Terminology

(1)          a party who exports or “dispatches” goods to a foreign purchaser is known as the “broker”;

(2)          a party who buys from the importer of the goods is known as “the acquirer”; and

(3)           intermediate purchasers between the acquirer and the broker are known as “buffers”.

The Deals

Documentary evidence

(1)          correspondence between the parties, and between the parties and the Tribunal;

(2)          various invoices, purchase orders, delivery and collection documents and shipping documentation called CMRs, which stands for “Convention Relative au Contrat de Transport International de Marchandises par la Route”;

(3)          extracts from Mr Chhatwal’s “deal book”, which we discuss in more detail at §470ff;

(4)          a schedule of EDC’s sales for each VAT quarter, from Q3 2007 through to Q4 2012, showing its UK sales, export sales and total sales;

(5)          a schedule for the same VAT quarters setting out the percentage of goods purchased from suppliers other than the manufacturer or authorised distributor of those goods (the “grey market”);

(6)          a schedule giving the sterling/euro foreign exchange (“FX”) rate for each VAT quarter for 2007 through to 2012 inclusive, and the same information shown graphically.

(1)          a “Deal Overview” schedule which analysed the deal chains for each of the disputed transactions, and included other information about pricing and profits; and

(2)          a more detailed schedule which set out the deal chain for each of the transactions, giving the price paid by each person in the chain, the date of each invoice, a description of the goods and (in relation to PS3s) the trade price at which it could be purchased from CentreSoft Ltd (“CentreSoft”), the authorised distributor for Sony products in the UK.

Witness evidence

Approach to witness credibility

(1)          he was evasive in answering straightforward questions, for example as to whether:

(a)          he had been given HMRC’s Public Notice 726, and whether he had read that Notice, see §102;

(b)          he had read a letter from HMRC dated 26 April 2010, see §111-112;

(c)          he  had received a specific letter from Sony about soft bundles, see §179-180; and

(d)         he was aware that there was a higher risk of fraud when purchasing from the grey market when compared to purchasing from the manufacturer or authorised distributor: Mr Watkinson asked him that question over twenty times, see §128;

(2)          he changed his evidence without any reasonable explanation or justification.  For instance:

(a)          faced with the facts about the EU specification of most of the PS3s involved in the Deals, he changed his original evidence about their source, see §525ff;

(b)          when asked to substantiate his statement that he would refer to the individual components of the soft bundles to ascertain whether the pricing was credible, he said he had not carried out that exercise, see §222(2);

(c)          although he originally said that his deal book recorded his negotiations with suppliers, he then denied this was the case, and even changed the meaning of an acronym used in that book, see §470ff;

(3)          when Mr Ginn pointed that Mr Chhatwal’s evidence about the due diligence carried out on “Zippy Distribution” (“Zippy”), one of his suppliers, was clearly incorrect, Mr Chhatwal said that his witness statement contained “inexact language” and a “typographical error”, which we did not accept, for the reasons explained at §256ff;

(4)          despite saying he was unable to access any emails relating to negotiations because of “a technical  issue  with  our  server, which resulted in the permanent loss of data”, in the course of the hearing he connected to that remote server and recovered emails he believed would support his position, see §490ff;

(5)          during his oral evidence he sought to contradict the evidence of Officer Hughes, even though that Officer’s witness statement had previously been accepted, see §115;

(6)          Mr Chhatwal gave inconsistent evidence about whether manufacturers and authorised distributors sold to internet retailers, see §137;

(7)          when in the witness box, Mr Chhatwal elaborated his evidence by adding significant new material, for example in cross-examination he provided, for the first time, evidence about the reasons for Deals A, K and P; and on re-examination he further expanded that evidence in relation to Deals A and K, see §326ff, §390ff and §418ff;

(8)          his newly stated reasons for entering into Deal A were directly linked to evidence given earlier in the proceedings by Mr Sherry, see §328ff; and

(9)          there were significant gaps in the documents which had been disclosed, see §459ff and §502-514.

The lack of supporting witness evidence

“In conducting my business, I preferred, where possible to establish long term relationships with counterparties...Trading with a select set of companies ensured that we would get to develop long term relationships arid trust with a handful of companies.”

(1)          it had now been five years since EDC had ceased business, and he no longer had any relationship with his suppliers or customers;

(2)          he had “no reason” to remain in contact with them after his business ceased; and

(3)          he had “lost confidence and no longer wanted to be involved in the business any more” as the result of this investigation.

Adverse inferences: the law

“If a prima facie case is made out, capable of being displaced, and if the party against whom it is established might by calling particular witnesses and producing particular evidence displace that prima facie case, and he omits to adduce that evidence, then the inference fairly arises, as a matter of inference for the jury and not a matter of legal presumption, that the absence of that evidence is to be accounted for by the fact that even if it were adduced it would not displace the prima facie case.  But that always presupposes that a prima facie case has been established; and unless we can see our way clearly to the conclusion that a prima facie case has been established, the omission to call witnesses who might have been called on the part of the defendant amounts to nothing."

“…the effect of a party failing to call a witness who would be expected to be available to such party to give evidence for such party and who in the circumstances would have a close knowledge of the facts on a particular issue, would be to increase the weight of the proofs given on such issue by the other party and to reduce the value of the proofs on such issue given by the party failing to call the witness.”

“From this line of authority I derive the following principles in the context of the present case:

(1) In certain circumstances a court may be entitled to draw adverse inferences from the absence or silence of a witness who might be expected to have material evidence to give on an issue in an action.

(2) If a court is willing to draw such inferences, they may go to strengthen the evidence adduced on that issue by the other party or to weaken the evidence, if any, adduced by the party who might reasonably have been expected to call the witness.

(3) There must, however, have been some evidence, however weak, adduced by the former on the matter in question before the court is entitled to draw the desired inference: in other words, there must be a case to answer on that issue.

(4) If the reason for the witness's absence or silence satisfies the court, then no such adverse inference may be drawn. If, on the other hand, there is some credible explanation given, even if it is not wholly satisfactory, the potentially detrimental effect of his/her absence or silence may be reduced or nullified.”

“This summary does identify some essential requirements before a court or tribunal may draw an adverse inference. Thus: (1) the party seeking the benefit of the inference must have adduced some evidence which shows there is a case for the other party to answer; (2) there must be a reason to expect that material evidence exists; (3) it is open to the party who resists the adverse inference to give a credible explanation, even a not wholly satisfactory explanation, as to why the evidence was not given. Apart from these basic requirements, there is much in the above summary of principle which is left open ended. We refer to the references to the court (or tribunal) being entitled to draw inferences ‘in some circumstances’ and the court's power to be influenced by an explanation which is not wholly satisfactory. These indicate that there is much about this approach which is not rigid and prescriptive. This reflects the circumstance that it is ultimately for the fact finding tribunal to make what it regards as appropriate findings of fact having regard to all the circumstances of the case including the fact, if this is established, that a party has not called an available witness and has not given a satisfactory explanation for not calling the witness.”

“1.  Is there some evidence, however weak, to support the suggested inference or finding on the matter in issue?

2.  Has the Defendant given a reason for the witness’s absence from the hearing?

3.  If a reason for the absence is given but it is not wholly satisfactory, is that reason ‘some credible explanation’ so that the potentially detrimental effect of the absence of the witness is reduced or nullified?

4.  Am I willing to draw an adverse inference in relation to the absent witness?”

“even if I eventually conclude that I have not been given a good reason or a credible explanation for the [party] not calling these three witnesses, it does not follow that I will automatically draw [an adverse] inference...In deciding what inferences to draw, I need to take into account not only the fact that [the individuals] were not called, when they could have been, but also other matters such as what I consider to be the most probable finding to make on the basis of all the evidence which I have received.”

“Mr. Chhatwal’s entire case on ‘the only reasonable explanation’ limb of Kittel really boils down to what he was told by various people about the three suppliers he used, and what they were doing with PlayStation bundles. There is no contemporaneous document recording anything in support of Mr Chhatwal’s evidence. In those circumstances, it is extraordinary that there is no witness from any of his counterparties who can make good Mr Chhatwal’s assertions.”

PART 2: THE LAW 

“1.  The right to deduct shall arise at the time when the deductible tax becomes chargeable.

2.  In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax, which he is liable to pay:

(a)  value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person;…..”

“167.  A right of deduction shall arise at the time the deductible tax becomes charged.

168.  In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT, which he is liable to pay:

(a) the VAT due or paid in that member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person.”

“24.  Input tax and output tax

(1) Subject to the following provisions of this section, ‘input tax’, in relation to a taxable person, means the following tax, that is to say

(a)  VAT on the supply to him of any goods or services;

(b)  VAT on the acquisition by him from another member State of any goods; and

(c)  VAT paid or payable by him on the importation of any goods from a place outside the member States,

Being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him….

(6) Regulations may provide-

(a)  for VAT on the supply of goods or services to a taxable person, VAT on the acquisition of goods by a taxable person from other member States and VAT paid or payable by a taxable person on the importation of goods from places outside the member States to be treated as his input tax only if and to the extent that the charge to VAT is evidenced and quantified by reference to such documents as may be specified in the regulations or the Commissioners may direct either generally or in particular cases or classes of cases;…

25. Payment by reference to accounting periods and credit for input tax against output tax

(1) A taxable person shall–

(a) in respect of supplies made by him, and

(b) in respect of the acquisition by him from other member states of any goods,

account for and pay VAT by reference to such periods (in this Act referred to as ‘prescribed accounting periods’) at such time and in such manner as may be determined by or under regulations and regulations may make different provision for different circumstances.

(2)   Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.

26.  Input tax allowable under section 25

(1)  The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.”

(2)   The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business–

(a)   taxable supplies;

(b)   supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom;…”

“…a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods.”

(1)           a trader who should have known that he was running a risk that the transaction might be connected with fraud, see [56];

(2)           a trader who knows or could have known no more than that there was a risk of fraud [55];

(3)          a trader who should have known that it was more likely than not that it was so connected [60].

(1)          should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion [59];

(2)          choose to ignore obvious inferences which arise from the facts and circumstances in which they have been trading [61];

(3)          should have known that the only reasonable explanation for the transactions was that they were connected with fraud [59]; and/or

(4)          have the means of knowledge available and choose not to deploy it [61].

“(1) Why was BSG, a relatively small company with comparatively little history of dealing in mobile phones, approached with offers to buy and sell very substantial quantities of such phones?

(2) How likely in ordinary commercial circumstances would it be for a company in BSG's position to be requested to supply large quantities of particular types of mobile phone and to be able to find without difficulty a supplier able to provide exactly that type and quantity of phone?

(3) Was Infinity [one of the suppliers to BSG] already making supplies direct to other EC countries? If so, he could have asked why Infinity was not making supplies direct, rather than selling to UK traders who in turn would sell to such other countries.

(4) Why are various people encouraging BSG to become involved in these transactions? What benefit might they be deriving by persuading BSG to do so? Why should they be inviting BSG to join in when they could do so instead and take the profit for themselves?”

“I digress to record that we were told in the course of oral argument that this passage from the Red 12 case is regarded as a road map for FtT hearings in this kind of case.”

(1)          a tribunal should not unduly focus on the question whether a trader has acted with due diligence, because that may “deflect a tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT” see Mobilx at [82]). 

(2)          However, “the exercise of due diligence or the lack of due diligence can potentially be relevant. If the trader has not carried out due diligence in relation to a transaction, that might assist HMRC in showing that the trader knew or should have known that the transaction was connected with fraud. Conversely, if due diligence has been exercised by the trader, that fact might not be conclusive as to whether the trader did not know or should not have known that a transaction was connected with fraud; the due diligence might have been done as window dressing and there might be other evidence which established that the trader knew or should have known that the transaction was connected with fraud”, see CCA at [52]; and

HMRC’s case

(1)          much of EDC’s case rested on assertions by Mr Chhatwal, but he was not a credible witness and no supplier or customer had been asked to give evidence to support EDC’s case;

(2)          there was no commercial market for PS3s which had been split from “soft bundles” made up of PS3s and games or accessories, and Mr Chhatwal knew this was the case.  He would therefore have known that the prices at which the suppliers offered to sell the PS3s could not be explained other than by reference to a fraudulent transaction chain, and were too good to be true;

(3)          he knew that the profit margin on PS3s was tight, and therefore also knew that the margin EDC was making was too good to be true;

(4)          the due diligence checks EDC undertook were casual and lax.  Either it collected insufficient information to make an informed decision as to the bona fides of its customers and suppliers, or about their financial ability legitimately to enter into such high value transactions; or, having collected the information, it simply ignored the obvious conclusions;

(5)          the goods in the deal chains were purchased from the grey market, whereas previously EDC purchased almost entirely from authorised dealers and manufacturers.  Mr Chhatwal had sought to explain this radical shift to the grey market by reference to FX differences and stock variances, but neither explanation is supported by the independent third-party evidence;

(6)          many of the goods traded in the chains were EU specification, meaning that they had been imported into the UK only to be dispatched out of the UK again. This made no commercial sense;

(7)          EDC rarely recorded on its invoices whether the PS3s were of UK or EU specification; this was because neither EDC nor its customers had a genuine commercial level of interest in the goods being traded;

(8)          most of the deal chains were completed within a few days; the disputed transactions which form part of these deal chains were mostly carried out very quickly, sometimes on a back-to-back basis, and this indicates that the transactions were pre-arranged;

(9)          there are significant gaps in the documentation, and Mr Chhatwal’s explanations for the absence of these documents are not credible.  If EDC was seeking its own trades within an active marketplace, evidence of the systems it used and records of its comparisons between competing suppliers would be capable of being produced;

(10)      under its terms and conditions, EDC retained title to the goods it sold until the receipt of full payment. Yet it often allowed its customers to ship the goods into mainland Europe before payment had been received.  In the context of high value wholesaling this required a level of unregulated trust that could only have been produced by the parties being knowingly part of a fraudulent scheme where they knew they would be paid come what may as monies were passed down the supply chains;

(11)      EDC was not purchasing from authorised distributors or manufacturers and it would therefore ordinarily have been a commercial imperative for EDC to inspect the goods, but EDC has produced no evidence of inspection reports and some of the delivery documents are marked “unchecked”.  The lack of inspection and record keeping meant that, if goods were returned by the customer, EDC could not even know whether it had supplied the item(s) in question, let alone that the order was complete and the stock in good condition;

(12)      there was no commercial reason for the length of the deal chains, which consisted almost entirely of wholesalers;

(13)      the same companies appear in many of the deal chains, and 21 of the 28 companies which participated have now been deregistered; this is beyond coincidence;

(14)      those orchestrating the fraud had a pool of companies at their disposal that they could bring into play; as soon as one company was deregistered it was replaced by another. The links between the defaulters and the scale of their defaults shows that the fraudulent defaulting traders did not operate in isolation; 

(15)      some of the suppliers and customers had traded directly between each other in other transactions, so the interposition of EDC made no commercial sense; and

(16)      any trader concerned to avoid MTIC carousel fraud would have been astute to record and retain the serial numbers of the goods that it dealt in.  This is a clear and controlled way in which a trader could protect itself from dealing in the same stock more than once, which would be an indication that the trader was in a carousel. It has the commercial advantage of providing clear records in the event of dispute or the need for insurance claim, yet EDC did not record the serial numbers of the goods it traded in these transaction chains.

(1)          the Deals involved twenty separate transactions, of which 18 took place between February 2011 and May 2011, a period of only four months.  EDC was also involved in a further 18 fraudulent transactions in which WNL was the defaulter; these took place between February 2011 and July 2011.   It was not credible that Mr Chhatwal could have been duped so many times, by so many different suppliers and customers, into undertaking the transactions which were part of fraudulent transaction chains, within the same short period;  

(2)          the scale of EDC’s involvement could be seen by considering the VAT position: during periods 02/11 to 05/11, between 67% and 51% of EDC’s input VAT arose from MTIC related transactions, being both the Deals and the transactions in which WNL was the defaulter; and

(3)          EDC’s profits were the highest, or the second highest, of all participants in the deal chains.  If EDC was an innocent dupe, the fraudsters would have had no reason to allocate so much of the profit to him. 

EDC’s case

(1)           there was a genuine commercial market in split soft bundles;

(2)          Mr Chhatwal had a genuine and reasonable belief that the PS3s he traded had been sourced from split bundles. That explained the low prices and the profit margins;

(3)          Mr Chhatwal only knew the suppliers and customers with which he traded, and had carried out sufficient and appropriate due diligence on them; he had no knowledge of the length of the deal chains, or the other participants;

(4)          whether the PS3s were of EU or UK specification was of no commercial significance;

(5)          recording serial numbers was neither practical nor standard industry practice;

(6)          although EDC does not have documentary evidence of Mr Chhatwal’s negotiations with the parties, he has provided his phone records, and these show he carried out the negotiations by phone;

(7)          it was unreasonable to criticise EDC for not calling suppliers and customers as witnesses, given that EDC ceased trading in 2013 and has had no relationship with the relevant individuals since that date.

(1)          compelling similarities between one transaction and another; the Deals were all different;

(2)          identical mark-ups on each of the Deals: EDC’s profit varied considerably from Deal to Deal;

(3)          a business with practically no capital: EDC was a substantial operation with a significant turnover;

(4)          no stock remaining in the hands of the participants: there were occasions when the stock purchased by EDC was not all disposed of to the customer;

(5)          all the transactions in the period are traced to tax losses: EDC carried out many deals during these VAT periods which have not been traced to tax losses.  Moreover, some of the stock which forms part of a disputed transaction was purchased at the same time and on the same invoice, as other goods which have not been challenged, and some stock was sold along with other goods which again have not been challenged.

PART 4: EDC AND ITS MARKETPLACE

(1)          EDC’s position generally;

(2)          Mr Chhatwal’s state of knowledge about the risk of MTIC fraud; and

(3)          Sony, CentreSoft and soft bundles.

EDC’s position generally

“Whilst I was involved in Electrical Discount Centre on a day-to-day basis, due to family and cultural reasons, my father was appointed as the Managing Director. I therefore did not have the title of Managing Director or any similar appointment as this would have been disrespectful to my father who had spent the better part of two decades building the business.”

Total sales and the move into the export market

(1)          the decline in EDC’s insurance business;

(2)          the decline in the UK market following the economic crisis in autumn 2008; and

(3)          FX fluctuations. 

Whether FX fluctuations were a reason for the disputed transactions

“At the date of the visit, 22 June 2010, EDC's EU export sales had dropped due to the Euro exchange rate.  UK retail sales had increased as a consequence. EDC envisaged their future EU export sales would drop by up to 60% due to the said Euro exchange rate problem.”

Grey market purchases

Contact with HMRC in 2008

Meeting with HMRC in August 2009

“Mr Watkinson: Do you recall being given notice 726?

Mr Chhatwal:  Can't recall 100 per cent, but probably was.

Mr Watkinson:  The heading, ‘Joint and several liability for unpaid VAT’.  Did you understand, having been given this notice, that if VAT went missing in the supply chain, that HMRC might try to hold your company liable for it?

Mr Chhatwal:  Yes

Mr Watkinson:  Was that important to you?

Mr Chhatwal:  Very

Mr Watkinson:  So you must have read this notice?

Mr Chhatwal: I was informed by Officer Hughes.

Mr Watkinson:  Did you read the Notice?

 Mr Chhatwal: I may have, briefly, but Officer Hughes confirmed everything.”

“the specified goods are any:

·      equipment made or adapted for use as a telephone and any other equipment made or adapted for use in connection with telephones or telecommunication;

·      equipment made or adapted for use as a computer and any other equipment made or adapted for use in connection with computers or computer systems…;

·      other electronic equipment made or adapted for use by individuals for the purposes of leisure, amusement or entertainment and any other equipment made or adapted for use in connection with any such electronic equipment.

This final bullet includes items such as digital cameras, camcorders and other portable electronic devices for playing music and games such as iPods, hand-held or portable DVD players, Playstation Portables (PSP's) etc.”

“Mr Watkinson:  Did you know, at the time of undertaking these transactions, dealing in the grey market in PlayStations and iPods carried an increased risk of MTIC fraud?”

Mr Chhatwal: We dealt with a whole range of products, PlayStations, iPods, televisions and so forth.  When Mr Hughes visited me, he knew exactly what we were supplying, where those goods were going.

Mr Watkinson: [repeats question]

Mr Chhatwal: No

Mr Watkinson: So it follows that despite being issued with this notice, you cannot have read it, yes?

Mr Chhatwal: I briefly would have gone through the notice if I'd received it, but I was taking the expert guidance from Mr – Officer Hughes when he visited my premises…”

(1)          can a brand new business obtain specified goods cheaper than a long established one?

(2)          have normal commercial practices been adopted in negotiating prices?

(3)          do the quantities of the goods concerned appear credible?

(4)          do the goods have UK specifications, yet are to be exported?

“A business trading within a market should have a reasonable idea of the market prices for the goods on any given day. If goods are offered at what appears to be a bargain price then you should find out the reason for the low cost, if it’s too good to be true, then it probably is.”

(1)          trades in home entertainment systems, predominantly televisions, but also made small volume sales of iPods;

(2)          was an authorised distributor for Sony, Samsung, Panasonic and other major television manufacturers;

(3)          purchased directly from the manufacturer and sells on;

(4)          sourced its overseas customers using the internet;

(5)          had never received unsolicited approaches from third parties;

(6)          employed a firm to carry out credit checks on customers for insurance purposes; and

(7)          checked VAT numbers on the Europa website. 

“explained to trader that AS Trading are currently a missing trader in Denmark. EDC last dealt with AS Trading in April.  Paperwork seen.  Satisfied with it all…issued PN726, although satisfied the system EDC have in place is adequate.”

Letter about verification of MTIC status

“you may previously have been verifying the VAT status of new or potential Customers/Suppliers with your Local Office or the National Advice Service. However, requests for verification of new Customers/Suppliers should now be faxed to Wigan HMRC Office Fax number [xxx].  If you do not have fax facilities please contact [tel no].”

Meeting with HMRC on 22 June 2010 and subsequent VAT returns

(1)          sold home entertainment systems, predominantly televisions, to wholesalers;

(2)          sold small volumes of gaming consoles and games.  These were purchased from CentreSoft and Gem Distributors and sold to EU customers, which EDC found via the internet, and that EDC checked the VAT numbers of these customers using the Europa site; and

(3)          employed a firm to carry out credit checks on customers for due diligence purposes.

Meeting with HMRC on 29 November 2010  and extended verifications

(1)          highlighted the risk of MTIC fraud;

(2)          explained HMRC’s position on repayment claims in the light of that risk; 

(3)          sets out the test from Kittel: and

(4)          reminded traders proactively to take reasonable precautions to ensure that they were not involved in MTIC fraud.  

Mr Chhatwal’s state of knowledge at the time of the disputed transactions

Reliance on statements made by Officer Hughes?

(1)          in the first meeting with Officer Hughes, Mr Chhatwal said that EDC purchase “directly from the manufacturer”, but in all the disputed transactions the goods were bought from another wholesaler;

(2)          the goods in all but two of  the disputed transactions are games consoles with more than half the deals being for over £100,000; but in his first meeting with Officer Hughes, Mr Chhatwal did not refer to games consoles, and in the second, he said only that EDC sold “small volumes”;   

(3)          Mr Chhatwal told Officer Hughes that he had had never received unsolicited approaches from third parties, but on his own evidence he was approached by BAK’s director, see §275; he also followed up an unsolicited approach from A Novo UK Ltd (“Anovo”), see §266.  We also found Mr Chhatwal’s evidence as to how he made contact with Everyberry Ltd, Zippy, and Anisur Rahman, Unipessoal LDA (“ARU”)  to be unreliable, see Part 5; and

(4)          despite saying during both meetings that EDC employed a firm to carry out credit checks on customers for due diligence purposes, this was not the position, as Mr Chhatwal subsequently accepted.  Instead, in August 2008, it obtained an insurance proposal from Euler Hermes (“Euler”), a credit insurance firm, see §295.  This was valid for a year, and so was significantly out of date by the time of the disputed transactions.  In addition, of the seven customers involved in the disputed transactions, only two – Ewert Phono GmbH (“Ewert”) and Redcoon GmbH (“Redcoon”) – were considered by Euler. 

Mr Chhatwal’s knowledge of the risk of MTIC in the grey market

(1)          On 20 August 2009, Officers Hughes and Humphrey discussed “MTIC fraud risks and due diligence” with Mr Chhatwal, and issued him with Public Notice 726, and he read that Notice, see §105.

(2)          Notice 726 sets out a list of high-risk items (see §103), including “electronic equipment made or adapted for use by individuals for the purposes of leisure, amusement or entertainment and any other equipment made or adapted for use in connection with any such electronic equipment”; this includes “portable electronic devices for playing music and games such as iPods”.

(3)          On 29 November 2010, Officers King and Chanan discussed MTIC fraud risks with Mr Chhatwal, and he “advised that he is well aware of the situation”, see §117.

(4)          On 20 December 2010, HMRC sent EDC the first of several extended verification letters, which set out the Kittel test and reminded the company to take all reasonable precautions, see §118.

Sony, CentreSoft, and soft bundles

(1)          Sony, which manufactured the PS3s involved in most of the disputed transactions;

(2)          CentreSoft, the authorised distributor for Sony products in the UK;

(3)          the margin on PS3s;

(4)          their supply chain;

(5)          whether there were PS3 stock shortages or surpluses during the relevant period;

(6)          hard and soft bundles generally;

(7)          Sony soft bundles and the “Sony Letter”, which is explained below;

(8)          the monitoring and policing of Sony soft bundles; and

(9)          whether a commercial marketplace for split soft bundles existed. 

Sony

CentreSoft

“CentreSoft's basic function as an official distributor is to act as the intermediary between Sony and retailers who sell Sony's products to the public. This role is necessary because it is not cost-effective for Sony to deal directly with all the independent retailers who operate single outlets or small chains, and because we ‘add value’ by offering hardware and software deals.  Although independent retailers make up the majority of our customers, we also supply some large retailers such as supermarkets, national chains (e.g. Dixons), and major mail-order firms (e.g. Shop Direct, formerly known as Littlewoods). Some large retailers deal directly with Sony instead of buying from us; it depends on the various commercial factors involved in each case.”

Cross-border sales of Sony products

(1)          products shipped by Sony to the UK would therefore have UK plugs.  If they were exported and sold to an EU retailer, that retailer would need to supply the end-user customer with an adapter which would allow the use of the PS3 in the EU; and

(2)           products shipped by Sony to the EU would have EU plugs.  If they were exported to the UK and sold to UK retailer, that retailer would need to s his end-user customer with an adapter which would allow the use of the PS3 in the UK.

“There's obviously free movement of goods. The expectation is we produced a product that was intended to be most suitable for the UK customer by including the correct plug and ensuring all manuals are in the right language, but there's nothing to stop someone buying a product from Amazon Germany and buying the European spec product or Pixmania as may be the case.  What Sony would not have authorised at any stage is to put an adaptor into the box because they'd have no control over the safety of that adaptor or if somebody was swapping out power leads that would…potentially risk the customer, definitely risk the reputation and void any guarantee.”

The margin on PS3s

(1)          Sony sold 320GB PS3s to CentreSoft for £205.43, and CentreSoft sold them to its own customers for £226.61; and

(2)          Sony sold 160GB PS3s to CentreSoft for £184.03, and CentreSoft sold them to its own customers for £198.79. 

“The market in Sony PlayStations and other games consoles operates on very tight margins. This results from the manufacturing process being sophisticated and expensive, and from manufacturers having a strong incentive to promote wide ownership of the hardware so that they can maximise sales of accessories and software (which are cheaper to produce and thus offer higher margins). In the first half of 2011, the available margin throughout the PS3 supply chain was only 13-14 per cent, and this had to be shared between the official distributor (and any sub-distributor) and the retailer.”

The PS3 supply chain

(1)          the typical supply chain for PS3s involved Sony, the authorised distributor, and a retailer;

(2)          when Sony directly supplied a small number of major retailers, the supply chain involved two companies, Sony and the retailer;

(3)          CentreSoft sold mostly to independent retailers, and the supply chain then involved three companies, Sony, CentreSoft and the retailer;

(4)          CentreSoft made a small number of sales to intermediate wholesalers such as EDC; Mr Sherry’s estimate, which Mr Frain-Bell accepted, was that there were less than ten such intermediate wholesalers.  The supply chain then consisted of four companies; and

(5)          it therefore follows that the normal PS3s supply chain between Sony and the customer consisted of two, three or four companies.

Sony stock allocations

“it is well known in the electronics trade that the UK receives a larger than proportionate stock allocation from the manufacturers compared with other European countries.”

“That was definitely not the case in respect of Playstation. In fact, Playstation 3 was far stronger in Continental Europe than it was in the UK, where Xbox 360 has done significantly better during that period.”

Stock surpluses or shortages?

(1)          Sony’s stock levels are “are based on an analysis of the demand from CentreSoft and our direct retailer customers”, with the aim of matching supply to demand as closely as possible;

(2)          Sony was not aware of any economically significant shortages of PS3s during the period from July 2010 to July 2011; and

(3)          it was “not Sony practice to sell Playstation 3 at discounted prices to dispose of surplus stock”. He added that Sony sometimes discounted prices to stimulate the market, for instance around Christmas, but that this discounting was “never” to deal with stock surpluses.   

(1)           CentreSoft managed its stock levels by matching them to pre-orders from its customer base, with a small excess to deal with urgent orders.  As a result, stock surpluses occurred only on “limited occasions”, when CentreSoft would ask Sony for assistance.  This usually took the form of an advertising campaign to boost sales, or the provision of discounted accessories or software which CentreSoft could package with the consoles.  On the rare occasions when there had been a surplus, CentreSoft had never reacted by dumping surplus stock on unofficial wholesalers; and

(2)          the only time that PlayStations were in short supply was at launch, and when asked specifically to confirm whether there was a shortage during the first five months of 2011, he denied it. 

Hard and soft bundles generally

(1)          those where Sony decided which free or heavily discounted game/accessory was to be provided with the console (“a Sony soft bundle”);

(2)          those where CentreSoft decided what free or discounted game/accessory would be provided with the console (“a CentreSoft soft bundle”).

Sony soft bundles and the Sony Letter

“Soft bundles are put together by Sony: they determine the contents and they issue [CentreSoft] with a buy price. A typical example would be a free piece of software for every PS3 purchased. CentreSoft would receive the PS3 and the software together; it would then sell them on to its customers, who in turn would sell them to the end-users.”

“As soft bundles are intended to benefit the consumer, [Sony UK] supplies them subject to terms and conditions that do not allow them to be broken up by the retailer or official distributor if the retailer wants the benefit of the discounted combined trade price for the products which [Sony UK]  is supplying as a soft bundle.”

“From time to time, [Sony UK]  may offer you, the Retailer the opportunity to supply (soft bundle) certain software titles (to be determined by [Sony UK]) free of charge to consumers purchasing a new PlayStation (“a Soft Bundle Offer”)

“Where [Sony UK] makes a Soft Bundle Offer, the offer is made for the consumer benefit, to ensure the consumer receives a new, unopened, free of charge, game title, nominated by [Sony UK], without cost or profit (other than indirectly through increased sales) to the Retailer.  The offer is made on the basis that the consumer received and does not swap, exchange, or otherwise return that game title…”

(1)          Sony UK nominated the games which were part of a Soft Bundle Offer; these formed the “Software Pool” for that particular Soft Bundle Offer;

(2)          a consumer who purchased an item of hardware (a “Bundle Customer”) must be informed by the Retailer that he is entitled to choose one game only (unless otherwise agreed in writing by Sony UK) from the Software Pool, and that game was provided free to the consumer; 

(3)          the Retailer was prohibited from increasing the overall price of the Soft Bundle, i.e., prohibited from charging for the added game; and

(4)          the Retailer was free to provide other free games to Bundle Customers, but these “Optional Units” did not form part of the Soft Bundle Offer, and were provided at the Retailer’s own cost. 

“something as important as that would have probably required their retailers to sign something and return back to them to say they'd received the letter, acknowledged the terms and conditions, and were now going to adhere to it.  But when – if you – if I haven't received the letter, I then start receiving offers which doesn't say anything about splitting bundles.  If I then purchase products from them, a soft bundle from them, and receive nothing on the invoice, or anything from Jane Revell [of CentreSoft’s sales staff], then I assume that I can do what I wish with this soft bundle…CentreSoft were not policing the soft bundle deals…they were supposed to be monitoring soft bundles…”

(1)          in his first witness statement, he said that “CentreSoft were not prepared to split bundles”;  

(2)          under cross-examination, he initially confirmed that evidence, saying that “on many occasions” he phoned Ms Revell, who worked in CentreSoft’s sales department, and asked if she would split the bundle and sell the PS3s at a cheaper price, and Ms Revell said “I can’t split the bundle”;  

(3)          however, he then went on to say – for the first time – that CentreSoft’s approach was that EDC could do what it wanted with the bundle once purchased.

(4)          In re-examination Mr Chhatwal further elaborated his evidence, saying:

“Jane Revell continuously encouraged us to split bundles to try and make more money.  She realised that consoles were being sold cheaper in the marketplace, and she would tell me: look buy some peripheral items that we've got at a discount, so you can then make a profit which will then lower the price of the console.  And it wasn't just her.  It was several members of the telesales staff.”

Monitoring and policing Sony soft bundles

“As this system had obvious cash-flow disadvantages for the retailer, CentreSoft started to offer the discount to the retailer up-front in relation to some soft bundles.  In other words, Sony sold the bundle items to CentreSoft at the full price [i.e., the wholesale price of the PS3 and the game] and we sold them onward to the retailer at the discounted price [i.e., the wholesale price of the PS3 only].  After selling the bundle items together as a single unit at the discounted price to the end-user the retailer would report the sale to CentreSoft and we would then request and receive the credit from Sony [and so recover the price paid by CentreSoft to Sony for the game]. CentreSoft and the retailer were still legally required to sell the bundle onwards as a single unit. This system has gradually become much more common than retrospective crediting of the discount to the retailer, but both systems were operating alongside each other in late 2010 and the first half of 2011.”

(1)          as explained above, if Sony knew that the bundle had been split so that the end consumer received only the console without the free game, CentreSoft would have to bear the cost of that free game and would be unable to recover it from Sony;

(2)          CentreSoft required its customers to provide Electronic Point of Sale (“EPOS”) data.  Because the console and the game each had their own bar code, this EPOS data would show whether the same customer had purchased the PS3 and the game at the same time. However, Mr Sherry said that when CentreSoft moved away from retrospective credits, it also stopped requiring the provision of EPOS data, and would instead apply “a sort of common-sense test”;

(3)          monitoring of retailers via a field force called “Team Playstation”, a joint venture between CentreSoft and Sony.  The field force carried out spot checks on retailers to see if consumers were enjoying the bundle at the right price, and it provided reports to both Sony and CentreSoft.  A retailer who was found not to be operating the Sony soft bundle policy would no longer be offered Sony soft bundles; and

(4)          the operation of the market place.  Mr Sherry’s unchallenged evidence was that:

(a)           the larger independent retailers with which CentreSoft dealt, complied with the soft bundle rules; and

(b)          UK consumers “obviously knew what deals were out there” and so a retailer or intermediate wholesaler who purchased a soft bundle, and then split it, would be “taking a risk, definitely” that the consumer would not purchase the PS3s as a stand-alone item, when they knew that Sony was offering a free game bundled with the PS3.

CentreSoft soft bundles

Other EU authorised distributors

Was there a market for split bundles?

(1)          intermediate wholesalers purchased substantial volumes of soft bundles from one or more authorised distributor(s) and/or from the few large retailers supplied directly by Sony;

(2)          those intermediate wholesalers split the bundles;

(3)          the PS3s were sold separately from the games/accessories with which they had originally been bundled, to different wholesalers or retailers;

(4)          a significant market existed in splitting and selling on these split bundle products;

(5)          the profit on the games/accessories allowed the intermediate wholesalers to reduce the price of the PS3s below that at which they were available from the authorised distributor(s).

(1)          that a commercial market in split bundles existed at all; and/or

(2)          if a commercial market did exist, how big it was, and how the goods were priced.

The Equanet email

“I have been offered the following stock of Sony PS3 320GB on offer.  Have 500+ stock but will go fast.  Price at £224.98.”

(1)          although CentreSoft sold PS3s for £226.61, it had purchased them from Sony UK at £205.43;

(2)          Dixons was one of the large retailers supplied directly by Sony UK (see §139), so would have been able to purchase PS3s for around the same price, and certainly for less than the £224.98 in the Equanet email;

(3)          Equanet obtained occasional surplus stock from Dixons, and could therefore have acquired that stock for less than the £224.98 at which it was offering to sell this limited number of PS3s.

The Pixmania screenprint

(1)          as Mr Frain-Bell accepted in the course of the hearing, the Pixmania offer was for a hard bundle, in other words, a single box which contained both the PS3 and the PES2012 game.  Thus, for EDC’s submission to be correct, the PS3 would have to have been split from a soft bundle, and then repackaged in a single box with the PES2012 game, to make the hard bundle on offer here.  Not only did EDC not put forward any evidence to that effect, it was not credible that Pixmania would seek to create its own hard bundle, given that the market was familiar with the hard bundle manufactured for Sony;  

(2)          although the Pixmania screenprint was not dated, other material from Pixmania exhibited by Mr Chhatwal was downloaded on 27 March 2013, and Mr Chhatwal confirmed that the Pixmania screenprint was taken when he was preparing his witness statement (which was signed on 28 November 2014);

(3)          Mr Gara’s unchallenged evidence was that the price of PS3 fell over time, beginning at around £350 and ending at around £99.  The price of a PS3 would therefore have been lower in 2013 (and in 2014) than in 2010-11;

(4)          Mr Chhatwal said that PES2012 came out during 2012, and was replaced during 2013.  He accepted that PES2012 would have had “a limited shelf-life” by March 2013.  We find that it was a platinum game by that date, and would have been of even less value by November 2014; and

(5)          careful examination of the Pixmania screenprint showed that the offer was marked as “clearance”. 

The examples

(1)          the list of games and accessories, and the prices in the “buys” column were taken from an email dated 12 May 2011 sent by Ms Revell of CentreSoft to EDC. This was around the end of the period during which the disputed transactions took place.  The email contained a soft bundle offer made up of a Sony 160GB console, plus the games and accessories in the example, at the prices there set out;

(2)          the Recommended Retail Price (“RRP”) figures were taken from an email sent by Mr Chhatwal to the Khan Partnership on 11 March 2013, in which the RRP was given including VAT.  The example has netted those figures down at 17.5% instead of the correct 20%, so the figures in the example are too high;

(3)          Mr Chhatwal said at the hearing that:

(a)          the RRP figures were derived from “from my knowledge and from my memory” as at 11 March 2013, when he sent the email to the Khan Partnership; and

(b)          the same was true of the “worst case” figures;

(4)          the 80% of RRP columns are calculated; the 80% was Mr Chhatwal’s own estimate of a possible price at which the component parts of a bundle might be sold.

(1)          the profit margins in the examples lack any sort of independent support.  We note in particular that:

(a)          the RRP prices are derived from Mr Chhatwal’s memory, some two years after the disputed transactions took place, and we have found his evidence to lack credibility;

(b)          in transposing those RRP figures from Mr Chhatwal’s email to the examples, the VAT was wrongly calculated, so those RRP figures are in any event overstated for that reason;

(c)          although we have no specific information on whether any of the games were “platinum” games, we have made the general finding, based on other CentreSoft emails, that many of the games included in soft bundle offers were platinum games, so had a lower retail value;

(2)          the second soft bundle offer was made after the end of the relevant period, and the first was made at the end of that period; so there is no necessary inference that similar bundles were on offer throughout the relevant period; and

(3)          the examples were based on soft bundles offered by CentreSoft, but that company did not supply any of the consoles in these transaction chains (see §130); the Tribunal had no evidence about the bundles on offer from EU distributors, so we had not basis on which to find that similar bundles, at similar prices, were available from those distributors; and

(4)          even if the “RRP” and “buy” figures were in fact correct (and we make no finding to that effect), so that a profit could be made by splitting bundles and selling the games and accessories separately from the PS3s, it does not follow that bundle-splitting actually happened.  In other words, these theoretical examples do not provide evidence of a commercial marketplace in which bundles were routinely split, with the consoles being sold separately from the games. 

Deal chains B, O and S1

(1)          Officer McCullough gave unchallenged evidence about JKD. The company’s only director was a Mr Katumba.  On 14 April 2011, shortly before these Deals took place, Mr Katumba was awarded income support on the basis that he was unemployed and unable to work; he had previously been on incapacity benefit.  JK was registered as operating from Mr Katumba’s home address, a residential house divided into flats. Two HMRC officers visited him at that address, and identified that the rooms in the flat were sublet.  The officers found Mr Katumba to be “confused” and “often incomprehensible”.    

(2)          Sony UK sold soft bundles to CentreSoft, its authorised UK distributor, for £205.43.  Other EU authorised distributors sold soft bundles for similar prices, because Sony sought to manage pricing of the same goods across Europe, so they were in line, see §89. 

(3)          JKD sold the bundles to General Online Services for £204.47, less than the price charged by Sony to its authorised distributors. It is not remotely credible that JK, a company set up by Mr Katumba and operating from a single room in a residential flat, could purchase these bundles for a price lower than that charged by Sony to its authorised distributors.

(4)          It is EDC’s case that wholesalers purchased soft bundles from authorised distributors and split them to sell the console and the game separately, and so make a profit.  But JK did not do that.  Instead, it sold the entire bundle for a profit of only 50p, to the next company in the chain.  That company on sold it for the same tiny profit, and the third company made only £2.03. That is inconsistent with EDC’s own case as to how the supposed commercial market in soft bundle splitting operated.    

(1)          Recette cannot have purchased the soft bundle from CentreSoft, as it was prepared to sell the bundle for £213.46, which is £13.15 less than it would have had to pay CentreSoft to purchase the bundle.  That the bundle did not originate from CentreSoft was also confirmed by the unchallenged evidence of HMRC’s investigating officers.  By the time of the hearing, EDC had accepted this was the case. 

(2)          Recette cannot have purchased the bundles from an authorised distributor overseas, because the consoles were UK specification.

(3)          Recette cannot have purchased the bundles from Sony UK, because it does not supply smaller wholesalers, see §135.

(4)          Sony UK does directly supply certain major retail chains in the UK, such as Dixons.  However, Recette did not purchase the bundles from a large UK retailer because:

(a)          there is no evidence that the few large retailers supplied directly by Sony UK were selling those bundles to wholesalers, let alone that they were doing so for less than CentreSoft’s wholesale price;

(b)          the only relevant evidence is Equanet’s email discussed at §195 above, which shows that it had just over 500 consoles (not bundles) for £224.98, i.e., £1.63 below CentreSoft’s price of £226.61. Equanet therefore offered to sell this limited number of consoles for £11.52 more than the price at which Recette sold the bundle. 

(5)          Furthermore, as stated above in relation to Deals O and S1, it is EDC’s case that wholesalers purchased soft bundles to split them and make a profit from selling the console and the game separately.  Like JK, Recette did not do that.  Instead, it sold the entire bundle for a profit of only 43p to the next company in the chain, Biznesa Meistars SIA, which is registered in Latvia.  That company on-sold it for an even smaller profit of 32p, and the third company made only £1.17.  This is not consistent with EDC’s own case about how the supposed commercial market in soft bundle splitting operated how

The prices of the consoles

Witness evidence about EDC’s own practice

“…if there was so much profit in this, could you not have taken these bundles yourself, and then sold the games in one direction, rather than just buying the console and not the game.”

“I didn't have a market for them.  I didn't have contacts in software side to sell huge volumes of peripherals and software.  That wasn't my field.  My field was to sell consumer electronics.”

Witness evidence about market practice

(1)          Mr Chhatwal said in his witness statement that he “was aware other retailers were often buying the soft bundles offered by CentreSoft, splitting the bundles and then selling the elements of the bundle at a discounted price”;  that “Electro Centre advised me on numerous occasions that it was acquiring and splitting soft bundles”; and that “RLR told us that they were purchasing soft bundles, splitting the bundles, achieving a higher margin on the games and was accordingly able to offer EDC the consoles at a lower price”. 

(2)          He also said “I only purchased stock because it made commercial sense. I would refer to the individual components of the soft bundles to ascertain this”. However, when this was put to him in cross-examination, he changed his evidence, saying he did not know which games or peripherals had been removed from the soft bundles before the PS3s were sold to EDC.

(3)          Mr Sherry was asked in cross-examination whether he knew that wholesalers were splitting soft bundles, and stated categorically that he did not.  He was then asked whether CentreSoft turned a blind eye to the practice, and he denied this was the position.

(4)          Mr Gara similarly denied that there was any such market, saying that “the custom and practice in the industry was soft bundling worked”, and that the whole bundle “went to end consumers”.

Summary of our assessment of the evidence

(1)          Only two pieces of independent documentary evidence were put forward by EDC, one from Equanet and one from Pixmania.  There is an entirely credible alternative explanation for the first, and the second does not support EDC’s case, for the reasons explained at §200.

(2)          The Deals themselves do not provide reliable evidence of a market in split bundles, for the reasons set out at §207ff in relation to Deals B, O and S1, and more generally because prices paid by EDC for its consoles are far below those which would have been charged in such a market, see §217. 

(3)          The only other evidence in support of such a market was that of Mr Chhatwal himself, whom we have found to lack credibility, see §27ff.

(4)          Had there been a market in split soft bundles, we would have expected Mr Sherry and Mr Gara to have been aware of that market.

(5)          The only reliable evidence of bundle-splitting arose in cases where EDC obtained a soft bundle, but did not need to supply the insurance claimants with the free game. These were occasional, one-off transactions, insufficient to sustain a market, and entirely different in origin from the profit-driven market postulated by Mr Chhatwal.  Moreover, Mr Chhatwal did not say that he then sold those free games to a third party, and we infer he sold them in EDC’s retail shops.  We accept that there may have been other one-off examples of a bundle being split, such as Deal T, but there was no evidence of an organised, commercial, profit-driven market in split bundles. 

Adverse inference from failure to call suppliers and/or customers?

(1)          Is there some evidence, however weak, to support the suggested inference or finding on the matter in issue? Mr Sherry’s evidence is sufficient to support an inference that EDC called no witnesses to give evidence on this issue, because there is no commercial market in split soft bundles.

(2)          Has [the Appellant] given a reason for the witness’s absence from the hearing? As we said at §32, Mr Chhatwal stated that EDC was not calling the suppliers or customers involved in the disputed transactions because:

(a)          it had now been five years since EDC had ceased business, and he no longer had any relationship with them;

(b)          he had “no reason” to remain in contact with them after his business ceased; and

(c)          he had “lost confidence and no longer wanted to be involved in the business any more” as the result of this investigation.

(3)          If a reason for the absence is given but it is not wholly satisfactory, is that reason ‘some credible explanation’ so that the potentially detrimental effect of the absence of the witness is reduced or nullified?  We find that none of the reasons is credible because: 

(a)          Mr Chhatwal was fully aware, at least by February 2013, that evidence from EDC’s suppliers and customers would be relevant to EDC’s case, see §33-34, and the company did not cease business until June 2013;

(b)          he had every reason to stay in contact with his suppliers and customers, because HMRC were refusing to repay the VAT which EDC had paid on the transactions EDC had entered into with those parties; and

(c)          Mr Chhatwal had the confidence to make and then to pursue EDC’s appeal; the witnesses relate to his evidence in that appeal, not to EDC’s continuing business. 

Adverse inference from failure to provide other evidence?

“(1) the party seeking the benefit of the inference must have adduced some evidence which shows there is a case for the other party to answer; (2) there must be a reason to expect that material evidence exists; (3) it is open to the party who resists the adverse inference to give a credible explanation, even a not wholly satisfactory explanation, as to why the evidence was not given.”

(1)          neither Mr Sherry nor Mr Gara had any knowledge of a commercial market in which Sony soft bundles were split with the separate parts sold separately.  Yet the existence of that market was a fundamental part of Mr Chhatwal’s explanation for the disputed transactions, so EDC clearly have a case to answer;

(2)          if, as Mr Chhatwal said, there was a commercial market in split bundles, it must have involved numerous buyers and sellers, who could have evidenced its existence; this includes those who bought and sold the games which had been split off from the consoles and sold separately.  In other words, if there was such a market, material evidence would exist; and

(3)          Mr Chhatwal gave no explanation as to why he did not put forward any such person as a witness, or why he did not provide any documents which showed the games being bought or sold. 

Drawing the inferences

Conclusion: no commercial market in split bundles

PART 5: THE SUPPLIERS AND CUSTOMERS

(1)           Mr Chhatwal knew some of the suppliers and customers were not reliable trading partners. 

(2)          he knew or should have known that others were not reliable trading partners, and

(3)          in relation to one of his suppliers, and two of his customers,  it was not possible for him to infer, merely from their involvement in the disputed transactions, that they were connected to fraud.

The suppliers

Electro

(1)          in the last three months of 2009, Electro sold EDC £1m of consoles.  Most were Nintendo, but sales also included 1,178 120GB PS3s at a total cost of £227,569; of these, 953 were sold on two consecutive days, 5 and 6 October 2009; a further 200 consoles were sold in a single deal on 11 November 2009 for £40,800.  Electro also sold EDC other goods worth £405,188 in total; and

(2)          in the first three months of 2010, Electro sold EDC consoles worth £188,664, of which only 150 were PS3s; it also sold EDC other goods worth £40,467.

(1)          this single invoice exceeded the value of EDC’s entire trade with Electro in 2010;

(2)          Electro could not have funded such a huge deal, because no lender would have given credit on this scale to Mr Ahmad.  Electro was, he said, not another Amazon, but a business run from a shop in Birmingham;

(3)          Mr Chhatwal did not ask how Electro was able to fund the volume of deals, had he done so, it would have been obvious it was not commercially possible; and

(4)          one of the questions in Notice 726 is whether the supplier is providing a credible amount of stock, and that is not the case here. 

RLR

“I considered RLR to be a secondary channel by which to source goods…I would first exhaust all direct channels of sourcing goods (from the manufacturers themselves) before relying on secondary channels.”

(1)          he should have asked himself why RLR “a brand new business” could obtain the consoles more cheaply than EDC, a long-established business, and the answer to that question would have identified the significant risk that the consoles did not have a legitimate source;

(2)          his response to Mr Watkinson’s similar question was speculative: he said “Mr Uchil may have had relationships with suppliers…which allowed him to access better deals than EDC”. Either he had not asked that question previously, but should have done, or he knew that giving a true answer would not assist him;

(3)          his response was also not credible: there were no uneven stock allocations, see §155, and given Mr Chhatwal’s experience in the industry, he knew this was the case;   

(4)          Mr Chhatwal therefore had no good reason for believing RLR could have had legitimate access to such significantly better prices than EDC;

(5)          CentreSoft had sufficient stock to supply EDC with PS3s during the relevant period, see §160, and EDC therefore did not “exhaust all direct channels of sourcing goods” before entering into the disputed transactions with RLR, as Mr Chhatwal said was the position; and

(6)          Notice 726 identifies, as an MTIC indicator, situations where “a brand new business obtain[s] specified goods cheaper than a long established one”, see §106.  The volume of consoles purchased from RLR exceeded that bought from CentreSoft, the authorised distributor, and Mr Chhatwal knew or should have known that those stock volumes were not credible, given RLR’s small size and lack of established trading history.

Zippy

“I found Mr Matthew Anness, the Director of Zippy Distribution, to be knowledgeable…I had looked at Zippy Distribution on Companies House, however I did not see any evidence of his disqualification.”

“This is just made up, isn't it, Mr Chhatwal?  You didn't look at anything on Companies House about Zippy or Mr Anness did you?”

(1)          Mr Chhatwal did not check Zippy’s status on Companies House, because had he done so, he would have seen that the only company called Zippy Distribution had been dissolved in 2007, years before EDC began trading with Mr Anness. 

(2)          Mr Chhatwal’s amended position, that he knew Zippy was not a company but had nevertheless checked Mr Anness on the Companies House website, is also untrue.  Companies House does not hold information about sole traders, so Mr Chhatwal would have had no reason to access that site to check Mr Anness.

(1)          an undated and unaddressed letter of introduction, which states that Zippy “has been trading in a broad range of IT and consumer related products for many years”;

(2)          a VAT certificate stating that Zippy’s trade was retailing computers, peripherals and software (emphasis added);

(3)          website screenshots, in which Zippy stated that it had been “retailing online for over 5 years” and that it was “a reseller of TVs by Samsung and LG Electronics”;

(4)          a VRN validation with Europa carried out on 28 July 2011 and a validation with HMRC on 26 August 2011, both after the disputed transactions;

(5)          Zippy’s bank account details; and

(6)          an undated application by EDC for £100,000 of credit with Zippy.

(1)          Mr Chhatwal’s statements about having checked Companies House were untrue;

(2)          his the due diligence was inadequate, consisting of a VRN check after the transactions took place, and other documents/screenshots which did not support the existence of a wholesale business;

(3)          when applying for its VAT certificate, Zippy described itself as an online retailer, and there is no reference in its website to it operating in the wholesale marketplace, yet Mr Chhatwal entered into six wholesale Deals with Zippy for PS3s, TVs and iPods, see Part 6;

(4)           EDC did not provide any third party witness evidence or other documents to support Mr Chhatwal’s statements about having relied on (unnamed) LG sales representatives and unspecified “well-known people” in relation to Zippy’s credentials, or its status as a distributor, and we find that this is because no such recommendations were made;

(5)          Mr Chhatwal did not ask himself whether Zippy was providing a credible amount of stock, see Notice 726 referred to above;  

(6)          Mr Chhatwal had no good reason for believing that Zippy, a sole trader with no wholesale experience, could have had access to significantly better prices than EDC; and

(7)          EDC carried out no financial due diligence on Zippy, yet entered into six Deals, two of which were for around £100,000, see the summary at §558. 

The customers

Anovo

“Anovo is a global electronics company and the division I am working within is trading most new and referbished [sic] IT commodities, major brand accessories and peripherals, consumer electronic and gaming hardware/software…I am hoping you can direct our email to the trading team focusing on volume trades in televisions and other commodities.”

“Having myself worked in insurance, and knowing the stringent checks that are carried out on repair companies, I was satisfied; that if large companies such as Samsung and Nokia were instructing Anovo to repair goods that they must be a good, reputable company.”

“Given the discussions I had with Mr Cato regarding the nature of Anovo UK's business and due to the fact that the introduction had originally been made by Samsung, EDC was satisfied that Anovo UK was a legitimate customer.”

(1)          an undated, unaddressed and unsigned letter of introduction from Mr Kevin Coleman, Anovo’s CEO, which said that the company carried out repair work and had a “trading and recycling” division;

(2)          a copy of Anovo’s VAT certificate, which gave its trade classification as “repair computers and peripheral equipment”;

(3)          undated web pages about Anovo, which stated that the company delivered “customised after-sales solutions to market leading technology companies” and “partners with operators, manufacturers and retailers to provide a full range of logistical and regeneration services”.  There is no reference to a trade in PS3s;

(4)          a VRN application dated 3 August 2011, after all the disputed transactions had taken place.  When Mr Watkinson asked Mr Chhatwal why the VRN check was so late, he replied “I’m not sure”; and

(5)          a credit application form issued by EDC, completed on 7 April 2011.  We noted that:  

(a)          under “trade reference” the words “Samsung UK” have been inserted, but no contact name is given.  Mr Watkinson asked Mr Chhatwal if he had followed up the reference.  He initially said “we must have”, and then that he didn’t know where the documents were; and

(b)          against the line which asks “amount of credit required” is written “nil”.  Mr Watkinson asked Mr Chhatwal if this was “a joke”, given that the stated purpose of the form was to apply for credit.  Mr Chhatwal said that Anovo had asked for credit of £1m; that EDC then “researched Anovo”, but did not carry out any credit checks, and refused the credit. 

(1)          Samsung simply forwarded to Mr Chhatwal an unsolicited email from Anovo; it provided no assurance as to that company’s status or reliability in the context of a trade in PS3s, as Mr Chhatwal accepted in cross-examination;

(2)          since (a) there was no Samsung contact name on the credit reference form; (b)  Mr Chhatwal knew that Samsung had not endorsed Anovo, and (c) there is no documentary evidence of any follow up with Samsung, we find as a fact that EDC did not take up that trade reference;

(3)          the central message of the documents held by EDC was that Anovo’s trade was repair and servicing; it is only Mr Cato’s mis-spelled email which talks about “trading…gaming consoles”;

(4)          EDC made no financial checks on Anovo, despite that company both (a) asking for credit of £1m, and (b) completing a credit application asking for credit of £nil; and

(5)          EDC did not check Anovo’s VRN until long after the Deals had been carried out, and Mr Chhatwal could not explain the reason for the delay.

ARU

(1)          two documents in Portuguese, a language Mr Chhatwal could not understand;

(2)          a translated document from the General Directorate of Taxes in Lisbon issued on 24 March 2010, which states that ARU was registered in Portugal but was not tax resident there, and which classified ARU’s “main activity” as “CAE 46382 – Trading activity CIRS” and its secondary activity as “retail of equipment”.  Mr Chhatwal told Mr Watkinson that CAE 46382  meant “trading in commodities”;

(3)          an undated, unaddressed letter of introduction from Mr Rahman which says that ARU “is an established company which specialises in importing and exporting goods such as electronic goods” and was “based in Lisbon, Portugal”;

(4)          ARU’s contact details and banking information;

(5)          a letter from Barclays confirming the company’s bank account number; and

(6)          an undated copy of Mr Rahman’s passport stating that he is a British citizen born in Bangladesh.   

(1)          it was a small company based overseas with which EDC had never previously done business, and about which it had little information;

(2)          the information he did possess stated that ARU’s trade was commodity trading and retailing, not wholesaling computers; and

(3)          he did not make any enquiries as to how ARU had been able to fund the substantial purchases, and carried  out no other financial due diligence. 

BAK

(1)          was interested in trading with EDC;

(2)          supplied German supermarkets with televisions and electronic goods;

(3)          did not trade in “a large quantity of gaming consoles but this was an avenue they were looking at expanding”. 

(1)           BAK operated in the environmental sector, trading and selling cleaning and filter systems in the field of waste disposal, and provided related advice and services in the environmental sector;

(2)          BAK had never filed a VAT return, was involved in MTIC transaction chains and traded carbon credits;

(3)          the German VAT authorities carried out investigations into BAK in November 2011, and found that:

(a)           it had not operated from its registered address since 27 January 2011 (so before any of the Deals between BAK and EDC took place);

(b)          the company could not be located after that date; and

(c)          it was deregistered with effect from June 2011; and

(4)          Mr Sekhon has pleaded guilty to extensive involvement in VAT fraud.

Everyberry 

“The background to Samsung’s referral was that Everyberry, a supplier to Viking (one of the UK's leading office suppliers), had written to Samsung on behalf of Viking to request Samsung to supply televisions. However, Samsung would not supply directly to Everyberry/Viking because neither had a retail front.  Samsung's representative passed on Everyberry's name to EDC because we had an established retail front.”

“We worked in partnership with Everyberry.  The whole point of the partnership was I was recommended by Samsung to liaise with Everyberry, because they had direct links with the Office Depot CEO.  Everyberry was a supplier to Office Depot supplying Chinese lanterns, paper stationery, and the CEO had expressed a desire to increase the turnover at Office Depot, and one of the ways they could see that happening is by introducing high value items like consumer electronics, and that's why they showed an interest in selling Samsung products…But because they didn't have a bricks and mortar presence, Samsung were not prepared to deal with them.”

“I am writing to you to introduce our company to seek business partnership for promoting electrical and electronic goods in the UK.” 

“Everyberry Ltd is a new supply channel for innovative and strongly branded products…for some products we can guarantee prominent sales and promotion positions in catalogues, online stores and in-store displays.  For buyers, our direct relationships with the manufacturers help us to ensure a consistent supply of the latest and most sought after products.  These products will attract customers, offer up- and cross sale opportunities, drive turnover and add glamour to your product portfolio…I would be glad to see your product offers for our promotions.”

Ewert

Redcoon

(1)          neither Mr Oerter nor Mr Hasentab were called as witnesses;

(2)          Mr Chhatwal’s exhibits include a letter of introduction from Redcoon dated 1 August 2011, after the disputed transactions had taken place; and

(3)          EDC validated Redcoon’s VAT number on 21 July 2011 with Europa, and with Wigan on 31 August 2011, again after all the disputed transactions.

XXL

(1)          Mr Chhatwal’s evidence that he met the company’s owners at a conference in Germany in 2008;

(2)          a copy of a presentation given by XXL, which says that the company was founded in November 2007 and is “a wholesaler and exporter for consumer electronic [sic]” which carries out import/export; and

(3)          some documents in German, which Mr Chhatwal was unable to understand

Overall conclusions on suppliers and customers

(1)          he also knew Zippy, Aru, BAK and Everyberry were not reliable trading partners; and

(2)          he knew or should have known that RLR, Anovo and XXL were not reliable trading partners; but

(3)          Electro, Ewert or Redcoon were all large companies with which EDC had carried out other legitimate business, and their involvement in the disputed transactions was not, of itself, an indicator of fraud.

PART 6: EACH TRANSACTION

The mobile phone records

(1)          Mr Watkinson had put EDC on notice at an early stage that he would be challenging the mobile phone records, and that if Mr Chhatwal did not provide support for the numbers on the Phone Schedule, he would not cross-examine him on the detail.  As a result, there would be some unfairness to HMRC if we took the phone records into account;

(2)          however, the Phone Schedule and the mobile phone records had been included in the Bundle, so were not new evidence; all that was new was the provision of documentary support for the Phone Schedule, namely proof that Mr Chhatwal had correctly identified some of the numbers on the records;

(3)          Mr Watkinson made submissions in closing on the phone records, including by reference to numbers other than the four which had been specifically validated by Mr Frain-Bell and Mr Chhatwal, so he had not ignored that evidence; and

(4)          part of EDC’s case was that there had been telephone contact between Mr Chhatwal and the parties, so refusing to take the records into account would weaken EDC’s position.   

Deal A

The transaction

(1)          Mr Chhatwal spoke to Everyberry for around a minute, and to Electro for almost 6 minutes;

(2)          Electro issued a pro-forma invoice to EDC for 400 soft bundles, made up of 320GB PS3s and Move Starter Packs at £240 each.  This was more than CentreSoft’s price of £226.61 for the same soft bundle.  The total was therefore £96,000, plus VAT of £16,800.  The pro-forma invoice states “this is not a VAT invoice”, and the “customer order number” has been left blank.  A box at the bottom states “please send delivery details anddeposit [sic] payment of £10k today along with the TV’s payment thanks.”  The document has been manually annotated to say “Pd dep £10,000”; 

(3)          a further document was issued to EDC, headed “invoice”, but this document is not on Electro’s normal invoice stationery and makes no reference to that company, but only to “Dipesh”.  It does not refer to the deposit.  Despite EDC stating that it was a VAT invoice, that is clearly not the case.

(1)          there are no purchase orders from Everyberry to EDC, or from EDC to Electro;

(2)          none of the documents state that the consoles are UK specification;

(3)          the pro-forma invoice from Electro does not contain an order number;

(4)          there is no VAT invoice from Electro;

(5)          Electro’s delivery note refers only to the Move Starter Packs, not the PS3s; and

(6)          there is no delivery record of the first 300 bundles being received by Everyberry or by Office Depot.

The reasons for the Deal

(1)          In support of his evidence that CentreSoft regularly offered soft bundles to customers, he exhibited:

(a)          an email from CentreSoft to EDC dated 18 November 2010, stating that delivery of EDC’s order of 1,000 Move Starter Packs had been delayed because CentreSoft had no more stock, and would not have any for the rest of 2010; and

(b)          an invoice from CentreSoft for 1,200 soft bundles made up of PS3s and Move Starter Packs.  He stated that EDC “sold some of the consoles  and starter move packs to Redcoon at a profit”.  The related invoice to Redcoon was dated 14 December 2010.

(2)          In support of his evidence that “sometimes soft bundles were not constituted of low-value items and on occasions included high demand goods”, with the Move Controller being an example of a high-value item, he exhibited a short article dated 25 November 2010 on a gaming website called slashgear.com, which said that “Sony has warned of worldwide stock shortages of the Move controller for PS3”.

“I tried and tried to get stock from CentreSoft. This Playstation move bundle became an extremely popular product.  It was out of stock for at least three to four months.  There was no chance of getting it from the direct market and I went to the third market, the indirect market to purchase this stock, and I paid a premium for it.”

“They [CentreSoft] had issued a soft bundle called the Sony PS3 320 with the Move Starter Pack.  When I - again, this is something I'd committed to the Office Depot catalogue as a deal for their customers, and when I went to purchase or try to purchase these products from CentreSoft directly, I was told that there was no more stock coming in for this product.  There was no due date.  No estimated time of arrival.  So again, out of desperation I went to the indirect market…[I was] forced because we had a commitment to our customer, to go to the indirect market. I then ended up paying a premium for that product.”

(1)          Mr Chhatwal had elaborated his evidence by linking Deal A with the shortage of Move Starter Packs;

(2)          there was no documentary proof that EDC tried to buy the Move Starter Pack soft bundle from any source other than Electro;

(3)          if, as Mr Chhatwal said, the Move Starter Pack was “out of stock for at least three to four months” it was “remarkably fortuitous that Electro could supply it at the drop of a hat”;

(4)          there was no witness or documentary evidence (such as a copy of the Office Depot catalogue, or emails/letters, to support Mr Chhatwal’s new evidence that:

(a)          Office Depot had included the soft bundles in its catalogue; and/or

(b)          EDC had committed to supply Office Depot those soft bundles; and

(5)          EDC did not invoice the first 300 of the Move Starter Packs to Everyberry until 26 November 2010, with the final 100 being invoiced on 9 December 2010.  EDC had therefore held the goods in stock for three to four weeks, so the claimed urgency did not exist.

(1)          if the reason for this Deal had been CentreSoft’s inability to supply soft bundles including those Move Starter Packs, it is not credible that Mr Chhatwal only remembered that this was the case when he began to give oral evidence;

(2)            although Mr Chhatwal exhibited some emails between him and CentreSoft as part of his evidence, he provided none to support his statement that he “tried and tried” to get the soft bundles from CentreSoft before he turned to the indirect market; and

(3)          on 14 December 2010, only four days after the 100 Move Starter Packs in the Deal A soft bundle were delivered to Office Depot, EDC supplied Redcoon with identical soft bundles made up of PS3s and Move Starter Packs, and those bundles had been obtained from CentreSoft, see §141. 

Deal B

The transaction

(1)          there were 12 mobile phone calls from Mr Chhatwal to RLR, the longest of which lasted for two minutes, and nine lasted for less than a minute;

(2)          RLR issued a delivery note for 500 320G PS3 consoles to be delivered to EDC; and

(3)          EDC issued an invoice to Ewert for 500 PS3 consoles at £196.50, a mark-up of 3.1%.

(1)          there were 9 further mobile phone calls from Mr Chhatwal to RLR, all of which lasted less than a minute;

(2)          EDC paid £114,700 (including delivery) for the goods; and

(3)          EDC signed RLR’s delivery note evidencing that the goods had been delivered to its premises.

(1)          Ewert did not send a purchase order to EDC, and the first evidence of contact between Ewert and EDC was when the carrier collected the consoles from EDC’s premises; and

(2)          none of the documentation stated that the goods were UK specification, despite the fact that they were being exported to Germany.

Deal C

(1)          RLR issued EDC with a VAT invoice for 115 160GB PS3 consoles;

(2)          EDC issued an invoice to Redcoon for 115 160GB PS3 consoles at £186, a mark-up of 5.1%;

(3)          EDC issued a delivery note to Redcoon for 115 160GB PS3 consoles;

(4)          the goods were collected from EDC, along with other goods, by a driver from Redcoon’s freight company; the driver signed the collection slip, which identified the consoles; and

(5)          EDC paid RLR for the goods. 

(1)          there was  no purchase order from Redcoon to EDC, and no other evidence of contact between EDC and Redcoon, until EDC issued it with a delivery note; and

(2)          none of the documentation stated that the goods were UK specification, despite the fact that they were being exported to Germany.

Deal D

Deal E

Deal F

(1)           there were six calls between EDC and Electro, for a total of around 20 minutes;

(2)          Electro sent EDC an invoice for 500 160GB EU specification PS3s at £188 each, which is 5.43% below CentreSoft’s wholesale price of £198.79.  The total value of the invoice was £94,000 excluding VAT; and

(3)          BAK paid EDC £48,500 by Faster Payments; this is the cost of 250 consoles at the price on EDC’s invoice issued the following day.

(1)          the goods were delivered by Electro to EDC, as evidenced by a signed Electro delivery note;

(2)          EDC invoiced the 500 consoles to BAK for £194, a profit of 3.2%.  The invoice totalled £197,000; EDC’s invoice does not refer to the consoles as being EU specification; and

(3)          BAK paid a further £47,850 to EDC by Faster Payments; this is slightly more than the cost of a further 246 consoles.

Deal G

The transaction  

(1)          At 12.02, Mr Chhatwal called Electro and spoke for three minutes.

(2)          At 15.01, Mr Rahman emailed Mr Chhatwal, thanking him for his offer made by telephone, but saying that “at that price there is no scope for us to proceed.  If you are able to improve your price we may be able to take things forward”. 

(3)          At 16.55, Mr Chhatwal spoke to Electro again, for over 12 minutes.

(4)          At 17.39, Mr Chhatwal replied to Mr Rahman by email, saying:

“Stock is already in our warehouse – because this is our first deal – I’m prepared to sell at £189.50. We have no more margin to work with.”

(1)          Mr Chhatwal called Electro at 10.46am for 19 seconds, and at 11.20 for 1 minute and 43 seconds.

(2)          Mr Rahman emailed Mr Chhatwal saying “are you able to offer me 1,000 units at £188.  If so, I am in a position to send payment today”.  The time of that email is not in evidence.  At 11.23, Mr Chhatwal replied, saying “£189 is the last price only 900pcs left”. 

(3)          At 11.46 Mr Rahman emailed Mr Chhatwal, saying “please send me your company documents and pro-forma invoice and I raise a PO for you.  Once paperwork is in place I will arrange for payment.  Please send me your payment instructions also”.

(4)          ARU issued a purchase order for 900 EU specification 160GB PS3s at £189 each, a total of £170,100.

(5)          EDC issued a delivery note to ARU for 900 PS3s.  There is no mention of EU specification. The figure of 900 units has been manually amended to “897”.

(6)          Electro invoiced EDC for 897 PS3s at £185 plus VAT; the invoice refers to EDC having issued a purchase order, but does not state that the consoles are EU specification.

(7)          A further call took place between Mr Chhatwal and Electro at 15.29pm for 4 minutes and 21 seconds.

(1)          ARU paid EDC £170,100 for 900 units by CHAPS.  EDC’s mark-up was 2.1%. 

(2)          At 8.58am Mr Chhatwal emailed Mr Rahman, saying the money had been received; that EDC would have 9 pallets ready for collection this afternoon; asking for details of the carrier; and saying “we will need a copy of your CMR upon receipt of the goods in Portugal”.

(3)          At 9.46am Mr Rahman emailed Mr Chhatwal, saying “as per your telephone conversation” the goods would be delivered to a warehouse in France.

(4)          EDC called HMRC’s Wigan office, and obtained verification of ARU’s status; it followed this up with a fax asking HMRC to confirm the position. 

(5)          Electro delivered the goods to EDC: the delivery note says “PS3 160GB 900pcs EU spec”, but in Mr Chhatwal’s handwriting the 900 has been crossed out and replaced it with 897; he has signed the bottom of the delivery note. 

(6)          Despite having been invoiced by Electro for 897 units the day before, EDC invoiced ARU for 900 units of 160GB PS3s at £189, a total price of £170,100.  EDC’s invoice does not say that the consoles are EU specification;

(7)          Mr Chhatwal then emailed Mr Rahman saying “I have just received the stock – but three units are missing (presumed stolen) – my supplier is sorting this out.  I will need to credit you for 3 units and arrange a refund – so there are 897 x ps 160gb eu stock now ready for collection”.    

(8)          EDC issued ARU with a credit note for three units; Mr Chhatwal manually amended EDC’s invoice to ARU, reducing the number to 897 units.

(9)          At 11.16 Mr Rahman responded with the words: “Stolen? That’s not very comforting!” and saying he had received the credit note, but adding: “it can prove to be more hassle than it’s worth with adjusting paperwork and receiving back such a small amount of funds.  If possible, can you hold the credit there for me?”

(10)      The goods were collected from EDC. The collection note, signed by Mr Chhatwal, states that 897 units were collected on 9 pallets. 

(11)      At 13.45 Mr Chhatwal emailed Mr Rahman, saying “we have a truck collecting 9 pallets.  Online BMT direct from Dover.  They have no CMR and are delivering to Dover only.  He has no paperwork”.

(12)      At 14.45 Mr Rahman emailed Mr Chhatwal, saying that the freight company had collected 10 pallets rather than the 9 pallets expected.

(13)      EDC paid Electro in full. 

(1)          The CMR exhibited to Mr Chhatwal’s evidence is entirely handwritten apart from three stamps giving EDC’s name and address.  The carrier is named as On Line MBT, and a person called LJ Wall has signed the CMR as the representative of that carrier.  The date of taking over the goods is 23 March 2011, and they are described as “PS3 160GB x 897 PCs load unchecked”. Under this, the words “10 pallets” have been crossed out and replaced by “9 pallets”; Mr Wall has signed that change. The consignee is ARU, at its address in Portugal; the place designated for the delivery of the goods is Prologic in Rungis, near Paris.  The total weight is given as 2.500 kg.  The box for the “sender’s/agent’s reference” is blank.  There is no stamp showing that the goods have been received.

(2)          Two linked CMRs were exhibited to Mr Ginn’s second witness statement. These are both entirely typewritten, other than a handwritten annotation on the first which says “5 pal[lets] black wrapped” and on the second “4 pal[lets] black wrapped”, and a stamp giving the name of the carrier as Bullit Express. The date of taking over the goods is 23 March 2011; Prologic is both the consignee and the place of delivery, and the total weight (taking both CMRs together) is 4,800kg.  The sender’s/agent’s reference box has been completed, and the CMRs were stamped by Prologic as having arrived on 24 March 2011. 

Inconsistencies

(1)          Inconsistent location of the ordered goods: Mr Rahman wanted 1,000 consoles, and Mr Chhatwal originally told ARU on 21 March 2011 that “stock is already in our warehouse” and later said EDC had “only 900pcs left”. However, the stock was not “already in EDC’s warehouse”, because the 900 consoles were invoiced to EDC, and delivered to EDC’s premises, by Electro the following day.    

(2)          Inconsistent number of units delivered to EDC: On 22 March 2011, Electro invoiced EDC for 897 units, so Mr Chhatwal can only have been expecting delivery of 897 units.  However the following day, EDC invoiced ARU for 900 units, and Mr Chhatwal told Mr Rahman that “I have just received the stock – but three units are missing (presumed stolen)”.  The other three consoles were not “missing” or “stolen”, because they had never been included on Electro’s invoice in the first place.

(3)          Inconsistent number of pallets: On 23 March 2011 Mr Chhatwal signed a delivery note saying that there were 9 pallets, but:

(a)          on the same day, Mr Rahman emailed to say that the freight company had complained that there were 10 pallets;

(b)          the following day Mr Chhatwal told Mr Rahman that he had managed to contain it to 9 pallets, and does not refer to Mr Rahman’s email about needing 10 pallets; and

(c)          both versions of the CMRs also stated that the goods were on 9 pallets;

(4)          Inconsistent carrier: Mr Chhatwal told Mr Rahman that the goods had been collected by a company called “Online BMT” which had no CMR; yet a person called Mr Wall signed a CMR on behalf of a company called “On Line MBT”; 

(5)          Inconsistent CMRs: there are numerous differences between the CMR signed by Mr Wall and that stamped by Prologic, including the weight of the goods, the carrier, the consignee and the agent’s reference.  There was no explanation before the Tribunal as to why there were two completely separate CMR documents for the same load.

Deal H 

The transaction 

(1)          Electro delivered the goods to EDC; the delivery note states that they are “PS3 160GB 1000pcs EU SPEC”; and

(2)          ARU issued a purchase order to EDC for  EU specification 160GB PS3s, with 739 being priced at £189 and 511 at £189.65, a total cost of £236,582.15; and

(3)          ARU authorised a bank transfer to EDC for £236,582.15.   

(1)          EDC invoiced ARU for 739 consoles at £189 and 511 consoles at £189.50, a total of £236,582.  The specification is not shown on the invoice.  EDC’s profit margin was 1.1%;

(2)          the goods were collected by ARU’s carrier, as evidenced by a delivery note, and shipped to ARU; and

(3)          EDC paid Electro by CHAPS. 

Deal I 

(1)          In the two weeks before 7 March 2011, there was no purchase order or other evidence of contact between EDC and Ewert. 

(2)          On 7 March 2011:

(a)          Mr Chhatwal made three short phone calls to RLR, totalling less than two minutes;

(b)          EDC issued a purchase order to RLR, for 300 160GB EU specification PS3s at £188.50 each, a total of £56,550.  The purchase price was 5% below CentreSoft’s wholesale price; and

(c)          EDC invoiced Ewert for 300 160GB slim consoles; the reference number on the invoice is H1/35567.  Each console was priced at £192, so  EDC’s profit margin was 1.9%.  EDC’s invoice did not give the specification of the consoles.

(3)          On 8 March 2011:

(a)          RLR invoiced EDC for 297 consoles at £188.50.  The invoice did not give the specification; and

(b)          Mr Chhatwal called RLR at 14.45 and spoke for 6 minutes.

(4)          On 9 March 2011:

(a)          an RLR delivery note records that 297 EU specification PS3s  had been delivered to EDC;

(b)          a Ewert collection note records that 300 PS3s invoiced under reference H1/35567 had been collected by its freight company, Kurt Beier A/S (“Beier”), at the same time as that company collected the 2,000 PS3s sold to Ewert in Deals E and H; and

(c)          Mr Chhatwal called RLR eight times for a total of around seven minutes between 8.33 am and 15.47 pm.

(5)          On 10 March 2011, RLR issued EDC with an invoice for three consoles at £188.50. 

(6)          On 14 March 2011, 300 consoles were shipped to Ewert, and are shown on the same CMR as those in Deals E and H. 

Deal J 

Deal K

“I had promised these TVs to Office Depot.  They had produced this brochure to sell on to their customers, and the model number was LE32C450.  We were then obliged to supply that TV to any of the customers that purchased that product.  We didn't know what kind of demand they would get through their sales, so we didn't necessarily stock a lot of sets, but we were ready when the orders were coming in. The time that they started to receive orders, which was around April/May time, this is a time when a lot of models in the industry are discontinued, and it just so happens that TV then moved from LCD to LED. I had no - Samsung had no stock of this set.  I had customers waiting from Office Depot. I had to deliver, because I obviously wanted to keep my relationship going with Office Depot in the long-term.  I then had no choice but to go to Zippy and purchase this product for a higher price.”

(1)          Mr Chhatwal did not include any of the above detail in his witness statement;

(2)          no copies of any documents from Office Depot were exhibited; and

(3)          there was no documentary or witness evidence:

(a)          to support Mr Chhatwal’s statements that there had been a change in the models and that Office Depot customers wanted the older model; or

(b)          to explain why Samsung was unable to supply the televisions to EDC, its authorised distributor, and how Zippy came to have access to this stock.

Deal L

(1)          a telephone call took place between Mr Chhatwal and Zippy; this lasted for less than two minutes;

(2)          EDC issued a purchase order to Zippy for 400 PS3 160GB consoles for £170.  This was 15% below CentreSoft’s wholesale price.  The invoice did not refer to the consoles as being UK specification.  The total value of the invoice was £68,000, excluding VAT; and

(3)          Zippy invoiced EDC for 400 UK specification 160GB PS3 consoles. 

(1)          Mr Chhatwal called Zippy again, and spoke for three minutes and 40 seconds;

(2)          EDC invoiced XXL for 200 160GB PS3s at a price of £182 per console, a 7% mark up.  The invoice did not state that the consoles were UK specification.  Also included on the same invoice were 100 batteries for Samsung 3D glasses, for a total price of £3,600; HMRC have not refused to repay the VAT on those batteries; and

(3)          EDC issued XXL with a delivery note containing the same information as was on the invoice.

Deal M

(1)          there are four short phone calls totalling around seven minutes between Mr Chhatwal and Zippy; there had also been two calls the previous day for around three minutes.

(2)          Mr Chhatwal emailed Mr Chad, who worked for Zippy, and under the heading “new order”, specified “400 x PS3 160GB with eu plug @ £173”.

(3)          Zippy invoiced EDC for 400 160GB UK specification PS3s at £173 per console, 13% below CentreSoft’s wholesale price.  The total value of the invoice was £69,200, excluding VAT.  There is an inconsistency between the UK specification on this invoice, and the EU specification requested by EDC, which we consider at §546.

(4)          Zippy issued a delivery note, which does not refer to the specification.  It states that the “ship date” to EDC’s premises was also 13 April 2011.

Deal N

(1)          a document headed “Purchase request” was sent to EDC by David Cato of Anovo, for 1,000 160GB EU specification PS3s, each for £191, so a total value of £191,000.  However:

(a)          the purchase request has no company logo;

(b)          in the box for “purchase ref” the figure “0” has been inserted;

(c)          in the box for “reason/sales order reference” are the words “Flip deal stock”.  Mr Watkinson said that this was a reference to a back-to-back deal, which we understand to mean a purchase which would be on-sold immediately, and this was not disputed;

(d)         the bottom part of the form has spaces for authorisation by the department manager and the delivery date; both have been left blank.

(2)          EDC did not issue a purchase order to Electro; 

(3)          EDC issued Anovo with a sales invoice.  In the box for “customer order number” is typed “David Cato”, and the invoice states that it is for 1000 PS3 slim, EU stock.  The price of each console was £191, so EDC’s profit margin was 3%; and

(4)          the consoles were collected by Anovo’s transport company; the collection slip refers to them being EU stock.

Deal O

(1)          Mr Chhatwal called Anovo at 9.27am and spoke for just over 3 minutes.

(2)          Mr Chhatwal immediately called Electro and spoke for 12 minutes.

(3)          there was one more call between Mr Chhatwal and Anovo, and between Mr Chhatwal and Electro, that afternoon, each call lasting around a minute.

(4)          Electro invoiced EDC for 480 320GB EU specification PS3s at £204.50 each.  This is almost 10% below CentreSoft’s wholesale price. 

(5)          The goods were delivered to EDC by Electro.  The delivery note says that the goods are 480 EU specification 320GB PS3s at £204.50 each.

(6)          EDC invoiced Anovo for 480 320GB slim PS3s at £250.80 per console, a profit margin of 2%; there is no mention of them being EU specification.  The total value of the invoice was £120,384 including VAT.

Deal P

(1)          Zippy issued an invoice for 420 iPods at £83 each, so for a total of £34,860; with VAT added, the invoiced amount was £41,832;

(2)          EDC invoiced Redcoon at £88 per iPod, a profit margin of 6%; and

(3)          the goods were collected by Redcoon’s carrier, along with other items including the PS3s in Deal M. 

“this was a product that was required - at the time was extremely short in supply from Apple.  I think they were restricting it to one customer -- one unit per customer.  Now, Redcoon had a huge demand for this product in Germany.  It was something they could make good money on because supply was short.  In the end we had to pay a premium for this product, but we helped our customer out.”

Deal Q

The transaction

(1)          EDC issued a purchase order to RLR requiring 500 160GB PS3 slim consoles with EU specification, at a price of £186 each, 6% less than CentreSoft’s wholesale price;

(2)          RLR invoiced EDC for 496 consoles, not the 500 ordered.  The total value of the invoice, excluding VAT, was £92,256; and

(3)          RLR did not state on the invoice that the consoles were EU specification.

Deal R

(1)          there were two further calls between EDC and Anovo, both before 10am, and both less than a minute in length;

(2)          these were immediately followed by three calls to Electro, the longest of which was for one minute and 19 seconds;

(3)          Electro invoiced EDC for 1007 EU specification 320GB PS3s. The price was £210.75, 7% below CentreSoft’s wholesale price.  The value of the invoice was £212,225.25 plus VAT of £42,445.05, making an overall total of £254,670.30; and

(4)          EDC invoiced Anovo for 1007 EU specification PS3s for £216 plus VAT, a profit margin of 2.5%.  The invoice total was £261,014.40.

Deal S

(1)          In the first strand (Deal S1), as already noted earlier in this decision, the defaulter was JK Distribution Ltd (“JKD”), and the goods were 1000 PS3s with a game called Killzone 3.  We have already found as a fact that these were EU specification consoles, see §209. 

(2)          In the second strand (Deal S2), WNL was the contra-trader, and the goods were 480 PS3s 320GB consoles; neither party has been able to provide evidence showing whether they were UK or EU specification. 

(3)          In the third strand (Deal S3), WNL was again the contra-trader, but the goods were LCD televisions. 

The transaction

(1)          there were two calls between EDC and RLR, one for 16 seconds and one for one minute, 54 seconds;

(2)          EDC invoiced Redcoon for 185 of the PS3s for £203 each, a profit of 2.5%.  The invoice does not mention the specification.  The invoice included other items, so the total value was £225,666, of which the PS3s made up £37,555; and  

(3)          Redcoon collected the PS3s, as evidenced by a signed and dated CMR.

(1)          as noted above, Electro purchased the PS3s and the televisions from RLR;

(2)          EDC issued a purchase order to RLR for 100 LG LCD televisions at a cost of £170;

(3)          RLR issued EDC with a single invoice for (a) the televisions at £170, and (b) 780 320GB PS3s at £198.  The invoice does not refer to the specification.  The total value of the invoice was £171,440, excluding VAT. 

Deal T

The transaction

(1)          Zippy issued EDC with an invoice for 500 EU specification 320GB PS3s with Move Starter Packs, for £210 each.  This was 7% less than CentreSoft’s wholesale price of £226.61 for a soft bundle, and 16% less than the cost of the components purchased separately (the Move Starter Pack wholesaled at  £23.66, so the total cost of the components would have been £250.77);

(2)          excluding VAT, the overall total cost was £105,000;

(3)          Zippy issued EDC with a delivery note for PS3s, using the same information as on the invoice;

(4)          the signed delivery note confirms that the goods were received by EDC;

(5)          EDC invoiced Anovo for 500 320GB slim consoles.  Added to the invoice, in bold, are the words “Note: eu stock”.  Each console was priced at £207, so £3 below the price EDC had paid for the soft bundle, including the Move Starter Pack. The total value of the invoice was £103,500 excluding VAT.

The Move Starter Packs

(1)          although Mr Ginn’s evidence was unchallenged, Mr Watkinson had explicitly stated that there was no documentary evidence as to what EDC had done with the Move Starter Packs;

(2)          Mr Frain-Bell did not refer to, still less rely on, the two Redcoon invoices exhibited by Mr Ginn;

(3)          the invoices show that EDC sold 665 Move Starter Packs to Redcoon, but had acquired only 500 from Zippy; 

(4)          we were not provided with any linkage (such as invoice or reference numbers) allowing us to be confident that the Move Starter Packs on the Redcoon invoices were in part sourced from the Zippy soft bundle;

(5)          Mr Sherry’s evidence was that CentreSoft’s wholesale price for Move Starter Packs in February 2011 was £23.11.  The EU wholesale price would have been similar, see our earlier findings at §89.  EDC was therefore selling the Move Starter Packs for more than 17% below their wholesale price.  We had had no explanation from either party as to why EDC would sell Move Starter Packs at such a steep discount; and

(6)          neither party relied on, or referred to, this soft bundle in the context of their submissions on the existence (or otherwise) of a commercial marketplace for the component parts of soft bundles, see §192ff and in particular §221. 

PART 7: THE CIRCUMSTANCES IN COMBINATION

“When dealing with a case based on circumstantial evidence, a fact finding tribunal has to do two things. First, it must make its findings as to what the circumstances actually were. Secondly, having determined what the circumstances were, it has to determine what inference to draw from all such circumstances taken together. In the first  part  of  this  exercise,  the  tribunal  necessarily  will  look  at  the  alleged circumstances individually; for the second part of this exercise, the tribunal must look at the circumstances in combination.”

Customer driven deals?

“on certain occasions, manufacturer sales representatives would offer EDC exceptional end-of-line discounts to acquire remaining stock which we would then sell to customers”

“a customer would approach EDC with a specific product requirement which we would source through our connections in the industry…It made business sense to always ensure customers were available to take on the stock, otherwise we would not commit to high volumes, and expose ourselves to risk.”

“EDC would generally operate a 'buy to order' policy that is to say that I would source goods on the basis of demand…occasionally I would buy an extra units without a customer secured if a deal was exceptionally good in anticipation of orders from Woolwich and Barclays insurance services or for sale in our retail business.”

“Once I understood what the customers' needs were, I would generally contact suppliers and make enquiries as to the availability of stock delivery timeframes and price.”

“I was offered the stock and then I used my business acumen to make an offer to Redcoon and say to them: look I’ve got stock, this is the price, it’s been split from a bundle; are you interested?”

Lack of documentary evidence

(1)          most of the Deals were carried out on the telephone and he kept the details of those negotiations in his head;

(2)          Deal G was an exception to this. He had had extensive email with Mr Rahman of ARU because there was no mobile phone reception, and the emails between him and Mr Rahman are evidence of genuine negotiation between the parties on price;

(3)          although he had a deal book, or day book, this was only used for certain types of transactions which did not include the Deals;

(4)          to the extent that documentation of the negotiations had existed, most could not now be accessed; and

(5)          his mobile phone records provide evidence of negotiations.

No written record?

“if [EDC] was seeking its own trades within an active marketplace, then evidence of the systems it used and records of its comparison of competing suppliers would be capable of being produced.”

(1)          in that case the FTT was re-hearing an appeal which had been remitted back from the Upper Tribunal following an earlier hearing in 2013.  The FTT came to its decision on the basis of a statement of agreed facts, together with the witness statements and transcripts of oral evidence from the original hearing.  The lack of oral evidence meant that the FTT was unable to make findings as to how the deals were put together, see [63] of the FTT decision.  In contrast, Mr Chhatwal has given evidence that he carried out a “labour intensive process” which required him to “call numerous suppliers”;

(2)          the appellant in Synectiv supplied HMRC with complete documentation relating to all trades in issue, including purchase orders and purchase and sales invoices and “details regarding the traded goods such as serial numbers, part numbers, batch numbers, product details, quantity, price per unit, what market research it carried out, name of manufacturer, website address, contact name and name of the authorised distributor” (see [103] of the FTT decision and [25] of the agreed statement of facts), as well as  third party inspection reports which provided additional information (see [106] of the decision).  In contrast, there are significant gaps in EDC’s Deal documents, as we discuss further below; and

(3)          the FTT in Synectiv made its decision, having assessed a multiplicity of different facts, and it is not appropriate to take one or two particular points and seek to rely on them by analogy in a different case. 

Deal G

(1)          on 21 March 2011, Mr Rahman emailed Mr Chhatwal saying “further to the telephone conversation I would like to thank you for your offer”, see §362(2); and

(2)          on 23 March 2011, Mr Chhatwal called Mr Rahman asking for details of the delivery address, see §364(3).

The deal book

“Once I understood what the customers' needs were, I would generally contact suppliers and make enquiries as to the availability of stock delivery timeframes and price.”

“Exhibited at pages 68 to 72 of DCl are an example of my sales orders recorded during such enquiries and the resulting Sales Order Acknowledgements (‘SOAs’).”

“with the indirect market, it could be the case that when I got a price regarding something, I would write that price down on a piece of paper.  I would then phone - it would be in my head and I would then phone up my customer and tell them what the price was.  There was no permutation involved in the price.  It was just a net price.”

“Agreed with Rob

[product ref] x 200pc @ 126.99 – agreed £99 (£31.99pb)

[product ref] x 60pcs @ 145

[product ref] x 50pcs @ 253.22 – agreed £240 (£13.22pb)

[product ref] x 40pcs @ 195 – agreed £180 (£15 pb)”

Unable to access?

“while it may be true that some of this material is easily retrieved, other evidence will take time to collect: for example, EDC may wish to obtain corroborative evidence from its suppliers and customers, some of whom are based overseas.”

“The Appellant utilised a software program for the electronic management of its  purchases   and   sales   including  for   wholesale   transactions. The Appellant's  licence in respect of this program ended in 2012. Since that time it has not renewed its licence to use this software, as it no longer required access to it. As such, the Appellant cannot access this historical information in electronic form.”

“Mr Chhatwal does not have access to all historical emails which were exchanged during the period 1 January 2008 to 3 June 2011. EDC provided only limited documentation about the disputed transactions.” 

“The Appellant has made further enquiries into the information which has been retained electronically in relation to its transactions and can confirm that it does not have access electronically to purchase and sales listings for each of EDC's wholesale  transactions  between  Q3/2007-Q4/2012,  regardless  of  whether  the licence to utilise the relevant software is renewed as the hard drive on which this information was stored is no longer in use and cannot be recovered.”

“The Appellant does not have access to all historical emails which were exchanged during the relevant period as full archives of the Appellant's emails have not been retained. There is no further emails  [sic] that  the  Appellant  envisages  having  access  to  in  the  future.” 

“In respect of the emails sent to my colleagues, I no longer have  access  to  these  emails  due  a technical  issue  with  our  server, which resulted in the permanent loss of data stored in these email account.”

“Mr Watkinson:  Mr Chhatwal, there are no stock offer forms that you have sent out in respect of any of these deals?

Mr Chhatwal:  No, and you won't find those with all the other thousands of transactions that I did.

Mr Watkinson:  But you say in your evidence that you sent them to a distribution list, including existing customers and prospective buyers.  Is that just made up?

Mr Chhatwal:  No

Mr Watkinson:  So why won't we find them any anywhere?

Mr Chhatwal:  Because they're probably done by email and we don't have – I was collating this evidence at the time when I was closing my company down.

Mr Watkinson: You are obliged to keep your business records.  You didn't destroy all the evidence of these transactions, did you?

Mr Chhatwal: We – no.  We – we had lots of emails coming in all the time, and in order to free up our server space, we were told by our IT department to delete lots of emails on a weekly basis.  We had a call centre that was operating on an insurance replacement business, and in order to keep that, the speed of everything, we had to delete a lot of emails.”

(1)          the information could not be accessed because EDC had not renewed the licence;

(2)          the hard drive was “no longer in use and cannot be recovered”;

(3)          emails could not be recovered because of “a technical  issue  with  our  server” which had led to the “permanent loss of data”;

(4)          Mr Chhatwal was collating the evidence at the time he was closing the company down, and was therefore distracted; and

(5)          EDC’s IT department required that “lots of emails” be deleted on a weekly basis.

“But on a point which was brought up yesterday about: do I have any evidence of deal transactions; in my process of enquiring about mobile phone numbers matching up with the three suppliers that were required, I managed to make contact with our old remote server, and I have now found some emails showing transactions between myself and those suppliers.

We managed to contact – I managed to contact the remote server.  I actually have them all on my phone, and they actually show emails between myself and RLR and Electrocentre and Zippy, not all of the transactions, not all the hundreds of calls that were made, but there is evidence that – it is only because I have been asked to now find mobile numbers that correlate to the people that are on the Vodafone itemised billings.”

“We have asked for this material for years. Mr Chhatwal's witness evidence was, for example, in respect of the emails, they no longer had access to them due to a technical issue with the server which resulted in permanent loss of data.”

“Tribunal:  Mr Chhatwal's evidence given under oath [was] that he was last night able to make contact with an old remote server, that he had previously said he couldn't.

Mr Frain-Bell: That’s correct.”

“What happened was that I was asked to find out some mobile phone numbers and who they belonged to.  I typed in those mobile phone numbers into my phone which I hadn't tried for a number of years because there's nothing happening in this – with regards to this case.  I typed it in.  It came up with a few emails, not a huge range but a few… So from my phone I was connected to the remote server we had five years ago and the emails popped up on the search facility when I typed in a key word search.”

The mobile phone records

(1)          Deal A: On 1 November 2010, before EDC ordered the goods, Mr Chhatwal called its customer, Everyberry, and spoke for over 10 minutes.  There were four further calls on 2 November 2010, totalling almost 20 minutes, and on 4 November Mr Chhatwal spoke to Everyberry for around a minute.  There were also calls between Mr Chhatwal and Electro (the supplier) during the same period. 

(2)          Deal G: the emails between Mr Chhatwal and Mr Rahman refer to calls having taken place (see §362(2) and §364(3)).  Although these are not recorded on Mr Chhatwal’s mobile phone records, in reliance on the emails, we accepted that these calls took place. There were also two calls between Mr Chhatwal and Electro on 21 March 2011 for a total of 15 minutes, and a further three calls on 22 March 2011, one at 10.46am for 19 seconds; one at 11.20 for 1 minute and 43 seconds and one at the end of the day, for four minutes and 21 seconds. 

(3)          Deal O:  Mr Chhatwal called Anovo, the customer, at 9.27am and spoke for just over 3 minutes; he then immediately called Electro, the supplier and spoke for 12 minutes.  There was one more call between Mr Chhatwal and Anovo, and between Mr Chhatwal and Electro, that afternoon, each call lasting around a minute.

“…the content of those calls is unknown.  It could have been it was Mr Chhatwal chatting with the other members of the fraudulent transaction chains.”

(1)           there was evidence of customer contact by phone in only three of the 20 Deals;

(2)          Mr Chhatwal’s normal method of transacting business was that he “would call numerous suppliers for product availability and price quotes”.  The mobile phone records do not reflect that process, but are instead calls to the specific business which supplied the goods in question; and

(3)          there was no documentary evidence as to what was said during these calls. The only exception was Deal G, where there was a mixture of phone calls and emails, but we have already found that the emails were at least in part, window-dressing; and

(4)          as Mr Ginn said, the existence of phone contact is not itself proof of genuine commercial negotiation; it is also consistent with knowing participation in fraudulent transaction chains

Conclusions on negotiation

Documentary evidence of contact with customers at inception of the Deals?

Contacts with suppliers

Other gaps in the paperwork

“Most of what Mr Chhatwal has said in his evidence should be capable of being supported by documentation obtained in the course of his business, yet in respect of these transactions, documents supporting his various explanations are conspicuous by their absence.”

(1)          Deal A, where there is no VAT invoice from the supplier;

(2)          part of Deal D, where there is no EDC invoice to the customer; and

(3)          Deal K, where there were no EDC customer invoices and we were unable to make findings about who the customers were. 

Goods supplied only after payment

“I made the commercial decision that EDC would require payment up front or a deposit in order to trade with Unipessoal as EDC and Unipessoal did not have a previous history of trading and they were ordering a large amount of stock.”

Goods supplied before payment

“Those were customers that I had an excellent trading relationship with… in business, in real business, you look to deal with people, big customers, you try and get their business…we gave goods away before we received payment, and they were to customers that we had a good working relationship with.”

(1)          Deal N: EDC released goods invoiced at £229,200 two days before receiving payment;

(2)          Deal O: EDC released goods invoiced at £120,384 two days before receiving payment;

(3)          Deal R: EDC released goods invoiced at £261,014, two days before receiving payment; and

(4)          Deal T: EDC released goods invoiced at £103,500, at least a day before receiving payment.

The source of the PS3s and their specification

Where did the PS3s come from?

“According to EDC’s records (in particular, the invoices which indicate whether the stock was EU specification) the majority of the goods sourced from Electrocentre, Zippy Distribution and RLR Distribution were UK and not EU specification.  EDC would only supply EU specification stock if it was specifically requested by the customer.”

“aware  other  retailers   were  often  buying  the  soft  bundles  offered  by CentreSoft, splitting the bundles and then selling  the elements of the bundle at a discounted  price.”

(1)          CentreSoft supplied soft bundles containing UK specification consoles and games;

(2)          the purchasers of those bundles split them and sold the consoles separately; and

(3)          most of the PS3s in the disputed transactions were sold to EDC by the business which had split the bundle. 

(1)          in 14 out of the 18 Deals, the consoles were of EU specification,

(2)          Sony never supplied EU specification PS3 models to CentreSoft, see §145, so these EU specification models were not purchased from CentreSoft; and

(3)          the PS3s sold to Ewert in Deals E, I and J were EU specification; these Deals involved a total of 2,300 PS3s. It was only Deal B, for only 500 PS3s, where the goods were of UK specification.  Mr Chhatwal struggled to explain why he did not know that most of the goods shipped to Ewert were EU specification.  Under cross-examination he accepted that “the paperwork, it says something very different”.

(1)          why the stock was imported into the UK at all, rather than being sold to customers in the EU;

(2)          why there was:

(a)          an apparent glut of stock in the EU, so that the consoles were imported into the UK, but simultaneously

(b)          a high level of demand for the same stock, so that EU companies were coming to the UK to buy more consoles;

(3)          why the consoles were imported into the UK without any steps being taken to make them suitable for sale here, such as the addition of plugs;

(4)          if the consoles were always intended for the EU market, why they were not warehoused there and subsequently sold from there;

(5)          why importers incurred the cost of shipment both to and from the UK, with its associated risks of damage or theft; and

(6)          why EU wholesalers were seeking EU specification stock in the UK rather than elsewhere in the EU.

“we were told by our immediate supplier that the bundle had been split in another country, the customer had split the - sold the game on and the other peripheral items, just as you could do it with CentreSoft, and then the console was made available at a very low price.” 

What the customers requested?

Did it matter if the consoles had the wrong specification?

“The only difference between EU and UK specification PlayStation 3 consoles is the AC power plug and hard copy instruction manual language. The plug can and regularly is changed by supplying a clip on plug or a replacement power cable. I understand that well established legitimate companies such as Redcoon and Pixmania regularly supply clip on plugs or a replacement power cable with their products and the practice is widespread throughout the industry as demonstrated by Pixmania's Terms and Conditions...UK specification goods regularly end up with consumers in the EU and vice versa…Whilst EDC did not place snap on plugs or replacement power cables into the boxes, I am aware that these products are very cheap. They are about £0.05 to manufacturer.”

What is recorded on the documentation?

(1)          in Deal H, Mr Chhatwal’s told Mr Rahman that he had EU specification consoles; Electro’s delivery note to EDC gives that specification, as does ARU’s purchase order, but it is not included on Electro’s invoice to EDC. or on EDC’s invoice to ARU;

(2)          in Deal N, Anovo ordered EU specification goods from EDC using a purchase order. Although Electro’s invoice to EDC does not include a specification, EDC’s invoice to Anovo states that the goods are EU specification, as does the collection document; and

(3)          in Deal T, Zippy’s invoice to EDC specifies EU stock, and this is also included on Zippy’s delivery note and EDC’s invoice to Anovo. 

(1)          in Deals A, B, C, D, E and S, none of the documents say whether the goods are of UK or EU specification.  This has only been established as the result of HMRC Officers checking other parts of the relevant deal chain;

(2)          in Deals F and O the invoices from Electro to EDC state the specification, but there is no reference to it on EDC’s invoice to the customer;

(3)          in Deal G, the specification is referred to in the customer’s purchase order and subsequent email, but not on the invoice from the supplier to EDC, or on the invoice from EDC to the customer;

(4)          in Deal I, EDC issued a purchase order to RLR, the supplier, specifying EU consoles, and RLR’s delivery note also says that it delivered EU consoles.  But that information is not included on RLR’s invoice to EDC, or on EDC’s invoice to Ewert; and

(5)          in Deal J, the only reference to the specification is on RLR’s delivery note to EDC, so the information was not transmitted to Ewert, the German customer.

Did Mr Chhatwal and the customer know the specification

Inconsistencies

(1)          in Deal M, Mr Chhatwal’s email to Zippy states that EU plugs are required, but Zippy’s invoice to EDC says that the consoles are UK specification.  We noted that two calls took place between Mr Chhatwal and Zippy after the goods were delivered, and considered whether to infer that this difference was discussed and resolved during one or both of those calls.  However, we decided not to make that inference, because in a normal commercial transaction the seller would have confirmed that change of specification to its customer, perhaps by including it on the invoice or on the delivery note; and/or calling the customer, but the invoice and delivery note do not refer to the specification, and there is also no documented call between EDC and Redcoon, the customer; and

(2)          in Deal Q EDC ordered EU stock from RLR; the invoices issued by RLR and EDC both omit any mention of the specification, and the CMR states that the goods were a mixture of UK and EU stock.

Conclusions on specification

Whether Mr Chhatwal knew there was no commercial grey market in split soft bundles

(1)          Mr Chhatwal was very experienced in the electronic goods market, having worked at EDC for around 20 years before the disputed transactions;

(2)          he was unable to provide any documentary or witness evidence for his alleged belief in the existence of a commercial grey market for split soft bundles, and was himself not a credible witness;

(3)          Mr Gara said that “the custom and practice in the industry was soft bundling worked” so that the whole bundle “went to end consumers”.  He also said it was “highly unlikely” Mr Chhatwal could have thought that he could do what he liked with the component parts of a split bundle, and we infer that it was, in his view, highly unlikely that Mr Chhatwal could have thought that there was an entire market in which wholesalers carried out this bundle-splitting;

(4)          Mr Chhatwal’s original position as set out in his witness statement was that he believed the bundle splitting had been carried out in the UK, by his immediate suppliers.  Had this genuinely been Mr Chhatwal’s belief, he would have asked his suppliers to explain the position as soon as he was offered EU specification PS3s, but instead he was unaware of the specification until shortly before the hearing;

(5)          he said that EDC would first exhaust all direct channels of sourcing goods before relying on secondary channels, and had “tried and tried” to get the PS3s from CentreSoft, but it is clear from our earlier findings that EDC could have obtained all the PS3s it required for the Deals from CentreSoft, because there was no stock shortage (see §160); and

(6)          Mr Chhatwal said in his witness statement that he “would refer the individual components of the soft bundles” to work out whether the pricing “made commercial sense” but later admitted this was incorrect;  he had never sought to establish which soft bundle(s) had been the supposed origin of the PS3s, and so had never sought to establish whether the pricing was credible.

Buying the goods

The prices

“A business trading within a market should have a reasonable idea of the market prices for the goods on any given day. If goods are offered at what appears to be a bargain price then you should find out the reason for the low cost, if it’s too good to be true, then it probably is.”

(1)          In Deal K Zippy supplied EDC with televisions, although EDC was an authorised distributor for Samsung, the manufacturer of the televisions in question, and EDC had vastly more experience in the buying and selling of televisions than Zippy.  There is no credible basis on which Zippy would be able to source these goods when EDC could not, at a price which EDC could not better. 

(2)          In Deal P Zippy supplied EDC with iPods.  We have already found Mr Chhatwal’s oral evidence about this Deal to lack credibility, see §419.  EDC had been trading iPods since at least August 2009 (see §108(1)) and it is not credible that Zippy, a sole trader business in the retail market, could source iPods more cheaply than EDC, or that Mr Chhatwal believed this was the case. 

The quantities

(1)          Deal D for £92,500;

(2)          Deal K for £16,650;

(3)          Deal L for £68,000;

(4)          Deal M for £69,200;

(5)          Deal P for £34,860; and

(6)          Deal T for £105,000.

(1)          Deal B for £95,250;

(2)          Deal C for £20,355;

(3)          Deal I for £56,550;

(4)          Deal J for £168,338;

(5)          Deal Q for £92,256; and

(6)          Deal S for £171,440.

The profits