[2011] UKFTT 20 (TC)

TC00897

Appeal number:LON/2007/7030

 

ANTI-DUMPING DUTY - post clearance demand note – fraudulent declaration of country of origin – remission of duty - error by customs authorities – no - good faith of importer – no – appeal dismissed

 

FIRST-TIER TRIBUNAL

 

TAX

 

 

 

FMX FOOD MERCHANTS IMPORT EXPORT CO LTD Appellant

 

 

- and -

 

 

                        THE COMMISSIONERS FOR HER MAJESTY’S

                        REVENUE AND CUSTOMS Respondents

 

 

 

 

TRIBUNAL: NICHOLAS ALEKSANDER (TRIBUNAL JUDGE) CHARLES BAKER

 

Sitting in public at 45 Bedford Square, London WC1 on 29 March to 1 April and on 16 September 2010

 

 

Eamon McNicholas, counsel, for the Appellant

 

Kieron Beal, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

 

 

© CROWN COPYRIGHT 2010

DECISION

 

1.     FMX Food Merchants Import Export Co Ltd, (“FMX”) appeals against a Post Clearance Demand Note in the sum of £370,872.50, covering the periods February 2004 to October 2004. The appeal concerns the imposition of customs duty on a number of importations of garlic from Cambodia in 2004. FMX imported nine different consignments of garlic between 25 February 2004 and 6 October 2004. HMRC issued a post clearance demand ("the Demand") on 22 February 2007. The Demand was issued to give effect to the HMRC's decision that garlic imported by FMX and declared as being of Cambodian origin was in fact of Chinese origin and therefore subject to Anti-Dumping Duty.

2.     Mr McNicholas represented FMX and Mr Beal represented HMRC. We heard oral evidence on behalf of FMX from its director Pierluigi Pignatelli and on behalf of HMRC from Guy Jennes, of the European Union's Anti Fraud Office ("OLAF"). In addition we had before us bundles of documents.

3.     FMX's case was in essence that it had acted throughout in good faith, relying on its longstanding relationship with contacts in the region, and certification from the Kingdom of Cambodia's customs administration which was at all material times in full possession of the facts. FMX says that the Anti Dumping Duty charged on the imports should have been waived, since the conditions under Article 220(2)(b) of the Community Customs Code ("the Code") were met. FMX also seek to have the Anti-Dumping Duty remitted under Article 239 of the Code.

Factual Background

4.     We find the background facts to be as follows:

5.     On 2 April 2002, EU Commission Regulation (EC) No 565/2002 imposed a quota on imports of garlic, with imports outside the quota liable to a payment of €1200 per net tonne in addition to customs duty of 9.6%.

6.     The EU Commission subsequently found that large quantities of Chinese garlic were being brought into the EU in circumvention of the quota system by being imported via third countries and being given false certificates of origin. On 12 August 2005, the Commission issued a Notice to Importers warning them of Chinese garlic exceeding the annual quota of 13,200 tonnes.

7.     In 2001, the General Affairs Council of the European Commission adopted its "Everything but Arms" amendment to the European Union's generalised scheme of preference ("GSP") eliminating duty on all goods (other than arms) exported by a list of least developed countries, including Cambodia. For the preferential customs tariff to apply, the goods must have the benefit of a GSP Certificate of Origin in Form A. As a consequence, garlic of Cambodian origin was not subject to the quota imposed by EU Commission Regulation (EC) No 565/2002.

8.     FMX is an importer of exotic fruit and vegetables. The company was established over 30 years ago by Mr Pignatelli's father. The business originally focussed on the importation of garlic, but due to competition (particularly from supermarkets), the business now imports a range of high quality ethnic produce which is sold through the wholesale fruit and vegetable markets.

9.     FMX is a substantial and long established importer of garlic. In evidence, Mr Pignatelli stated that in 2004 he supplied in excess of 1100 tonnes of imported garlic. We also note that in 2005 FMX reported to HMRC that Chinese garlic was being smuggled into Europe via India, with false certificates of origin being issued in India. Mr Pignatelli told us in the course of his evidence that he was anxious that FMX's report to HMRC should be kept confidential, as the garlic world was small ("we all know each other"), and he was worried that there might be repercussions if it became known that FMX had reported the smuggling.

10.  Mr Pignatelli in his evidence stated that he had been dealing since 1998 with Mr Steve Wang of Arrow Quick Trading Limited ("Arrowquick") in Taiwan, who supplied pears, ginger and onions. During 2003 Mr Wang contacted FMX and offered Cambodian garlic through his contact there. Samples were sent by courier, and the quality was very good and the colour was very white ("super white"). Although the cost of the garlic was a little more than the amount FMX was paying at the time for garlic of other origins, the quality was superb and Mr Pignatelli knew from experience that he could sell it for a much better price. According to Mr Pignatelli's witness statement "A former employee of our company was in charge of purchasing with me overseeing everything". Based on all of the above he started the importation from Cambodia in 2003. We note that FMX imported a number of consignments of garlic in 2003 which are not the subject of the Demand.

11.  In his witness statement, Mr Pignatelli did not identify the "former employee", but during the course of cross examination, it emerged that the individual was Mr Antonio Tuccillo, who was a director of FMX until 15 September 2008, and was at all material times the holder of a majority of FMX's issued share capital.

12.  In 2004, FMX imported the following consignments ("the Consignments") of fresh garlic, which are the subject of the Demand:

Date	Consignor	Entry No	Weight (kg)	Invoice value	Value per kg
25/2/04	Arrowquick	71 032111T	64,800	69,120	1.07
11/3/04	Arrowquick	71 015495J	21,600	22,464	1.04
31/3/04	Arrowquick	71 041848L	43,200	46,656	1.08
15/4/04	Duong Chhiv	71 021397E	64,800	68,472	1.06
18/5/04	Arrowquick	71 023659E	64,800	66,960	1.03
10/6/04	Arrowquick	71 017150A	64,800	66,960	1.03
11/8/04	Arrowquick	71 017622X	43,200	38,232	0.89
21/9/04	Duong Chhiv	71 932687R	43,200	38,232	0.89
6/10/04	Arrowquick	71 009541A	21,600	20,178	0.93
	TOTALS		432,000	US$ 437,274

 

13.  We note that some of the Consignments were erroneously declared on import by FMX's import agent to be frozen garlic, but in fact all of the Consignments represented fresh garlic.

14.  Trade statistics available to OLAF showed a sharp increase in fresh garlic imports from Cambodia to Italy between May 2003 and November 2004. They also showed consignments of frozen garlic said to be originating in Cambodia being imported into the UK between August 2003 and October 2004. According to trade statistics available to the European Commission, there were no such imports prior to 2003.

15.  In June 2006, OLAF contacted the Cambodian government for permission to conduct a visit to Cambodia to investigate the authenticity of certificates of origin produced in support of various importations into the European Union. The visit took place between 23 January 2007 and 1 February 2007 and the OLAF mission was led by Mr Jennes.

16.  During the course of the visit, the OLAF mission visited the Ministry of Commerce in Phnom Penh, the Bureau of Customs in Phnom Penh, the Customs office in Sihanouk Ville, the Kampuchea Shipping Agency in Sihanouk Ville, Maersk (Cambodia) Ltd in Phnom Penh, National Shipping Lines of Cambodia Ltd in Phnom Penh, Cosco Cambodia Ltd in Phnom Penh, Zim Israel Navigation Company in Phnom Penh, APL Cambodia Co. Ltd in Phnom Penh, Duong Chhiv Import Export and Transport Co Ltd ("Duong Chhiv") in Phnom Penh, Ministry of Agriculture's Department of Agronomy in Phnom Penh. A summary report was drafted at the end of the visit which was signed by the Cambodian Minister of Commerce and by Mr Jennes.

17.  The factual content of the OLAF mission report was not substantively challenged by FMX, and on the basis of that report we find as follows:

(1)  Mr Duong Tech of Duong Chhiv had been approached by Mr Steve Wang of Arrowquick in 2003 to become involved in the sale of agricultural produce to Europe. In relation to garlic, his company's role was to apply for certificates of origin from the Cambodian Ministry of Commerce and to arrange for consignment of the garlic to Europe. Duong Chhiv had no direct contact with the European customer, only with Arrowquick.

(2)  Commission fees were received by Duong Chhiv from Arrowquick.

(3)  Garlic of Chinese origin had been imported into Cambodia from China, and then transhipped to the UK and Italy, having been declared to be of Chinese origin to the Cambodian customs authorities at Sihanouk Ville on import. This included all of the Consignments.

(4)  Certificates stating that the garlic was of Cambodian origin were then issued by the Ministry of Commerce in Phnom Penh but on the basis of forged documents provided to them by Duong Chhiv.

(5)  Arrowquick was owned by Mr Steve Wang. Mr Wang was a director of Marcolink International Company Ltd ("Marcolink"), and Marcolink had been previously involved in the misdescription of origin of fresh garlic imported into the Netherlands and Italy.

18.  The documents uplifted by OLAF establish the following pattern (we use the first of the Consignments as an example – but all of the Consignments follow a similar pattern):

(1)  On 11 January 2004 a commercial invoice (number MDC-1) purporting to show the sale of 7200 cartons of garlic (64.8 tonnes) from Jinxiang Dongyun Freezing Storage Co Ltd in China to New Land Trading Company in Cambodia is raised, with an invoice value of US$ 19,440.

(2)  On the same date a packing list is issued by Jinxiang Dongyun Freezing Storage Co Ltd for the sale of 7200 cartons of garlic (64.8 tonnes) to New Land Trading Company. This packing list confirms that the origin is China.

(3)  On the same date, a bill of lading for a consignment of 7200 cartons of garlic (cross referring to the invoice MDC-1) evidences shipment from China to Cambodia by Jinxiang Dongyun Freezing Storage Co Ltd. The named consignee is New Land Trading Company and the destination is Sihanouk Ville in Cambodia.

(4)  On 16 January 2004, a commercial invoice (number GDC-FMX-1) is raised by Duong Chhiv to FMX in respect of 7200 cartons (64.8 tonnes) of garlic at a unit price of US$300 but with an invoice value of US$ 19,440. This invoice is never sent to FMX.

(5)  On the same date a packing list is issued by Duong Chhiv for 64.8 tonnes of garlic in 7200 cartons to be discharged at Felixstowe for the benefit of FMX as consignee. The list is cross referenced to invoice GDC-FMX-1.

(6)  A customs declaration is made on 28 January 2004 to the Cambodian customs showing the arrival in Sihanouk Ville of 7200 cartons (64.8 tonnes) of garlic from China to Cambodia with an invoice value of US$ 19,440. This declaration is in respect of an inbound consignment of garlic and is cross-referenced to invoice MSC-1. The country of origin is declared to be China. This document is not forwarded to the Ministry of Commerce in Phnom Penh.

(7)  A phytosanitary (plant health) certificate is issued on 30 January 2004 in respect of a load of 64.8 tonnes of garlic in 7200 cartons, with FMX listed as consignee.

(8)  On 31 January 2004 a bill of lading issued by Maersk Sealand for Duong Chhiv as consignor and FMX as consignee evidences shipment of 7200 cartons of garlic. The cargo is laden on board the Mekong Bright.

(9)  On 31 January 2004 a customs declaration is made to the Cambodian authorities in respect of the outbound consignment of fresh garlic sold by Duong Chhiv to FMX. The copy held by the Customs office in Sihanouk Ville states that the country of origin is China. It cross refers to invoice GDC-FMX-1.

(10)                   The copy of the customs declaration which was presented to the Ministry of Commerce and is found in the Ministry's records is identical, save that it shows the origin of the garlic as being Cambodian.

(11)                   A shipping delivery order dated 31 January 2004 also confirms the transhipment of 7200 cartons of garlic previously arrived from China to the Mekong Bright.

(12)                   Duong Chhiv pays substantial sums of money to a transport company to carry out customs clearance of the garlic transhipped from China, pay the Camcontrol certificate fees, carry out a TC scan and then load the goods onto a different ship.

(13)                   The goods are shipped on 31 January 2004 from Sihanouk Ville to Felixstowe.

(14)                   The relevant GSP certificate of origin is not issued by the Ministry of Commerce until 13 February 2004. As the goods had left Cambodia two weeks previously, the application can only have been based on the documents produced by the exporter (Duong Chhiv), and any "control" undertaken by the Ministry of Commerce can only have been documentary.

19.  At the conclusion of the OLAF visit, the Cambodian government confirmed by a letter dated 1 February 2007 that the certificates of origin issued in respect of the consignments listed above had been issued on the basis of incorrect information presented by the exporter. The certificates were therefore withdrawn.

20.  The underlying documents uplifted by OLAF and the report of OLAF's interview with Duong Tech which were included in the annexes to their report (which were included in the hearing bundles) were not challenged by FMX. We therefore find that a fraudulent statement of origin had been made to the Ministry of Commerce in Cambodia in order to induce it to issue a GSP Certificate of Origin Form A giving the origin of the garlic as Cambodia. That was achieved through the mechanism of two different customs declarations being submitted by Duong Chhiv to two different Cambodian authorities.

21.  On the evidence before us, it appears that Duong Chhiv and Arrowquick were also engaged in the export of garlic to an Italian company Agrimpex. We address the relationship between Agrimpex and FMX below.

22.  Duong Tech of Duong Chhiv had told the members of the OLAF mission that he had applied for certificates of origin in Cambodia, even though Duong Chhiv was not directly involved in the purchase and sale of garlic to FMX or Agrimpex. We find that New Land Trading Company exported the garlic from China to Cambodia, and then Duong Chhiv exported the same produce to FMX in the UK and to Agrimpex in Italy. Duong Chhiv was paid by Arrowquick to apply for and obtain an GSP Form A Certificate of Origin describing the garlic as being of Cambodian origin. We accordingly also find that the fraud was undertaken on the instructions of Steve Wang of Arrowquick.

The legislation

23.  Article 236 of the Code requires duties to be repaid of they were not legally due or where the amount has been entered in the accounts contrary to Article 220(2). Article 220(2) provides as follows:

"2. Except in the cases referred to in the second and third subparagraphs of Article 217(1), subsequent entry in the accounts shall not occur where—

 (a) […]

 (b) the amount of duty legally owed was not entered in the accounts as a result of an error on the part of the customs authorities which could not reasonably have been detected by the person liable for payment, the latter for his part having acted in good faith and complied with all the provisions laid down by the legislation in force as regards the customs declaration.

Where the preferential status of the goods is established on the basis of a system of administrative cooperation involving the authorities of a third country, the issue of a certificate by those authorities, should it prove to be incorrect, shall constitute an error which could not reasonably have been detected within the meaning of the first subparagraph.

The issue of an incorrect certificate shall not, however, constitute an error where the certificate is based on an incorrect account of the facts provided by the exporter, except where, in particular, it is evident that the issuing authorities were aware or should have been aware that the goods did not satisfy the conditions laid down for entitlement to the preferential treatment.

The person liable may plead good faith when he can demonstrate that, during the period of the trading operations concerned, he has taken due care to ensure that all the conditions for the preferential treatment have been fulfilled.

The person liable may not, however, plead good faith if the European Commission has published a notice in the Official Journal of the European Communities, stating that there are grounds for doubt concerning the proper application of the preferential arrangements by the beneficiary country;

 (c) […]."

24.  Article 239 of the Code provides as follows:

"1. Import duties or export duties may be repaid or remitted in situations other than those referred to in Articles 236, 237, and 238—

 — to be determined in accordance with the procedure of the committee;

 — resulting from circumstances in which no deception or obvious negligence may be attributed to the person concerned. The situations in which this provision may be applied and the procedures to be followed to that end shall be defined in accordance with the committee procedure. Repayment or remission may be made subject to special conditions.

2. Duties shall be repaid or remitted for the reasons set out in paragraph 1 upon submission of an application to the appropriate customs office within 12 months from the date on which the amount of the duties was communicated to the debtor.

However, the customs authorities may permit this period to be exceeded in duly justified exceptional cases."

25.  Article 869 of the Community Customs Code Implementing Regulations ("the Implementing Regulations") provides that the customs authorities shall themselves decide not to collect uncollected duties in the accounts in cases where they consider that the provisions of Article 220(2)(b) of the Code are fulfilled. However this is subject to the exception that they shall not do so where the dossier must be transmitted to the Commission under Article 871 of the Implementing Regulations.

26.  Article 871 provides as follows:

"1. The customs authority shall transmit the case to the Commission to be settled under the procedure laid down in Articles 872 to 876 where it considers that the conditions laid down in Article 220(2)(b) of the Code are fulfilled and:

 — it considers that the Commission has committed an error within the meaning of Article 220(2)(b) of the Code,

 — the circumstances of the case are related to the findings of a Community investigation carried out under Council Regulation (EC) No 515/97 of 13 March 1997 on mutual assistance between the administrative authorities of the Member States and co-operation between the latter and the Commission to ensure the correct application of the law on customs and agricultural matters or under any other Community legislation or any agreement concluded by the Community with countries or groups of countries in which provision is made for carrying out such Community investigations, or

 — the amount not collected from the operator concerned in respect of one or more import or export operations but in consequence of a single error is EUR 500 000 or more.

2. However, the cases referred to in paragraph 1 shall not be transmitted where:

 — the Commission has already adopted a decision under the procedure provided for in Articles 872 to 876 on a case involving comparable issues of fact and law,

 — the Commission is already considering a case involving comparable issues of fact and law.

3. The dossier submitted to the Commission shall contain all the information required for full consideration. It shall include detailed information on the behaviour of the operator concerned, and in particular on his professional experience, good faith and diligence. This assessment shall be accompanied by all information that may demonstrate that the operator acted in good faith. The dossier shall also include a statement, signed by the applicant for repayment or remission, certifying that he has read the dossier and either stating that he has nothing to add or listing all the additional information that he considers should be included.

[…]"

27.  Title IV of the Implementing Regulations lays down specific provisions governing the repayment or remission of import and export duties. Article 878 prescribes a form which must be used for an application for repayment or remission – but it permits that the same information may be given on plain paper instead.

28.  Article 899 of the Implementing Regulations governs the applications under Article 239 of the Code. It provides:

"1. Where the decision-making customs authority establishes that an application for repayment or remission submitted to it under Article 239(2) of the Code:

 — is based on grounds corresponding to one of the circumstances referred to in Articles 900 to 903, and that these do not result from deception or obvious negligence on the part of the person concerned, it shall repay or remit the amount of import or export duties concerned,

 — is based on grounds corresponding to one of the circumstances referred to in Article 904, it shall not repay or remit the amount of import or export duties concerned.

2. In other cases, except those in which the dossier must be submitted to the Commission pursuant to Article 905, the decision-making customs authority shall itself decide to grant repayment or remission of the import or export duties where there is a special situation resulting from circumstances in which no deception or obvious negligence may be attributed to the person concerned.

Where Article 905(2), second indent, is applicable, the customs authorities may not decide to authorise repayment or remission of the duties in question until the end of a procedure initiated in accordance with Articles 906 to 909.

[…]"

29.  Article 899(3) defines the "person concerned" by reference to the persons entitled to make the application and their representatives, as well as any other person involved in the completion of the customs formalities relating to the goods.

30.  Conversely, Article 904(c) of the Implementing Regulations provides that the duties shall not be remitted or repaid where the only grounds relied upon are the presentation, for the purposes of obtaining preferential tariff treatment of goods declared for free circulation, of documents subsequently found to be forged, falsified or nor valid for that purpose – even where such documents were presented in good faith.

31.  Article 905 provides for a reference procedure to the EU Commission in certain circumstances. It provides as follows:

"1. Where the application for repayment or remission submitted under Article 239(2) of the Code is supported by evidence which might constitute a special situation resulting from circumstances in which no deception or obvious negligence may be attributed to the person concerned, the Member State to which the decision-making customs authority belongs shall transmit the case to the Commission to be settled under the procedure laid down in Articles 906 to 909 where:

 — the authority considers that a special situation is the result of the Commission failing in its obligations,

 — the circumstances of the case are related to the findings of a Community investigation carried out under Regulation (EC) No 515/97, or under any other Community legislation or any agreement concluded by the Community with countries or groups of countries in which provision is made for carrying out such Community investigations, or

 — the amount for which the person concerned may be liable in respect of one or more import or export operations but in consequence of a single special situation is EUR 500 000 or more.

The term “the person concerned” shall be interpreted in the same way as in Article 899.

2. However, the cases referred to in paragraph 1 shall not be transmitted where:

 — the Commission has already adopted a decision under the procedure provided for in Articles 906 to 909 on a case involving comparable issues of fact and of law,

 — the Commission is already considering a case involving comparable issues of fact and of law.

3. The dossier submitted to the Commission shall contain all the information required for full consideration. It shall include detailed information on the behaviour of the operator concerned, and in particular on his professional experience, good faith and diligence. This assessment shall be accompanied by all information that may demonstrate that the operator acted in good faith. The dossier shall also include a statement, signed by the applicant for repayment or remission, certifying that he has read the dossier and either stating that he has nothing to add or listing all the additional information that he considers should be included.

[…]"

The Issues for Determination

32.  There are three issues which need to be addressed by the Tribunal.

33.  First, whether the garlic imported in the Consignments is Chinese or Cambodian.

34.  Secondly, whether the customs debt arising can be waived under Article 220(2)(b) of the Code. In particular can FMX show (i) error by the customs authorities of which they were, or ought to have been, aware and (ii) good faith?

35.  Thirdly, whether duties can be remitted under Article 239 of the Code where there has been no deception by the trader or obvious negligence, including whether remission is permitted in a "special situation" under Article 905 of the Implementing Regulations.

Origin of the garlic

36.  We find on the basis of the evidence before us that the garlic was Chinese.

Waiver of post clearance recovery under Article 220(2)(b) of the Code

37.  Waiver of post clearance recovery is permitted where each of the cumulative conditions under Article 220(2)(b) of the Code are met.

38.  In issue in this case are:

(1)  Whether there was an error by the customs authorities (see first and third indents).

(2)  Whether FMX has acted in good faith (see first and fourth indents)

39.  For the purposes of the Code, customs authorities includes authorities entrusted by the EU with the task of furnishing relevant information, which would include the Cambodian Ministry of Commerce.

40.  The European Court of Justice in the case of Covita [1998] ECR I-7711 considered the conditions that needed to be fulfilled for recovery to be permitted in the context of the predecessor to these provisions. The tests were summarised by the court in the case of Ilumitornica [2002] ECR I-10433 as follows:

"38 First, non-collection of the duties must have been due to an error made by the competent authorities themselves. Second, the error they made must be such that the person competent, acting in good faith, could not reasonably have been able to detect it in spite of the professional experience and exercise of due care by him. Finally, he must have complied with all the provisions laid down by the legislation in force so far as his customs declaration is concerned (see, in particular, Hewlett Packard France, paragraph 13, Faeroe Seafood paragraph 83 and Case C-370/96 Covita [1998] ECR I-7711, paragraphs 25 to 28).

39. The fulfilment of those conditions must be assessed in the light of the purpose of Article 5(2) of Regulation 1697/79, which is to protect the legitimate expectation of the person liable that all the information and criteria on which the decision whether or not to proceed with recovery of customs duties is based are correct (see, in particular, Case C-348/89 Mecanarte [1991] ECR I-3277, paragraph 19 and Faroe Seafood, paragraph 87).

Was there an error by competent authorities?

41.  We are satisfied on the evidence before us that a fraud was perpetrated on the Cambodian Ministry of Commerce. It is self-evident that at the time the garlic was exported from Cambodia to Europe, the Cambodian Ministry of Commerce, the authority responsible for the preparation of the certificates of origin, was not aware of any problems with their certificates of origin, since they initially maintained that the certificates had been validly issued. The fraud only came to light following an in-depth investigation by OLAF. As the issue of the certificate of origin was based upon an "incorrect account of the facts provided by the exporter", FMX must show that the issuing authority (the Ministry of Commerce in Cambodia) was aware, or should have been aware, that the garlic was not of Cambodian origin.

42.  FMX submits that that the OLAF mission went no further in its investigations than concluding that the certificates of origin were incorrectly issued, and the mission should have gone on to consider and report on what the Cambodian authorities knew of matters at the time. In particular the OLAF representatives did not ask questions at Sihanouk Ville or Phnom Penh of port procedures to explain the offloading and reloading of substantial amounts of garlic, and how this came to happen without the knowledge of the local customs authorities. Given the scale of the operations both at the port and with the official sanction of phytosanitary certificates, FMX submit that the Cambodian authorities at least ought to have known of the alleged large scale irregularities concerning large scale export of garlic.

43.  FMX also submit that the Cambodian authorities controls were inadequate as they should have included some form of cross-checking between the customs authorities at the port at Sihanouk Ville and in Phnom Penh.

44.  In our view, there were a number of features of the transhipment in the port of Sihanouk Ville that the local customs officials (had they been aware of them) ought to have found suspicious. We agree with FMX that a system of cross checking between Sihanouk Ville and Phnom Penn might have prevented the issue of the Cambodian certificates of origin. However, we saw no evidence that the issuing authority were informed of the grounds for suspicion. Still less did they know that the information provided by the exporter was false and deceptive.

45.  We consider that the criticism of the OLAF mission is misplaced. Its role is to protect the revenues of the European Union from fraud. Its presence in Cambodia was at the invitation of the Cambodian government, and it does not have any independent investigation powers that it can exercise in Cambodia on its own initiative. It is not an international police force, and it is not responsible for the policing and prosecution of offences under Cambodian law. In particular, we disagree with the submission made on behalf of FMX that it had a legitimate expectation that OLAF would investigate all relevant circumstances to protect not only the EU Commission and member states, but also traders.

46.  We were provided with evidence as to the scale of garlic production in Cambodia. The United Nations Food and Agriculture Organisation shows exports of Cambodian garlic in 2004 as being 3120 tonnes. FMX submit that the Cambodian authorities ought to have been aware that the quantity of garlic being exported to FMX and Agrimpex could not have been sustained from domestic production. Mr McNicholas gave as an analogy an application by an exporter to UK customs at the port in Aberdeen for a certificate of origin for Scottish bananas.

47.  In the Ilumitornica case, the European Court of Justice held that there had been errors by the Turkish customs administration in connection with the importation of televisions which had been certified by the Turkish authorities as being of Turkish origin, in circumstances where the Turkish authorities had full knowledge that the goods could not be so certified. In contrast, in the circumstances of this case, we have no evidence before us that the Ministry of Commerce in Phnom Penh was aware, or should have been aware, that the garlic was of Chinese origin.

48.  In contrast to Mr McNicholas's analogy with Scottish bananas, garlic is produced in Cambodia, and the evidence was that garlic was grown in Cambodia in greater quantities than was exported to FMX and Agrimpex. Although the amounts exported might have represented a substantial proportion of Cambodia's production, it was not all of the Cambodian production. We therefore find that the quantity of the garlic exported would not of itself have been sufficient to put the Cambodian Ministry of Commerce on notice that the origin of the garlic was not Cambodian.

49.  Indeed the operation of the fraud was designed to ensure the deception of the Ministry of Commerce in Phnom Penh as to the origin of the garlic. The Ministry was presented with documents after the garlic had been shipped which, on their face, confirmed Cambodian origin. The Ministry could not at that stage physically inspect the goods, as by then they had been shipped. Mr Jennes stated in his evidence, which was not challenged, that the level of control exercised by the Cambodian Ministry of Commerce in Phnom Penh over the issue of certificates of origin was about the same as that exercised by equivalent authorities within the European Union.

50.  We therefore find that there was no relevant error on the part of the Ministry of Commerce in Cambodia.

Did FMX act in good faith

51.  "Good faith" has a restricted meaning in the context of the Code. For FMX to be treated as having acted in good faith, it must have acted without deception and exercised appropriate diligence or "due care" in its import arrangements (see Case C-357/07 Staatssecretaris van Financien v Heuschen & Schrouff Oriental Foods Trading BV [2008] ECR I-8599 at [57] to [59]).

52.  Mr McNicholas submitted that FMX had acted in good faith. It had acted without deception and exercised all appropriate diligence and due care. He noted that FMX had informed the UK customs authorities about the smuggling of Chinese garlic through India, and had also co-operated with the police in connection with the prosecution of a corrupt officer of HMRC. Mr McNicholas submitted that there were no irregularities apparent on the face of the documentation received by FMX, and the boxes in which the garlic was packaged had pictures of Cambodian temples. Published trade statistics show that there was a legitimate trade in Cambodian garlic. Mr McNicholas notes that it was not until 12 August 2005 that the Commission issued a Notice to Importers warning them of Chinese garlic exceeding the annual quota of 13,200 tonnes. Accordingly there was nothing in 2004 to put FMX on notice that anything was awry and that there was nothing more that FMX could have done to detect the fraud.

53.  We are not satisfied that FMX acted with "good faith" for the purposes of Article 220 for the following reasons:

54.  We note that FMX and Mr Pignatelli were aware that Chinese garlic was being smuggled into the European Union via third countries, where false certificates of origin were issued. FMX were therefore aware that there was a risk of false certificates of origin being supplied. Yet contrary to the guidance in HMRC Public Notice 826, FMX made no contractual arrangements with Arrowquick to ensure that the risk was managed (see Case T-239/00 SCI UK Ltd v Commission [2002] ECR II-2957 at [55] which held that the importer is responsible for the regularity of the documents presented by him to the EU customs authorities and that the wrongful acts of an importer's contractual partners cannot be borne by the EU but must fall at the door of the importer).

55.  We note also that HMRC Public Notice 826 at paragraph 2 lists a series of checks that should be followed by an importer, including obtaining written assurances from the overseas supplier (Duong Chhiv) or overseas selling agent (Arrowquick) that the garlic was of Cambodian origin. None of these checks were made. We note that FMX would have been aware that Duong Chhiv were the suppliers, as they are listed as the consignor of the garlic and are shown as the exporter on bills of lading and on some of the import documents filed by FMX's import agent. Mr Pignatelli acknowledged in the course of his evidence that he received packing slips from Duong Chhiv with the garlic.

56.  We note also that, contrary to the recommendation in Public Notice 826, FMX did not request a Binding Origin Information.

57.  Mr Pignatelli was not entirely candid with us as regards his relationship with Mr Antonio Tuccillo and Agrimpex in Italy. In Mr Pignatelli's witness statement and his evidence in chief, he referred to the purchase of the garlic being undertaken by a "former employee" under his supervision. Whilst giving evidence, Mr Pignatelli on several occasions referred to obtaining documents from "an importer in Italy" or from Agrimpex. But it was only when cross-examined that it became clear that the "former employee" was Mr Tuccillo, who was a director of FMX until 15 September 2008 and was at all material times the majority shareholder in FMX. It also only became clear in the course of cross-examination that Mr Tuccillo was also a director and owner of Agrimpex, which specialised in the importation of garlic into Italy, and that the "importer in Italy" that Mr Pignatelli referred to whilst giving evidence was Agrimpex. Mr Pignatelli confirmed that he and Mr Tuccillo were in regular contact by telephone and that Mr Tuccillo was responsible for purchasing garlic (and sometimes other produce) for FMX - Mr Pignatelli would advise Mr Tuccillo of quantities and sizes required. Mr Pignatelli told us that when telephoning Mr Tuccillo, in addition to discussing FMX purchasing, they would also talk about business generally.

58.  As Mr Tuccillo was at all material times a director of FMX, his knowledge must be imputed to FMX.

59.  In 2004 Agrimpex had difficulties with the Italian customs regarding the origin of imported garlic. Mr Pignatelli in the course of his evidence confirmed that Mr Tuccillo had told him at the time that Agrimpex had difficulties with Italian customs, but said Mr Tuccillo had not discussed the reasons for these difficulties. Mr Pignatelli described Italian customs as being particularly bureaucratic and thought that Agrimpex were just having general difficulties with Customs delaying goods, rather than because of concerns with their origin. Given the nature of the relationship between Mr Pignatelli and Mr Tuccillo, we do not find it credible that Mr Tuccillo would have discussed the difficulties he was having with Italian customs with Mr Pignatelli, but not have mentioned the reasons for the difficulties.

60.  The phytosanitary certificates also raise issues. Mr Pignatelli confirmed that he knew that no phytosanitary certificates were required in order to import garlic into the EU, yet Mr Pignatelli requested that they be obtained for every shipment "just to have so to speak". Mr Pignatelli gave no satisfactory account of why he requested them. Also included in the bundles is a letter from the Cambodian phytosanitary department dated 3 November 2004 that by its context must have been sent to Agrimpex in support of its dispute with Italian customs as to the origin of the Cambodian garlic. The letter confirms that Duong Chhiv is a producer and exporter of Cambodian garlic, that it is growing new types of garlic under the supervision of the phytosanitary department to promote a long term garlic export business, and is considering exporting other Cambodian produce to Italy, and that the phytosanitary department are providing full cooperation to promote the export of Cambodian products. Mr Pignatelli told us that the letter was subsequently faxed by Mr Tuccillo to FMX, the date of transmission shown on the fax header is 19 November 2004. Mr Pignatelli stated that Mr Tuccillo had got the letter to help with the dispute that Agrimpex had with Italian customs about the origin of imported garlic. But, it would be unusual, to say the least, for a department concerned with inspecting plants for infections or insect infestation to provide assurances about the origin of produce, and in particular to state that a company is a producer and exporter of fresh produce, and that the phytosanitary department is engaged in supervision of growing or involved in the marketing of produce. At the very least these all raise questions as to the role of the Cambodian phytosanitary department and its relationship with Agrimpex and Duong Chhiv, yet Mr Pignatelli in his evidence said that he had no reason to doubt the letter.

61.  Included as exhibits to Mr Pignatelli's witness statement were two Cambodian export declarations relating to consignments of garlic imported by Agrimpex into Italy. These both date from July 2003. The declarations are identical, save that one identifies the consignment's country of origin as China, and the other Cambodia. Mr Pignatelli exhibited them to illustrate confusion by Cambodian customs as regards the coding of the country of origin, but in our view their true significance is that they show the double declaration system being operated by Duong Chhiv in its dealings with Cambodian customs and the Cambodian Ministry of Commerce.

62.  It transpired during the course of cross examination that these declarations had been sent to Mr Pignatelli by Agrimpex, together with a covering memo (which was not exhibited to the witness statement). The covering memo was subsequently produced to the Tribunal (and a translation from Italian to English was later prepared for the Tribunal's benefit). The covering memo makes it clear that the two export declarations were used as part of the fraud to obtain false certificates of origin from the Cambodian Ministry of Trade, and suggests that both the Ministry of Trade and Cambodian customs were aware of the true origin of the garlic. The covering memo refers to the OLAF report, so these declarations cannot have been received by FMX before February 2007 (in evidence Mr Pignatelli stated that he had received them a few months prior to the date of his witness statement in August 2009). They do not therefore prove that Mr Pignatelli had knowledge of the fraud in 2004, but they do indicate that Mr Pignatelli and Mr Tuccillo had discussed the fraud, contrary to the assertions given by Mr Pignatelli in his oral evidence that he was unaware of the reasons why Agrimpex had problems with Italian customs.

63.  We note that in addition to dealing with Arrowquick in Taiwan, FMX had dealings with Marcolink, also in Taiwan. HMRC produced copies of import entries made on behalf of FMX in February 2004 relating to fresh Chinese garlic (within their quota allocation) showing Marcolink as consignor. Mr Pignatelli stated in his evidence that he was unaware that Mr Wang was involved with Marcolink. Given the long association that FMX has had with Mr Wang, and the fact that FMX was importing garlic within their quota allocation from China through Marcolink, we consider that it is not credible that Mr Pignatelli and Mr Tuccillo were unaware of Mr Wang's involvement with Marcolink.

64.  In evidence, Mr Jennes (for OLAF) said Agrimpex had earlier difficulties over the import of garlic. In the late 1990's, the Italian authorities had unsuccessfully pursued a case against Agrimpex relating to garlic supplied by Marcolink with false Malaysian certificates of origin. Mr Tuccillo was buying for both Agrimpex and FMX and so was on notice that Marcolink was associated with inaccurate declarations of origin.

65.  In evidence, Mr Pignatelli confirmed that he was aware that there had been problems with the misdescription of the origin of garlic described as Malaysian. Given the nature of the garlic importation market (where, according to Mr Pignatelli's evidence, "we all know each other") and FMX's and Mr Tuccillo's significant position within it, we consider it more likely than not that Mr Pignatelli and Mr Tuccillo would have been aware of Marcolink's involvement in the misdescription of Malaysian garlic. Given that FMX was aware that it was sourcing purportedly Cambodian garlic from a company based in Taiwan operated by a man, who through another company was also contemporaneously supplying Chinese garlic, and had previous involvement in the misdescription of the origin of Malaysian garlic, we would have expected FMX to have sought proof as to the origin of the garlic being supplied, but it did not do so.

66.  FMX argued that the Cambodian authorities should have realised that the quantities of garlic were unlikely to have been grown in Cambodia. That is the "Scottish bananas" argument. However, that argument runs in both directions. Both Mr Tuccillo who ordered the garlic and Mr Pignatelli had long experience in the garlic trade. The garlic world was small and the main players knew each other. FMX would therefore know that Cambodia was not a significant exporter of garlic. Mr Pignatelli described the samples of "Cambodian" super-white garlic as being of exceptional quality. He and his fellow director ought to have wondered how it was possible for large quantities of exceptionally high quality garlic to become available from a previously insignificant source. They might wonder about the reliability of the supply, given that the "Cambodian" garlic would amount to some 40 percent of their purchases in 2004. For these reasons, the directors of FMX could be expected to find out details about the ultimate source of supply, but did not do so.

67.  There were other matters which Mr Beal in his submissions suggested were additional factors indicating lack of good faith on the part of FMX, but which we found to be less convincing (for example Mr Beal submitted that discrepancies between the dates of the commercial invoices shown on the Certificates of Origin and the dates of the invoices received by FMX ought to have given rise to a concern of double invoicing, but these discrepancies could also be explained by the fact that there could have been a chain of invoices with differing dates leading from the Cambodian grower to Arrowquick). But in the light of all the other factors mentioned above find Mr Pignatelli's evidence that FMX acted in good faith and exercised all due care not to be credible. We find that FMX did not exercise all due care in relation to the Consignments, and that the second criterion for the application of Article 220(2)(b) of the Code is not met.

Had FMX complied with all the provisions laid down by the legislation in force as regards the customs declarations?

68.  The garlic was transported at -3°C, and this is the temperature at which fresh garlic is transported. However the garlic was incorrectly described on import as being frozen. Mr Pignatelli stated in evidence that he only noted that an incorrect declaration had been made by his import agents in October 2004. Submissions were made on behalf of HMRC that the circumstances relating to the use of incorrect tariff codes illustrated that FMX had not taken all due care in relation to the importation of the goods. Given all the other circumstances relating to the importations, we consider that nothing turns on the incorrect tariff codes. However, for completeness we note that as incorrect tariff codes were used, FMX had not complied with all the relevant provisions regarding its customs declarations. Therefore the third criterion set out in Article 220(2)(b) has not been met.

Remittance under Article 239 where there has been no deception or obvious negligence

69.  It is a precondition to repayment or remission under Article 239 that the relevant application is submitted within 12 months from the date on which the amount of duty was communicated to the applicant. That was not done in this case, and FMX have not advanced any exceptional circumstances to justify extension of the time limit.

70.  Article 878 of the Implementing Regulations prescribes a form for applications, which FMX have not used, Nor have they provided in a convenient format the salient details required by the form contained in Annex 111 to the Implementing Regulations. We agree with the submissions made by HMRC that this is not excessive formalism, as the Committee hearing any application works in many different languages, and the use of a standardised form greatly assists them.

71.  As no compliant application has been made, HMRC have taken no decision, and accordingly there is nothing against which FMX can appeal. In these circumstances, we have no jurisdiction to consider the matter.

72.  However, given that the Tribunal has heard detailed evidence and argument on the issues, HMRC are content for the Tribunal to give a ruling on Article 239, to guide the parties on the likely merits of such an application – should one be subsequently made.

73.  We consider that any application made under Article 239 must be bound to fail for the following reasons.

74.  First, Article 904(c) of the Implementing Regulations provides that the duties shall not be remitted or repaid where the only grounds relied upon are the presentation, for the purposes of obtaining preferential tariff treatment of goods declared for free circulation, of documents subsequently found to be forged, falsified or not valid for that purpose – even where such documents were presented in good faith. In this case as the relevant documents were found to be forged, falsified or not valid for that purpose, remission or repayment is not permitted, even if the documents had been presented in "good faith".

75.  Secondly, the submission of documents subsequently found to be falsified or inaccurate does not of itself constitute a "special situation" justifying remission or repayment of import duties. This is a trade risk assumed by importers. See the decision of the General Court in Case T-290/97 Mehibas Dortseelan v Commission [2000] ECR II-15 at [83]

76.  Finally, FMX has not shown that it acted without deception or obvious negligence. The considerations in issue here are similar to those arising under Article 220(2)(b) of the Code which have been addressed above - see Case C-375/07 Staastssecretaris van Financien v Heuschen & Schrouff Oriental Foods Trading BV [2008] ECR I-8599 at [57] to [59] in which the European Court of Justice held that the procedures provided for in Articles 220 and 239 of the Code pursue the same aim, and must be interpreted in the same manner. For the reasons given in relation to FMX's arguments under Article 220, we find that FMX cannot establish that it has acted without deception or obvious negligence.

Fraud

77.  Mr McNicholas submitted to us that as no allegation of fraud had been pleaded by HMRC, FMX had been prejudiced by the fact that HMRC in its submissions had alleged that a fraud had been committed. It was a requirement (see HMRC v Dempster [2008] EWHC 63 (Ch) at 26) that any allegation of dishonesty must both be fairly and squarely pleaded and fairly and squarely put to the witness in cross examination.

78.  We consider this submission to be misconceived. We consider that FMX is not prejudiced by any allegations of fraud not having been specifically pleaded, since it is sufficient for its appeal to fail for HMRC to show that the certificates of origin were obtained through incorrect information, and that FMX had not exercised all due care. These issues are satisfactorily set out in HMRC's statement of case.

Conclusions

79.  For the reasons given above, we dismiss the appeal.

Costs

80.  The appeal was lodged with the VAT and Duties Tribunal on 12 April 2007. The appeal was transferred to the First Tier Tribunal (Tax Chamber) pursuant to the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009. Pursuant to Paragraph 7 of Schedule 3 to that Order, this Tribunal has discretion to apply any provision in procedural rules which applied to the proceedings before the commencement date of the Order, and to disapply any provision of the Tribunal's procedure rules.

81.  Both parties have applied that Rule 10 of the Tribunal Procedure (First Tier Tribunal) (Tax Chamber) Rules 2009 relating to costs should not apply, and instead the provisions of Rule 29 of the Value Added Tax Tribunal Rules 1986 should apply, allowing the Tribunal to make an award of costs. However, FMX also submit that the "Sheldon" practice should apply, and that HMRC should not seek their costs if they are successful. Mr Beale submitted that this case was one falling within the exception to the Sheldon practice, as it falls into the category of large and complex cases which justifies departure from the usual practice.

82.  Mr McNicholas submits that as HMRC did not serve a fully particularised Statement of Case until September 2009, it would not be appropriate to award costs against FMX.

83.  Given that both parties have applied for the "old" costs rules to apply, we should make a direction to that effect, and hereby direct that Rule 10 of the Tribunal Procedure (First Tier Tribunal) (Tax Chamber) Rules 2009 relating to costs should not apply, and instead the provisions of Rule 29 of the Value Added Tax Tribunal Rules 1986 should apply.

84.  We consider that this case is sufficiently complex that it falls within the exception to the Sheldon statement, and that HMRC should not be restrained from an award of costs.

85.  However we note that HMRC did not serve a fully particularised Statement of Case until September 2009, and FMX should not be prejudiced as a result.

86.  We therefore direct that the costs of the appeal (other than the costs of and caused by the amendment to the Statement of Case which shall be paid by the Respondents to the Appellant) shall be paid by the Appellant to the Respondents and (in default of agreement) shall be assessed by a Costs Judge of the Senior Courts.

87.  This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

                         

 

 

                         

                        Nicholas Aleksander

 

                        TRIBUNAL JUDGE

                        RELEASE DATE: 21 December 2010

 

Cases mentioned in argument but to which no reference is made in this decision:

 

Case 161/88 Binder v Hauptzollamt Bad Reichenhall [1989] ECR 2415 ECJ

Case C-348/89 Mecanarte v Chefe do Serico da Conferencia Final da Alfandega [1991] ECR I-3277 ECJ

Cases C-153/94 and C-204/94 Faroe Seafood and others [1996] ECR I-2465 ECJ

Case C-413/96 Skatteministeriet v Sportsgoods A/S [1998] ECR I-5285 ECJ

Case C-61/98 De Haan Beheer BV v Inspecteur der Invoerrechten en Accunzen te Rotterdam [1999] ECR I-5003 ECJ

Case T-290/97 Mehibas Dordtseelan v Commission [2000] ECR II-15 CFI

Case T-330/99 Spedition Wlhelm Rotermund GmbH v Commission [2001] ECR II-1619 CFI

Case T-104/02 Societe francaise de Transports Gondrand Freres v Commission [2004] ECR II-3211 CFI

Case C-499/03 P Peter Biegi Nahrungsmittel GmbH v Commission [2005] ECR I-1751 ECJ

Case C-62/05 P Nordspeizionieri de Danielis Livio v Commission [2007] ECR I-8647 ECJ

Re the Arena Corporation [2004] EWCA Civ 371

Case C-283/04 Beemsterboer Coldstore v Inspecteur der Belastingdienst – Dounedistrict Arnhem ECJ 09 Mar 06 (BAILII: [2006] EUECJ C-283/04)

Case T-42/96 Eyckeler & Malt & UK v Commission CFI 19 Feb 98 (BAILII: [1998] EUECJ T-42/96)

Case 250/91 Hewlett Packard France ECJ 01 Apr 93 (BAILII: [1993] EUECJ C-250/91)

HM Customs and Excise v Invicta Poultry [2010] UKFT (TC) 45

Case C-48/98 Sohl & Sohlke v Hauptzollamt Bremen ECJ 11 Nov 99 (BAILII: [1999] EUECJ C-48/98)

South Lodge (Imports) Limited v Customs VTD C00103 26 July 99

Terex Equipment v HMRC [2008] UKVAT (Customs) C00250 23 Jan 08

Cases C-430/08 and C-431/08 Terex Equipment v HMRC ECJ 14 Jan 10 (BAILII: [2010] EUECJ C-430/08)

Case C-204/07 P CAS Spa v Commission ECJ 25 July 08 (BAILII: [2008] EUECJ C-204/07)