FTT suggested would, I think, be open to just such an accusation.
32. For this reason, the hanger sale argument must, in my judgment, be rejected.

The alternative valuation argument

33. Mr Cordara accepted that this was something of a fall-back position, which would be unlikely to succeed if his other arguments fail. I agree. It seems to me to be quite impossible to move to a consideration of the alternative valuation methods under articles 30 and 31 of the Code unless the customs value of the imported goods in question "cannot be determined" under the valuation method explained in articles 29, 32 and 33.
34. In this case, as I have already explained, the valuation method under articles 29, 32 and 33 leads to a clear result, namely that the customs value of the clothing and hangers sold by the clothing supplier to Asda is the price paid and payable by Asda to the clothing supplier under that transaction. The rebate is ignored for this purpose. There is no warrant to consider the alternative valuation methods provided for by articles 30 and 31 of the Code.

Disposal

35. For the reasons I have given, I would dismiss this appeal from the decision of the Upper Tribunal.

Lady Justice Gloster:

36. I agree.

Lord Justice Moore-Bick:

37. I also agree.