DECISION
Introduction
1.
This an appeal against a decision by the Commissioners for Her Majesty’s
Revenue & Customs (“the Commissioners”) dated 4 August 2011. The decision
upheld a reconsideration decision made on 31 May 2011. The earlier decision refused
an application for repayment of import duties totally £40,258.35. The
Application for repayment had been made pursuant to Article 236 of the Customs
Code (Council Regulation 2913/92).
Background & relevant facts
2.
The facts in this case are not disputed. The relevant facts are
outlined below.
(1)
Widget UK Ltd (“the Appellant”) (No 3956797) is a company which imports
and distributes consumer electronic products. Their registered office is Unit
4, The 10 Centre, Arlington Business Park, Whittle Way, Stevenage, Hertfordshire
SG1 2BD.
(2)
On 2 March 2009, the Appellant entered into a distribution agreement
(“the Agreement”) with a US supplier, Pure Digital Technologies Incorporated
(“Pure Digital”) for the purchase and resale of products manufactured by Pure Digital.
This included flip video camcorders, tapeless camcorders for digital radios and
a range of other similar camcorders. These camcorders were largely used in
making short video recordings. The Appellant imported several of these video
camcorders from the USA between March 2009 and December 2009. The importation
took place within the terms of the Agreement. The total importation amounted
to some £14,000,000 with duty of £821,599 of which 4.9% (£40,255) is sought to
be recovered.
(3)
Pure Digital invoiced the Appellant for the imported products. The
invoice price was the price paid by the Appellant as a transaction value on
which the applicable customs duty was to be paid (being the price paid or
payable by the buyer to the seller).
(4)
Under the Agreement Clause 2.8 provides for a Marketing Development Fund
(“MDF”) which provides:
“MDF is accrued by Widget UK Ltd per camcorder purchase
from the PDT….. The fund is allocated to Widget customers based on the
completion by the customer(s) of agreed marketing actions…… Widget UK Ltd will
transfer these funds in line with their contractual relationship with the
customer(s)…….”
(5)
The Appellant asserts that the payment pursuant to Clause 2.8 of the
Agreement constitutes a reduction in the price paid or payable by the buyer to
the seller for the goods.
(6)
The basis of the claim is that the Customs value originally paid in
respect of the camcorders when they were purchased from the Pure Digital and
imported into the UK should be reduced to take into account amounts shown on
credit notes issued by Pure Digital in respect of payments made from the MDF.
(7)
The core issue therefore is the MDF credit and the quantum of that
credit. The Appellant asserts that the amount claimed is 4.9% of £821.599
which is £40,258.35.
(8)
In October 2010 the Commissioners rejected the claim of the Appellant on
the grounds that there were two transactions and the marketing payment could
not be deducted from the import value. After further representations by the
Appellant, the Commissioners upheld their decision.
(9)
On 26 January 2011, the Appellant’s representatives, The Customs
Consultancy, submitted a further C285 Form, containing a repayment of customs
duty claim under Article 236 of the Community Customs Code (“CCC”), which
constituted a second claim for the duty. On 31 May 2011, the Commissioners
rejected this new claim on the grounds that the repayment was the same as those
made in the earlier claim. For clarification, the new claim was treated as a
resubmission of the earlier claim on the grounds that the repayment was the
same as that in the earlier claim.
(10)
There was further correspondence between the parties in June 2011. The
Appellant provided further information relating to the circumstances that gave
rise to the claim and further argument. After reconsideration by the
Commissioners, on 4 August 2011, the Commissioners notified the Appellant that
their second repayment claim was rejected. This is the decision which is the
subject of this Appeal.
(11)
The Commissioners disagreed with the Appellant’s contention that the
payments made pursuant to Clause 2.8 constituted a reduction in the price paid
or payable by the buyer to the seller for the goods imported. The payments
were treated as being made for undertaking certain marketing activities. This
is supported by the fact that the payments were made for the benefit of
customers.
Relevant Legal Provisions
3.
Article 29.1 of the CCC provides in relevant part:
“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….”
4.
Article 29.3 then provides in relevant part:
“The price actually paid or
payable is the total payment made or to be made by the buyer to or for the
benefit of the seller of 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.
Article 236(1) provides:
“Import duties or export
duties shall be repair in so far as it is established that when they were paid
the amount of such duties was not legally owed or that the amount has been
entered into the accounts contrary to Article 220”
Witness Statement of Mark Needham
6.
Mark Needham is the Chairman of Widget UK Ltd. He provided a Witness
Statement dated 11 May 2012 and oral evidence. He made the following points;
(1)
The MDF is stated as relating to the need for retailers to engage in
marketing activities, but in reality its use was quite different. It would be
used to provide credits to help him show the maintenance of retail price
through rewards to compliant customers. Alternatively, it might be used to
provide additional credits in relation to securing larger sales, particularly
at quarter end to ensure that sales targets were met by Widget.
(2)
The use of the MDF was not the sole discretion of Widget. In addition
to his own sales staff, the marketing of the Flip product range to retailers
also undertaken by the staff of Pure Digital. The use of the MDF relation to
securing sales was undertaken at the direction of Pure Digital’s marketing
team.
(3)
The MDF was used as a means to control price by allowing for reductions
in the value of the imported goods.
(4)
Retailers would ask for a percentage of the purchase price to be
allocated for marketing. This would impact on the profits of the Appellant.
The MDF provides a mechanism for paying these additional costs which a retailer
may add when contracting the Appellant.
(5)
The money paid under the MDF was treated as a credit which was held in
the account of the Appellant. Pure Digital would give their permission to
dispose of the money once retailers undertook suitable marketing activities.
(6)
The Appellant obtained a discount or price reduction on the price paid
to Pure Digital for products.
(7)
A credit note would only be given to the Appellant after it was approved
by the customer relations manager appointed by Pure Digital.
Appellants Submission
7.
The Appellant makes two core submissions.
8.
The first is that under the terms of the Agreement, the MDF credits
would allow for a reduction in the price paid or payable for the products.
This is because pursuant to Article 29 3(a) of the CCC the costs in
undertaking marketing activities are not to be included in the value for
Customs under the transaction method of valuation. Article 29, 32 and 33 of
the CCC provide for certain additions and exclusions to and from the transaction
value. One such exclusion is the cost of marketing activities undertaken by
the buyer. Such a payment is not considered to be an “indirect payment to the
seller” even though it might be regarded as a benefit to the seller or have
been undertaken by agreement with the seller.
9.
Marketing activities for the purposes of Article 29.3(b) of the CCC is
given a broad definition and includes “all activities relating to advertising
and promoting the sale of the goods in question and all activities relating to
warranties or guarantees in respect of them”.
10.
Article 148 of the Implementing Regulations (“IR”) to the CCC states
that such marketing activities are treated as being undertaken by the buyer on
their own account and not on behalf of the seller even though they are
performed in pursuant of an obligation and the buyer is in agreement with the
seller.
11.
The point being made by the Appellant is that marketing costs shall not
be added to the price actually paid or payable in determining the customs value
of imported goods. This is confirmed Article 29.3 (a).
12.
The Appellants say that the MDF, is simply a provision requiring
marketing activities to be undertaken and under Article 148 of IR to the CCC,
it is clear that marketing activities linked to any MDF payments must be
regarded as being undertaken by the Appellant on their own account and should
not be added to the customs value of imported goods. The Article 148 of the IR
to the CCC is consistent with the provisions of the third and fifth recitals to
the Agreement on Implementation of Article VII of the General Agreement on
Trade and Tariffs (“GATT”) 1994. The third recital recognises the need to be
fair, uniform and neutral in valuing goods for customs purposes and that
precludes the use of arbitrary or fictitious custom value. The Appellant
cites the case of C-306-04 Compaq Computer International Corporation v
Inspecteur Der Belasting Inest – Douane District Arnhem (at para 30) were
the Court (ECJ) stated that it would be unfair if the costs associated with
marketing activities undertaken in the EU were on occasion subject to the
customs duties and at other times was to be excluded from the value of the
duty.
13.
The fifth recital recognises that customs values should be based on
simple and equitable criteria consistent with commercial practice and valuation
practices and procedures should be of general application without distinction
between sources of supply. The Appellant said that in order to be equitable
and recognise commercial realities there should be a consistent application and
interpretation of the relevant provisions and marketing costs should not
adversely impact on the values for customs duties.
14.
Irrespective of the position under Article 29 3 (a) of the CCC and
Article 148 of the IR to the CCC, the Appellants submit that the MDF credits should
not be the subject of duty. This results from the fact that the payments are
made in accordance with the Agreement and consequently reduced the price or
payable for the goods. The Appellant’s draw reference to Commentary No. 8 of
the Customs Code Committee dealing with the treatment of discounts under
Article 29 of the CCC. The simple point is that a discount is taken to be a
reduction of the list price for goods or services if given at the material
time. The material time would be when the Agreement is signed and thus the
importation of the products took place pursuant to the Agreement. For the
discount to be given it must relate to the imported goods and there must be a
valid contractual entitlement at the time of signing of the Agreement under
which the goods are imported. The Appellants say that the MDF satisfy all of
the requirements in Commentary No. 8 of the Customs Code Committee. They state
the conditions to be
(a)
The MDF credit result in a discount to the list price of the goods.
(b) The
potential for the discount and its value was known at the material time for
Customs valuation.
(c)
The discount was contractually provided for and specifically relates to
the imported goods.
(d) Although
not detailed in the suppliers’ invoice, the fact that it is a contractual claim
at the material time means that a discount should be recognised in the Customs
valuation.
15.
The Appellants’ second submission is that the MDF is simply a price
reduction. They contend that as implemented, the MDF credits received under
the Agreement allow for a reduction in the price paid or payable for the
products. The Appellant draws on the witness statement of Mr Mark Needham,
Chairman of the Appellant company. In his oral and written evidence he stated
that the MDF was simply used as a means to control price by allowing for reductions
in the value of the products at the time of importation. Mr Needham stated
that the MDF was used to ensure the maintenance of retail price through a
reward system given to compliant customers or as a credit to secure larger
sales.
16.
The Appellants say that in reality the MDF was a discount which reduced
the price paid or payable for the goods. Therefore it follows that the
transaction value was accordingly reduced as contemplated by Article 29 of the
CCC. In determining value it is not sufficient to rely on the Agreement. To
do so may create arbitrary and fictitious customers values. This argument
seems to focus on the reality of the commercial transaction rather than the
written terms of the Agreement. The Appellants say that the MDF payments were
“in reality” utilised as a price protection reduction to the value of the
products and imports and consequently the Commentary No 8 of the Customs Code
Committee is applicable in determining whether the price paid or payable for
the product was altered. Again, the Appellant draws reference to the
requirements stated by the Customs Code Committee which were itemised above and
says that they are all satisfied with this case.
17.
This form of price reduction is recognised by the Commissioners as
stated in the letter of Tara Allitt of 24 September 2012. It further is
provided in HMRC’s Public Notice 252, Valuation of Imported Goods for Customs Purposes
VIGCP, Section 30.3 which states
“Where, at the time of entry, there are contractual
arrangements in place between you and the seller indicating the possibility of retrospective
price adjustments, the invoice price for the goods concerned would, in effect
be provisional”.
18.
In simple terms, the Appellants say that this is a reduction in the
price and the true or real price should be the subject of Customs duty not a
fictitious or artificial price which included an amount for marketing.
The Respondents Submissions
19.
The Respondent’s core submission is that customs duty is calculated on
the transactional value which is to say the price actually paid or payable for
the products. In this case that price is the invoice price charged by Pure
Digital to the Appellant. While accepting that that price could be discounted,
the amounts paid pursuant to the MDF (Clause 2.8 of the Agreement) are not
retrospective price decreases but rather payments made for undertaking certain
marketing activities. The price paid or the transactional price has not been
altered.
20.
The payments made under Clause 2.8 of the Agreement are for the benefit
of the Appellant’s customers and do not constitute a reduction in the price
paid or payable to the seller.
21.
The Appellant has not provided evidence of a contractual entitlement or
price reduction based on Clause 2.8. This was required under Public Notice 252
Paragraph 30.3 which requires any claim for a price reduction to be
“accompanied by appropriate evidence including full details of the contractual
arrangements as well as rebates received from and issued by the seller”.
Therefore the evidential burden has not been satisfied by the Appellants. The
Public Notice 252 lays out requirements which are not satisfied in this case.
22.
Clause 2.8 of the Agreement does not provide a price reduction. There
is no formal variation of the contract price which gives rise to an
entitlement. There is no legal basis for the entitlement.
23.
The reliance by the Appellant on Article 148 of IR which reliance runs
contrary to the Appellant’s ascertain that Clause 2.8, does not operate in
practice as provided for by the wording of the Agreement. The reason is
because Article 148 (2) makes clear that the cost of marketing “even if they
are performed in pursuant of an obligation on the buyer following an agreement
with the seller” are not to be taken into consideration for Customs valuation
purposes. The obligation in this case is not on the buyer but rather on the
retailers to do certain marketing. Therefore if it was a fund to provide
repayment for marketing by retailers, the claim would fail.
24.
The alternative argument, that it was a mechanism for price reduction is
without support on the evidence provided. Clause 2.8 of the Agreement only
provides that the money is to be used in marketing.
25.
The Respondents say that there has been no over payment of duty
justifying a repayment under Article 236 of CCC.
Discussion
26.
Let us start by looking at the background.
27.
The European Union (“the EU”) is a member of the World Trade
Organisation (“WTO”). On 1st January 1995 the WTO Agreement replaced
the General Agreement on Tarrifs and Trade (“GATT”). The GATT was a
multilateral Agreement regulating international trade. The WTO Agreement
provides a framework within which the previous GATT tax operates subject to any
modification. WTO Agreements therefore incorporate and update the GATT.
28.
Article V11 of GATT 1994 deals with the valuation of products for
Customs purposes. The value is based around actual value. The actual price is
the price of which goods are sold or offered for sale in the ordinary course of
business. In providing a basis for valuation of goods it was intended to
provide a system which was simple and equitable and based on commercial
principles and agreed valuation procedures. The Customs value of goods
imported from outside the EU is determined on the basis of the CCC established
by Council Regulation 2193/92, Articles 29-36 and the IR to the CCC established
by Commission Regulation 2454/93, Articles 141-181 and Annexes 23-29.
29.
In valuing goods, there are several possible methods of valuation. The Ad
Valorem Customs value of imported goods is determined according to six
possible methods. The methods of valuation must be attempted starting with
method 1 and moving to method 6 in consecutive order. Method 5 is attempted
before method 4. Method 1 is known as the transaction value which is
determined by the price actually paid or payable for the goods when sold for
export in the country of importation. The transaction value is accepted by
both parties as being the appropriate valuation in this case. This therefore
is a method of valuation to be used in determining the sales price between PD
and the Appellants.
30.
Article 29.3 (a) of the CCC a includes in making the valuation “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 and obligation
of the seller” Article 29.3 (b) excludes the costs of marketing activities from
the price if undertaken by “the buyer on his own account”.
31.
In looking at the price paid or payable in Article 29 of the CCC the IR
provides a useful guide in Article 148 which states:
“1.
For the purposes of Article 29.3 (b) of the Code, the term “marketing
activities” means all activities relating to advertising and promoting the sale
of the goods in question and all activities relating to warranties or
guarantees in respect of them.
2.
Such activities undertaken by the buyer shall be regarding as having been
undertaken on his own account even if they are performed in pursuance of an
obligation on the buyer following an agreement with the seller”
32.
The critical wording is “own account”. This would suggest that costs
associated with the buyer in conducting marketing activities on their own
account, which is that they pay for them, are not to be included in the value
for Customs under the transaction method.
33.
Article 148 of the IR to the CCC extends the provisions of Article 29.3
(a) of the CCC. It provides that marketing activities performed as a result of
a “contractual obligation” with the seller, shall be regarded as being
undertaken by the buyer on their own account. This means that this cost should
not be added to the price actually paid or payable in determining the customs
value of imported goods.
34.
What then does the contractual provisions provide? The MDF, a
marketing agreement between the Appellant and Pure Digital, the Appellant is
obliged to undertake certain contractual arrangements with its customers. In
return for undertaking certain marketing activities customers receive payments
from the Appellant. The Appellant asserts that marketing activities linked to
any MDF payment must be regarded as being undertaken by the Appellant on their
own account and so should not be added to the customs value of imported goods.
They say that this approach is consistent with Article V11 of GATT 1994 which
recognises a fair, uniform and neutral system for the valuation of goods and
where values should be based on simple and equitable criteria.
35.
The Tribunal disagrees. The price contemplated by Article 29 is the
price charged by the seller to the Appellant on the day that the goods were
released for free circulation. That is a material time for determining the
customs value. At the time of export, the Appellant has no contractual
entitlement to any payment from the MDF because that payment is subject to the
retailer carrying certain marketing activities. Clause 2.8 of the MDF states
that the “fund is allocated to the Appellant’s customers based on the
completion by customers of agreed marketing actions, validated by the Country
Manager of Flip Video UK. “Widget UK Ltd will transfer these funds in
accordance with their contractual relations with the customer(s). ….”
36.
The discount being offered to the Appellant through the MDF is both
conditional and retrospective in nature.
37.
The Commissioners guidance in Public Notice 252 provides for
retrospective price adjustments, including discounts but this is provided
“where we are satisfied that the price decrease stemmed from contractual
arrangements in force at the time of entry of the goods concerned….”. There is
no disputing that the discounts provided by the MDF do arise from contractual
arrangements between the parties at the time of the entry of the goods but
these sums are not “payable” at the time of the export under Article 29.1.
Further, the payments contemplated are for the benefit of the customers of the
Appellants and only and on undertaking certain marketing activities. The
payment is therefore too far removed from the material time when the sales
transaction takes place.
38.
Commentary No 8 of the Customs Code Committee (Customs Valuation
Section) of European Commission deals with discounts under Article 29 of the
CCC and at paragraph 2 states; “For customs valuation purposes the discount
must relate to the imported goods and there must be a valid contractual
entitlement at the material time”. The material time is the date of acceptance
of the Customs Declaration by Customs authorities.
39.
What emerges is that for any discount rebate or price adjustment to be
taken into in determining of the customs value for the purposes of Article 29
of CCC, it must satisfy the following conditions:
(1)
Relate to the imported goods;
(2)
Be granted against the transaction on the basis of which the customs
value was declared; and
(3)
If granted retrospectively, it must be provided for in the contractual
arrangements between buyer and seller in force at the time of the acceptance of
the Declaration for release to free circulation.
40.
The discount was not something the Appellant was entitled to. There was
no legal obligation to make a payment of the specified amount in the future.
The amount payable under the MDF is more flexible. It was an amount which may
or may not become payable in the future on the basis of marketing activities
which may or may not be undertaken by the Appellant’s customer
41.
The Tribunal therefore finds that there were two separate transactions.
These transactions are;
(1)
The sale of goods by Pure Digital to the Appellant in return for the
payment of a wholesale price for goods pursuant to the Agreement; and
(2)
The MDF payments made by the Appellant in accordance with Clause 2.8 of
that Agreement, the purpose of which is to support the Appellant’s customers in
marketing the goods.
The MDF payments do not amount a
revision or renegotiation of the price paid to Pure Digital for the imported
goods after the entry of those goods.
42.
Further the MDF accrues according to the number of Flip Video Camcorders
purchased by the Appellant from Pure Digital. The payments contemplated by the
MDF therefore are payments which would be made after the goods have imported.
They do not relate to their sale but rather to their marketing. This is
confirmed by the fact that the payments are made only after agreed marketing
actions were undertaken by the Appellants customers.
43.
The MDF is an internal fund created which can be rolled over to future
periods and appears to be only related to the imported goods. Clause 2.8
states “the fund will be reviewed, quarterly, and the balance officially rolled
over to the following quarter if both parties agree. If there is no agreement
then the surplus is paid back to PDT and a deficit rescinded to Widget UK”. In the Tribunal’s view this does not amount to a discount of the purchase price and
is clearly a conditional payment.
44.
The Appellant asserts that the Clause 2.8 of the Agreement operated
differently in practice. The evidence of Mark Needham suggested the MDF was
used as a means to control price by allowing for reductions in the value of the
goods at the time of importation. The MDF payments were reality discounts
granted by the supplier to the buyer and reduced the price paid or payable for
the goods. The Appellant says that the Agreement was implemented in a
different way and reliance should not be placed on its terms. They also draw a
reference to the fact that the Respondents confirmed that price protection
credits, of the type provided by the MDF, can alter the price paid or payable
for goods and can lead to the repayment of Duty. They draw reference to the
HMRC’s letter of 24 September 2012. In that letter, HMRC makes a distinction
between payments made under the MDF and where a supplier drops their prices and
a credit is given in relation to any stock that the Appellant is holding a the
time of the price drop which was purchased prior to the price drop. The HMRC
accepts that this is clearly a reduction in the price paid or payable for the
goods. This is a different situation from the one in this Appeal. It must be
added also that while the Appellants say the contract operated differently in
practice, this is not what is stated on their Notice of Appeal. Or indeed what
the contract itself says in its wording. This argument of the Appellant while
interesting is not persuasive.
45.
The Appellant has provided with the Application for Repayment Form
(C285) details of the import valuation claim schedule, a copy of the MDF
Agreement, calculations showing schedule of post import credits, examples of
credit notes, examples of commercial invoice supporting entry, example of post
import credits, copy of the relevant contracts, correspondence and MSS data
listing all imports of the Flip Camcorder.
46.
This information is helpful and was well presented. However while the
accrual of the marketing fund seems to be based on the number of goods
purchased, the payment out of the marketing fund are not linked to the goods
but rather to the occurrence of certain marketing activities. The Tribunal
cannot see how these payments constitute a price reduction in relation to the
goods themselves. The Appellants further argument that the payments from the
MDF were not conditional upon marketing activities but rather was a mechanism
through which the price of the goods could be reduced. This appears to be a
new argument and not one which is supported by the contractual documents. The
Appellant bears the legal and evidential burden of establishing that their claim
for the repayment of customs duty is correct. The onus is on the Appellant to
prove their case and in the Tribunal’s view they have failed to provide
sufficient evidence to support their claim. The Appeal is therefore dismissed
and the Commissioners refusal of the Appellants claim for repayment of the
customs duty is upheld.
47.
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.
DR K KHAN
TRIBUNAL JUDGE
RELEASE DATE: 13 February 2013
