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URL: http://www.bailii.org/uk/cases/UKVAT/Customs/2004/C00190.html
Cite as: [2004] UKVAT(Customs) C190, [2004] UKVAT(Customs) C00190
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Sony Computer Entertainment Europe Ltd v Customs and Excise [2004] UKVAT(Customs) C00190 (15 October 2004)
    C00190
    CUSTOMS DUTY CLASSIFICATION – Sony PlayStation®2 – whether 8471 (digital processing unit) or 9504 (video game) – BTI originally classifying it under 9504 amended to classify it under 8471 ceasing to be valid by the issue of Commission Regulation classifying it under 9504 which Regulation was subsequently annulled by the Court of First Instance – whether revocation of the BTI by the Commissioners was also annulled by the Court's decision so as to revive the BTI – no – classified under 9504

    LONDON TRIBUNAL CENTRE

    SONY COMPUTER ENTERTAINMENT EUROPE LIMITED Appellant

    - and -

    THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

    Tribunal: DR JOHN F AVERY JONES CBE (Chairman)

    ALEX MCCLOUGHLIN

    Sitting in public in London on 29 and 30 September 2004

    Mark Clough QC, solicitor advocate, Ashurst, and Philippe de Baere, of the Belgian Bar, van Bael & Bellis, Brussels, for the Appellant

    Kieron Beal, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

    © CROWN COPYRIGHT 2004

     
    DECISION
  1. Sony Computer Entertainment Europe Limited appeals against a decision on review dated 18 October 2001 that binding tariff information 105614503 classifying the Sony PlayStation®2 (the Product) under heading 8471 was revoked on 31 July 2001. The Appellant was represented by Mr Mark Clough QC and Mr Philippe de Baere, and the Commissioners were represented by Mr Kieron Beal.

  2. The issue in the appeal is essentially to determine the effect of the following steps: (a) the issue of binding tariff information 105614503 classifying the Product under heading 8471; (b) Commission Regulation 1400/2001 classifying it under heading 9504; (c) the Commissioners revoking the BTI; and (d) the Court of First Instance (CFI) annulling the Regulation. Does the BTI revive, as the Appellant contends, or does it remain revoked, as the Commissioners contend?

  3. There was an agreed statement of facts as follows:

    4. (1) On 28 August 2000, Mr. Marcus Webster of Sony Europe, acting as the representative of the Appellant, applied for a BTI to the Commissioners for PlayStation®2 models SCPH-30003 and SCPH-30004. The application proposed a classification under CN Code 8471.50.90.00, i.e. "Automatic data processing machines and units thereof – Digital Processing Units – Other". The Appellant contended for a classification under CN Code 8471.50.90 on the averment that the Product satisfied all criteria listed in Note 5(A) to Chapter 84 of the Common Customs Tariff ("CCT") and that, in view of the Harmonised System Explanatory Note (HSEN) (b) to Heading 9504, a classification under Subheading 9504.10 was thereby excluded. A presentation of the Product was held in the presence of two officials of HM Customs & Excise in the Appellant's office in London on 6 October 2000.
    (2) By BTI reference GB 105614503 dated 19 October 2000 (the BTI), the Appellant was informed that the Product had to be classified under CN Code 9504.10.00, i.e. "Video games of a kind used with a television receiver". The BTI stated that the justification for the classification of the goods had been determined by "the provisions of GIRs 1, 3(b) and 6. Commission Regulation (EC) No. 1508/2000. HSEN pages." The Commissioners based this decision in part on their finding that the Product was not freely programmable and therefore did not meet the condition of Note 5(A)(a)(2) to Chapter 84 of the CCT, i.e. that the apparatus must be capable of "being freely programmed in accordance with the requirements of the user". The Commissioners also based their decision that the apparatus was not freely programmable on their view that any programming function was subsidiary to the video games function. The Commissioners also stated that they had followed the legal procedure for Tariff classification as shown in Volume 2 Part 1 Section 3 of the Tariff.
    (3) On 22 November 2000, the Appellant requested a formal departmental review of BTI reference GB 105614503 and a reviewing officer was appointed. The reviewing officer visited the Appellant on 7 December 2000 to see a demonstration of the Product. The decision by the reviewing officer to maintain the BTI classification given under CN code 9504.10.00.00 was communicated to the Appellant on 5 January 2001. This decision was again based in part on a finding that the Product was not capable of being freely programmed by the user. After having decided that the Product was not freely programmable as required for a classification under heading 8471, the review officer analysed the remaining classification options, i.e. classification as a CD player, a DVD player or as a computer games console. By application of the legal rules for tariff classification, including an application of GIR 3(a) to 3(c), the review officer concluded that the essential characteristic of the Product was given by its function of playing video games rather than by its CD and DVD player function. Even if that were not the case, her alternative conclusion was that the application of GIR 3(c) would still lead to a classification under heading 95 04 instead of under heading 8519 or 8521. On 30 January 2001, the Appellant appealed to the VAT and Duties Tribunal against the Decision taken by the Commissioners on the Formal Departmental Review.
    (4) The Commissioners had informed the Appellant that the Appellant's request for a BTI in the UK had come to the attention of the EC Nomenclature Committee and had suggested the Appellant contact the Nomenclature Committee's president. Counsel for the Appellant contacted Mr. Jan Foltmar, president of the Nomenclature Committee, in January 2001. Mr. Foltmar confirmed the discussions in the Nomenclature Committee on the classification of the Product and informed counsel for the Appellant by e-mail dated 9 February 2001, that the classification of the Product was on the agenda for the next meeting of the Nomenclature Committee. Mr Foltmar also confirmed that Appellant could demonstrate the Product during the meeting on 27 February 2001. The Nomenclature Committee subsequently acknowledged that the product was capable of performing various functions such as reproducing sound and images and being a games machine. The United Kingdom argued that the conditions in Note 5(A)a(i) were not fulfilled while other Member states tended to consider the conditions in Note 5(A)a(i) were met. After a discussion amongst Committee members, the Nomenclature Committee unanimously supported a classification in heading 9504 as a video game machine.
    (5) Contacts between the European Commission and the Appellant continued after the meeting on 27 February 2001, and until Commission Regulation (EC) N° 1400/2001 was adopted. Although the Appellant did not take part in later meetings, the Nomenclature Committee discussed and confirmed the classification of the Product again in the meeting held from 9 to 11 April 2001 and in the meeting held on 30 May 2001 when the hearing of the VAT and Duties Tribunal was taking place. At that meeting on 30 May 2001, the Nomenclature Committee delivered a favourable opinion by a qualified majority on the draft classification Regulation which had been produced. Germany and Sweden did not agree to the applicability of GIR 3(b) in relation to function. Sweden abstained while Germany voted against the draft Regulation, arguing that GIR 3(c) rather than 3(b) should constitute the legal basis for the classification.
    (6) During the hearing of the VAT and Duties Tribunal, on 30 May 2001, the Commissioners requested the Tribunal to stay the proceeding arguing that the correct classification of the Product was being discussed at that precise moment by the Nomenclature Committee and that a decision was imminent. While this request was being considered by the Tribunal, the Commissioners informed the Tribunal that it had just received by fax a copy of the draft Regulation approved by the Nomenclature Committee. The draft Regulation stated that the Product was capable of being programmed in YABASIC and that one of its functions was performing automatic data processing. The draft Regulation adopted indicated that the Product was capable of being freely programmed. In view of this, the Commissioners decided no longer to oppose the appeal, as their decision had proceeded in part on the contention that the Product was not freely programmable.
    (7) On 5 June 2001, the VAT and Duties Tribunal accordingly directed by consent "that the Appeal be allowed."
    (8) Following the appeal, the Commissioners amended BTI GB 105614503 by decision of 12 June 2001. The amended BTI reclassified the Product under CN code 8471.49.90.00 with effect from 19 October 2000.
    (9) On 10 July 2001, the European Commission adopted Regulation (EC) No 1400/2001 concerning the classification of certain goods in the Combined Nomenclature (hereafter "the Regulation"). The Regulation classifies apparatus meeting the requirements in column (1) of the Annex under the CN code 9504.10.00 and its accompanying CD-ROM under 8524.39.90. The Regulation was published on 11 July 2001.[1]
    (10) The Regulation applies to apparatus including the following components specified in Column (1) of its Annex:
    '- a central processing unit (CPU),
    - a 32 Mbits DRAM main memory module,[2]
    - a digital versatile disk (DVD)drive, a graphics chip,[3]
    - a graphics chip,
    - 2 universal serial bus (USB) connector ports,
    - 2 controller module ports,
    - 2 memory card slots,
    - an audio/video connector port (IEEE 1394),
    - an optical digital output connector port.'
    The components listed by the Commission in the Annex to the Commission Regulation are, barring the clerical mistakes, identical to those of the Product.
    (11) Column (1) of the Annex to the Regulation also states that the apparatus is capable of:
    - processing dedicated software for playing video games,
    - converting digital information from DVD video disks or audio CDs into video/audio signals for reproduction by television receivers or audio systems,
    - being programmed in "YABASIC".
    (12) The Regulation also mistakenly classified the CD-ROM unit including the programming language "YABASIC" as well as several video games and videos under CN Heading 8525.39.90. A corrigendum to correct the CN Code to Heading 8524.39.90 was published.[4]
    (13) On 25 July 2001, the Commissioners sent the Appellant the revocation decision whereby the Appellant was informed that BTI GB 105614503 would be revoked with effect from 31 July 2001.
    (14) On 6 September 2001, the Appellant submitted a request for a departmental review of the revocation decision to the Commissioners. The Appellant considered that the revocation decision was invalid as, it submitted, it was made in application of an illegal Community act, i.e. the Regulation. The Appellant requested the Commissioners to annul their revocation decision.
    (15) On 3 October 2001, the Appellant brought an application under Article 230 EC to the Court of First Instance of the European Community (CFI) for annulment of the Regulation, registered under case number T-243/01. The application contained not only the legal arguments of the Appellant supporting the invalidity of the Commission regulation, but also a detailed section on admissibility.
    (16) On or about 5 October 2001, the Harmonised System Committee of the World Customs Organisation ("the HSC") met in Brussels to continue its discussions on the proper classification of certain DVD drives. The European Commission submitted a copy of the Product for discussion on the tariff classification of the Product. The Secretariat to the HSC stated that one argument was that the Product should be classified under Heading 8471 as an automatic data processing machine by application of Note 5(A)(a) to Chapter 84. However, another argument was that since as presented the principal purpose of the apparatus is not automatic data processing, it should not fall under Heading 8471, but rather should be classified by virtue of GIR 3(b) under heading 9504. The Secretariat noted that if it were impossible to determine the principal purpose of the product, GIR 3(c) would apply and the PS2 would fall under heading 9504. Nevertheless, the Secretariat left the final decision to the HSC.
    (17) By letter addressed to counsel for the Appellant dated 18 October 2001, the reviewing officer upheld the decision to revoke the BTI. The present appeal is directed against this decision of the reviewing officer.
    (18) On or about 15 November 2001, Sony filed a Notice of Appeal with the VAT and Duties Tribunal against the review decision dated 18 October 2001. Its grounds for doing so were essentially that the revocation decision should not have been upheld because it was made in application of an illegal Community act, i.e. the Regulation, as set out in that Notice.
    (19) On 30 September 2003, the CFI handed down its judgment in Case T-243/01 Sony v. Commission (the Sony case). The CFI annulled the Regulation in so far as it classified the console described in column 1 of the table in the Annex to that regulation under CN code 9504.10.00 and the accompanying CD-ROM under CN code 8524.39.90. The CFI found that the European Commission committed an error of law in determining the classification of the game console described in column 1 on the basis of GIR 3(b).
    (20) By letter dated 21 October 2003, the Commissioners wrote to the EC Commission in the light of the CFI's judgment.
    (21) By letter dated 8 January 2004, the Commission replied that it followed from the CFI's judgment that the PS2 could not be classified in HS heading 8471 and that it can be classified in HS heading 9504. The Commission stated that the PS2 "was and still is" classifiable under the latter heading and that this approach was in accordance with the judgment of the ECJ in Case C-11/93 Siemens-Nixdorf.
    (22) On 18 November 2003 the HSC discussed the proper tariff classification of the Product. The Japanese Delegate contended for a classification under hearing 8471. The question was put to a vote and the HSC decided by 28 votes to 9 that it was proper to classify the Product under tariff 9504 10 by virtue of the application of GIR 1, Note 1(p) to Section XVI and GIR 6. The Committee instructed the Secretariat to prepare a classification opinion confirming their decision and to undertake a study aimed at determining whether or not there is a contradiction between the legal texts and exclusion (b) of the Explanatory Note to heading 9504 and if appropriate, consider its amendment and/or deletion.
    (23) The WCO classification opinion was adopted in May 2004 and published on the WCO website on August 2004.
  4. We were greatly assisted by the written material produced by both Mr Clough and Mr Beal. Their skeleton arguments and other written material submitted during the hearing amounted to some 140 pages.

  5. The jurisdiction of the Tribunal is a full appellate jurisdiction with respect to the review decision. Section 16(5) of the Finance Act 1994 provides:

    6. "(5) In relation to other [that is, other than ancillary matters] decisions, the powers of an appeal tribunal on an appeal under this section shall also include power to quash of vary any decision and power to substitute their own decision for any decision quashed on appeal.
  6. In summary, Mr Clough for the Appellant contends:

    7. (1) The revocation letter of 25 July 2001 is the notification of the invalidation of the BTI by the Regulation without the exercise of any independent decision-making power by the Commissioners.
    (2) Even if the revocation letter were a decision, its legal basis was only the invalidity of the BTI resulting from the Regulation under article 15(5)(a)(i) of the Community Customs Code.
    (3) Even if the letter were a decision on the independent ground that the correct tariff classification of the Product was heading 9504, the new reasoning cannot be introduced with retroactive effect.
  7. In summary, Mr Beal for the Commissioners contends:

    8. (1) The proper classification of the Product is as a matter of Community law under heading 95 04.
    (2) The Regulation was annulled because of a defect in its reasoning not in its conclusion. As a matter of Community law (and in order to protect the Community's own resources) the Commissioners as a national customs authority are obliged to ensure that the Product is entered to the correct commodity code.
    (3) The Product should always have been entered to CN 95 04 on importation on the basis that the BTI was properly revoked because it classified the Product under the wrong heading.

    He contends that the approach of the Tribunal should be to determine:

    (1) What is the proper classification for the Product?
    (2) What is the proper effect of the judgment of the CFI in the Sony case. Specifically, is the classification found under issue (1) altered by the annulment of the contested Regulation pursuant to that judgment?
    (3) If not, can the Appellant rely upon any extant BTI to override the obligation to enter its products under heading 95 04?
    (4) If not, can the Appellant otherwise establish a substantive legitimate expectation which entitles it to enter its products under CN heading 84 71 notwithstanding that the proper classification is under heading 95 04?
  8. It will be apparent that the parties are not agreed about the issue for the Tribunal. The Appellant asks the Tribunal to quash the revocation decision so that BTI revived on the Court annulling the Regulation, without making any decision on classification, which it says does not arise in the appeal; the Commissioners ask the Tribunal to start by classifying the Product. We consider that it is necessary to deal with the Appellant's argument first. If the revocation of the BTI was an automatic consequence of the Regulation, the BTI would remain in force now that the Regulation has been annulled retrospectively and the BTI would conclusively determine the classification. If that is not the case, the issue becomes the first one put forward by the Commissioners of whether the revocation of the BTI was valid, which depends upon whether the BTI correctly classified the Product.

    9. Whether there has been an independent revocation of the BTI
  9. The first issue can be stated in a simplified form as what is the effect of the following steps:

    10. (1) 12 June 2001. The Respondent issues (or more precisely amends with purported retrospective effect) the BTI classifying the Product as 8471;
    (2) 10 July 2001. The Regulation classifies the Product (without naming it but setting out its characteristics) under 9504 from 31 July 2001;
    (3) 25 July 2001. The Respondent revokes the BTI with effect from 31 July 2001;
    (4) 30 September 2003. The CFI annuls the Commission Regulation (with retrospective effect) in the Sony case.
  10. Mr Clough contends that step (3) was not an independent step; the effect of the Regulation was that the BTI ceased to be valid. Accordingly, when the Regulation was annulled the BTI was reinstated with retrospective effect. Mr Beal contends that step (3) was an independent step, rather than something that merely stated the effect of the Regulation, and so the BTI remains revoked on the annulment of the Regulation. The problem is that until the CFI annulled the Regulation it had full effect with the classification being 9504, but when it was annulled it was annulled retrospectively so that looking at the facts today it is as if there never had been a Regulation. Does the revocation of the BTI in step (3) automatically fall with the annulment of the Regulation (as the Appellant contends), or does it remain in effect (as the Commissioners contend)? The Appellant's argument concentrates on the time when step (3) took place to determine that it had no independent effect from the Regulation; the Commissioners concentrate on the position today to determine that it had the effect of revoking the BTI independently of the effect of the Regulation. At the time step (3) took place the Commissioners had no power to do anything except give effect to the Regulation; but following the annulment of the Regulation, step (3) cannot be said to be giving effect to the Regulation and is capable of being a free-standing revocation of the BTI.

  11. If step (3) had not been taken or if the Regulation had revoked the BTI, the Appellant would clearly be right. When the Regulation was issued the BTI automatically ceased to be valid. When the Regulation was annulled, the effect was as if there had been no Regulation and so the BTI remained in force. This is so whether or not the classification by the BTI was wrong and the Regulation was annulled because of a defect in the legal basis for the conclusion, rather than the conclusion itself being wrong (which the CFI did not address). The issue is whether the position is different because of the Commissioners' letter revoking the BTI.

  12. The revocation letter of 25 July 2001 states:

    13. "As you know, Commission Regulation (EC) No.1400/2001 was published on 11 July. Article 3 states that the "Regulation shall enter into force on the 20th day following its publication in the Official Journal of the European Communities." Accordingly, the Regulation enters into force on 31 July, and consequently BTI 105614503 will be revoked on that date.
    If you do not agree with the decision to revoke the BTI, you can ask for a formal Departmental review…".
  13. This seems to us to show that although the revocation was in consequence of the Regulation ("consequently BTI 105614503 will be revoked on that date"), the revocation has some separate existence. Why would there be a right to ask the Commissioners to review the BTI automatically ceasing to be valid in consequence of the Regulation entering into force? The Appellant duly exercised its right to ask for a review, stating that it considered that the revocation decision was invalid as it was made in application of an illegal Community act, the Regulation. One of the reasons they put forward was the one which the CFI later accepted, that General Rule 3(b) was not applicable. The review letter of 18 October 2001 clearly separates the revocation decision from the Regulation:

    14. "There are two important issues to consider as part of my review. Firstly, the legality of the revocation decision and that of the Commission Regulation (EC) No.1400/2001. Secondly, whether a UK Tribunal or I have jurisdiction to annul either decision or Regulation should we consider the legality of these to be flawed."

    In dealing with the first of these, the letter points out that the Regulation

    "…at this time is legally extant and valid. This means that BTI reference GB105614503 which classified the Playstation 2 under commodity code 8471499000, no longer conforms to the published EC view. The BTI was revoked in accordance with Articles 9(1) and 12(5)(i) [which must mean 12(5)(a)(i)] to Council Regulation (EEC) 2913/92. The holder was notified in accordance with Article 9(3). The date of revocation was effected in accordance with Article 9(4) and Article 12(5).
    In my opinion, the conditions set out in Council Regulation (EEC) No 2913/92 have been complied with. The revocation of BTI reference GB105614503 is legal and was correctly notified to the holder concerned. Therefore I must uphold the decision to revoke your clients [sic] BTI as it clearly no longer conforms to the law laid down thereby.…"
    (The letter then goes on to consider the second aspect and the possibility of annulling the Regulation, and correctly states that only the European Court could consider the validity of the Regulation and that the time for challenging it expired on 7 October 2001 (the Commissioners were unaware that the Appellant had challenged it). It concluded "Accordingly, there would seem to be no legal basis upon which your client could challenge the UK Customs decision to revoke BTI reference 105614503.")
  14. Accordingly, the letter relies on both Articles 9(1) and 12(5)(a)(i) which are different ways in which a BTI may cease to be valid. Article 12(5) provides:

    15. "5. Binding information shall cease to be valid:
    (a) in the case of tariff information:
    (i) where a regulation is adopted and the information no longer conforms to the law laid down thereby;…
    …
    (iii) where it is revoked or amended in accordance with Article 9, provided the revocation or amendment is notified to the holder.
    The date on which binding information ceased to be valid for the cases cited in (i) or (ii) shall be the date of publication of the said measures or, in the case of international measures, the date of the Commission communication in the 'C' series of the Official Journal of the European Communities…".

    Article 9 provides:

    "(1) A decision favourable to the person concerned, shall be revoked or amended where, in cases other than those referred to in Article 8 [dealing with incorrect or incomplete information], one or more of the conditions laid down for its issue were not or are no longer fulfilled.
    …
    (3)The person to whom the decision is addressed shall be notified of its revocation or amendment.
    (4) The revocation or amendment of the decision shall take effect from the date of notification. However, in exceptional cases where the legitimate interests of the person to whom the decision is addressed so require, the customs authorities may defer the date when revocation or amendment takes effect."
  15. The letter is odd in invoking both Articles 9(1) and 12(5)(a)(i). The former requires notification; the latter does not. The holder was in fact notified in accordance with Article 9(3). The dates on which they take effect are potentially different: the date of notification (with the possibility of postponement) in the former; the date of publication in the latter (we assume that this must mean the date it enters into force). The date of revocation was stated to be effected in accordance with both Article 9(4) (which implies that a decision to apply a postponement was made under article 9(4)) and Article 12(5). The reason for upholding the revocation decision, that the BTI "no longer conforms to the law laid down thereby" [i.e. by the Regulation] is a quotation from the latter. These suggest that at least at the time of the review decision, which is what is the subject of the appeal, the Commissioners saw the automatic effect of the Regulation and the revocation of the BTI as two separate things.

  16. We entirely agree with Mr Clough that the hands of the Commissioners were tied by the Regulation but it seems to us that they were not entirely tied. For example, they could have revoked the BTI by notice earlier than the Regulation entered into force (although in the circumstances in article 12(6)—that there had been binding contracts for the purchase or sale of the Products—the Regulation itself provides for the BTI to continue to be invoked for three months). As it is, they made a decision that both took effect on the same day. We consider that this analysis means that the revocation of the BTI under article 9(1) was a separate act from its automatically ceasing to be valid under article 12(5)(a)(i) by virtue of the Regulation. Now that the Regulation has been annulled retrospectively there is no reason why the revocation should not stand, unless this is prevented by the Commissioners not giving the correct reason for the revocation at the time.

  17. Mr Clough contends that even if the revocation was on the ground that the correct classification was 9504 new reasons cannot be introduced with retrospective effects. The only reason given at the time was the issue of the Regulation. He contends that the Commissioners are not entitled to introduce reasons with retrospective effect because the Appellant has a right of appeal which requires them to know the reasons for the contested decision before lodging an appeal. The decision in Customs and Excise Commissioners v Alzitrans [2003] EWHC 75 (Ch) that the Commissioners could put forward reasons supporting a deemed refusal to restore excise goods because of the absence of a review during the time limits was limited to this type of case. He contends that the introduction of new reasons invalidates the Appellant's rights under Community law which protect the Appellant's rights under the BTI deriving from directly applicable Community law.

  18. Mr Beal points out that there is a duty on Community bodies to state reasons under article 253 (ex 190) EC

    19. "Regulations, directives and decisions adopted jointly by the European Parliament and the Council, and such acts adopted by the Council or the Commission, shall state the reasons on which they are based and shall refer to any proposals or opinions which were required to be obtained pursuant to this Treaty."

    Even if this duty were transposed to the Commissioners operating at a domestic level, they did state reasons in the review decision that the BTI no longer conforms to the law laid down by the Regulation. In the light of the annulment of the Regulation, this has been shown to be incorrect but the fundamental proposition that the BTI's classification was wrong in law has not changed. This is not a case where later reasons contradict earlier reasons, as had been the case in R v Westminster City Council ex p. Ermakov [1996] 2 All ER 302.

  19. It seems to us that one must consider the context in which this dispute arises. One is required to treat the Regulation as valid until it was annulled. Although the Appellant stated from the beginning that it considered that the Regulation was invalid for the same reason as the CFI, until the CFI decided this the Regulation was valid. The Commissioners were consistent in their reason for revoking the BTI: that its classification was wrong in law. Clearly any detailed reasons which the Commissioners had at the time had to take into account the validity of the Regulation. Now that they know that the Regulation has been annulled it must be open to them to put forward new reasons supporting their conclusion in the light of the new circumstances. The only limit is that the Appellant must be in a position to challenge the reasons in an appeal. That is completely satisfied in this case. New reasons were given by the Commissioners in a letter of 25 February 2004 and at the same time in their statement of case. The Tribunal has jurisdiction to decide the issue of law of whether the classification was correct; this is not a review jurisdiction where the stated reason for the decision is important to the determination of its reasonableness, as Blackburne J stated in Alzitrans at [53]:

    20. "53. I add one further note. It is a matter I have touched on earlier. Although the 1994 Act does not require the Commissioners to give reasons, it is axiomatic, if the complainant is to have any ground for challenging a review in other than the plainest case, that he be told the reasons for the review decision. In Anthony Hendy v Commissioners of Customs and Excise (a decision of the VAT and Duties Tribunal of 11 January 2002), the view was expressed that a determination on a review without reasons was not a proper compliance with section 15 of the 1994 Act and that, having regard to Articles 6(1) and Article 1 of the Protocol 1 to the Convention, it must be implicit that reasons for the decision under review are adequately stated. I agree. This does not require the giving of lengthy reasons particularly if, as will almost inevitably be the case, the owner of the vehicle will be anxious to recover his vehicle with the result that there is likely to be a degree of urgency about the matter. Reasons should have been given for the Commissioners' decision in this case but, in circumstances that I have explained, this did not happen until the statement of case was lodged in opposition to Alzitrans' appeal to the Tribunal. That was scarcely satisfactory. All that is now in the past but I express the hope that it should not be necessary to draw attention to this need on a future occasion."

    The position here is different. Unlike a Community body which, as demonstrated in the Sony case, must state the correct reasons for regulations, directives and decisions, here the issue is whether the Commissioners were right or wrong in law in revoking the BTI. It is not unusual for the Commissioners to adopt new legal arguments in the course of an appeal in this Tribunal. Accordingly, we do not consider that the revocation decision is invalid because the Commissioners put forward different reasons, in the light of the annulment of the Regulation for the classification being wrong, as they had always contended.

    Was the revocation correct in law?
  20. Article 9 enables the Commissioners to revoke the BTI where "one or more of the conditions laid down for its issue were not or are no longer fulfilled." This has been interpreted by the Court (not following the Advocate General) in Timmermans Transport & Logistics BV Cases C-133/02 and 134/02 to include a changed interpretation:

    21. "25 Where, on more detailed examination, it appears to the customs authorities that that interpretation is wrong, following an error of assessment or evolution in the thinking in relation to tariff classification., they are entitled to consider that one of the conditions laid down for the issue of a BTI is no longer fulfilled and to revoke that BTI with a view to amending the tariff classification of the goods concerned.
    …
    28 In the light of the foregoing, the answer to the question referred must be that Article 9(1) read in conjunction with Article 12(5)(a)(iii) of the Customs Code must be interpreted as meaning that they provide the customs authorities with a legal basis for withdrawing a binding tariff information where those authorities change the interpretation given therein of the legal provisions applicable to the tariff classification of the goods concerned.

    Of course, since this judgment was given only on 22 January 2004 the Commissioners did not know that this was the case but the decision is declaratory of the law. The Commissioners could therefore have revoked the BTI on 25 July 2001 if they thought it was wrong in law. Had they addressed their minds to it at the time they could have concluded that it was wrong in law because the Regulation said so. The question for us is whether, now that the Regulation has been annulled, the BTI was wrong in law.

  21. Because of the way in which Mr Clough argued the case, he did not address us on this issue. We assume that for tactical reasons he did not do so in reply either. Our decision is therefore made without the benefit of the Appellant's arguments but on the other hand, we now have a wealth of views from various bodies on the matter.

  22. The first possible classification is 8471 50 90 00:

    23. "8471 Automatic data processing machines and units thereof; magnetic or optical readers, machines for transcribing data onto data media in coded form and machines for processing such data, not elsewhere specified or included:
    8471 50 Digital processing units other than those of subheadings 8471 41 and 8471 49, whether or not containing in the same housing one or two of the following types of unit: storage units, input units, output units:
    8471 50 90 Other"

    Chapter 84 begins with a series of notes, subheading notes and additional notes. Note 5(A) states:

    "(A) For the purposes of heading No 8471, the expression "automatic data-processing machines" means:
    (a) digital machines, capable of
    (1) storing the processing program or programs and at least the data immediately necessary for the execution of the program;
    (2) being freely programmed in accordance with the requirements of the user;
    (3) performing arithmetical computations specified by the user; and
    (4) executing, without human intervention, a processing program which requires them to modify their execution, by logical decision during the processing run;…".

    In paragraph 106 of the judgment in the Sony case in it was stated to be common ground that the Product satisfies the conditions in Note 5(A)(a).

    Note 5(E) states:

    "(E) Machines performing a specific function other than data processing and incorporating or working in conjunction with an automatic data processing machine are to be classified in the headings appropriate to their respective functions or, failing that, in residual headings."

    In paragraph 106 of the judgment in the Sony case in it was stated that the parties agreed that the Product does not perform any function other than data processing.

    Note 1 to Section XVI provides that: "This section does not cover…(p) articles of Chapter 95."

  23. The Second possible classification is 9504 10 00:

    24. "9504 Articles for funfair, table or parlour games, including pintables, billiards, special tables for casino games and automatic bowling alley equipment:
    9504 10 00 Video games of a kind used with a television receiver"

    The HSEN to heading 9504 provides that "The heading also excludes…(b) machines and apparatus fulfilling the conditions of Note 5(A) to Chapter 84, whether or not capable of being programmed for video games (heading 8471)…".

  24. The general rules of interpretation in Chapter A of Part I of the Combined Nomenclature lay down the following principles:

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

    26. …
  26. When by application of rule 2(b) or for any other reason, goods are prima facie classifiable under two or more headings, classification shall be effected as follows:

    27. ...
    (b) Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3(a), shall be classified as if they consisted of the material or component which gives them their essential character in so far as this criterion is applicable.
    (c) when goods cannot be classified by reference to 3(a) or (b), they shall be classified under the heading which occurs last in numerical order among those which equally merit consideration.
    …
  27. For legal purposes, the classification of goods in the subheadings of a heading shall be determined according to the terms of those subheadings and any related subheading notes and mutatis mutandis to the above rules, on the understanding that only subheadings at the same level are comparable. For the purposes of this rule the relative section and chapter notes also apply, unless the context otherwise requires."

  28. The confusion in the categorisation of the Product has no doubt arisen because Note 1(p) excludes from 8471 items within Chapter 95, while the HSEN to Chapter 95 sends one back to 8471. The Sony case does not decide the correct categorisation but the CFI makes the following points:

    29. "106 It should be recalled, as a preliminary point, that it is common ground between the parties that the PlayStation®2 satisfies the conditions laid down by Note 5(A) to Chapter 84 and may thus be considered to be an automatic data-processing machine. Therefore, that product may be classified under heading 8471, which is defined as covering: '[a]utomatic data-processing machines and units thereof, magnetic or optical readers, machines for transcribing data into data media in code form, machines for processing such data, not elsewhere specified or included.' Likewise, the parties agree that the PlayStation®2 does not perform any 'specific function other than data processing' as that concept has been interpreted by the Court of Justice (see, especially, Peacock, cited in paragraph 103 above, paragraphs 16 and 17).
    107 The parties do not agree, however, on the possibility of classifying the PlayStation®2 under heading 9504, more specifically under subheading 9504 10. The applicant takes the view that because the product satisfies the conditions laid down by Note 5(A) to Chapter 84 and does not perform any specific function within the meaning of Note 5(E) to that chapter, it is not capable of being classified under subheading 9504 10 because, according to it, the classification of an automatic data-processing machine cannot depend on the type of data file which is being processed by that machine.
    …
    111 Such reasoning can also be applied to a case such as this one. Thus, in the absence of a definition of 'video games' for the purposes of subheading 9504 10, it is appropriate to consider as video games any products which are intended to be used, exclusively or mainly, for playing video games, even though they might be used for other purposes.
    112 It is, moreover, undeniable that, both by the manner in which the PlayStation®2 is imported, sold and presented to the public and by the way it is configured, it is intended to be used mainly for playing video games, even though, as is apparent from the contested regulation, it may also be used for other purposes, such as playing video DVDs and audio CDs, in addition to automatic data processing.
    113 This finding is corroborated by numerous documents, in particular the brochures and other promotional information relating to the PlayStation®2 which the parties have produced in these proceedings. Those documents show clearly that the PlayStation®2 is marketed and sold to consumers mainly as a video game console, even though it may also be put to other uses. In addition, the various answers given by the applicant during the presentation of the PlayStation®2 to the Nomenclature Committee on 27 February 2001 show that consumers perceive the PlayStation®2 mainly as a game console. Also, the description of the product contained in column 1 of the table in the Annex to the contested regulation shows that the PlayStation®2 is packaged for retail sale as a video game console, since it is presented with a 'controller module [with] several control buttons, which are mainly used for playing video games,' as well as connector cables. On the other hand, the other units, such as standard keyboard, mouse and ADP monitor to which it can be connected are sold separately, a point confirmed by the applicant.
    114 In addition, neither the wording of subheading 9504 10 nor the section and chapter notes pertaining thereto contain any indications, much less limitations, as to the operation and/or the composition of the products coming thereunder. It follows that, contrary to what the applicant maintains, the mere fact that the PlayStation®2 may operate as an automatic data-processing machine and that video games are only one type of file that it can process does not by itself preclude its being classified under subheading 9504 10, since it is quite clear that it is intended mainly to be used to run video games.
    115 Contrary to what the applicant maintains, this finding is not affected by HSEN(b) to heading 9504, which provides that that heading does not cover 'machines and apparatus fulfilling the conditions of Note 5(A) to Chapter 84, whether or not capable of being programmed for video games (heading 8471)'.
    116 It is true that, according to settled case-law, the HSENs constitute an important means of ensuring the uniform application of the Common Customs Tariff by the customs authorities of the Member States and as such may be considered a valid aid to the interpretation of the tariff. However, those notes do not have legally binding force so that, where appropriate, it is necessary to consider whether their content is in accordance with the actual provisions of the Common Customs Tariff and whether they alter the meaning of such provisions (Case C-35/93 Develop Dr. Eisbein [1994] ECR I-2655, paragraph 21).
    117 Moreover, if HSEN(b) to heading 9504 were to be interpreted as not covering all products which fulfil the conditions of Note 5(A) to Chapter 84, including products intended to be used mainly for playing video games, as advocated by the applicant, that note would in effect modify and, more specifically, limit the scope of that heading and subheading 9504 10; this cannot be accepted.
    118 Lastly, the Court does not accept the applicant's argument that the classification of an automatic data-processing machine according to the type of file processed would place an undue limitation on the scope of heading 8471 because it would introduce a new rule expanding the 'specific function' requirement of Note 5(E) to Chapter 84 to include all functions covered by any other heading or subheading of the Combined Nomenclature. It is true that, as found in paragraph 106 above, the PlayStation®2 does not perform any 'specific function other than data processing' and that the playing of video games is not one of its specific functions per se. However, the mere fact that an apparatus fulfils the conditions of Note 5(A) to Chapter 84 and does not perform any specific function other than data processing for the purposes of Note 5(E) to that chapter does not by itself preclude such an apparatus from being classified under another heading.
  29. At this point the CFI has found the Product is capable of being classified within both 8471 (which was common ground) and 9504, notwithstanding the contrary statement in HSEN (b), which is not legally binding. The Regulation had relied on GIR 3(b) to resolve the conflict, about which the CFI said:

    30. 119 Since it has been established that, contrary to what the applicant maintains, the PlayStation®2 can be classified under heading 9504, it is appropriate at this point to examine whether, as the applicant submits in the second part of its argument, the defendant committed an error of law by determining, on the basis of general rule 3(b), the classification of the PlayStation®2, having regard to the function which gives it its essential character.
    120 The Court finds, as is apparent from the reasons given in column 3 of the table in the Annex to the contested regulation, that the defendant determined the classification of the PlayStation®2 on the basis of the finding that '[o]f the various functions (including playing video games, playback of CD audio, DVD video, automatic data processing, etc.), playing video games gives the apparatus its essential character'. In its written pleadings and at the hearing, the defendant confirmed that it had applied general rule 3(b).
    121 According to its wording, general rule 3(b) applies only '[w]hen by application of rule 2(b) or for any other reason, goods are prima facie classifiable under two or more headings'.
    122 General rule 3(b) also provides: '[m]ixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3(a), shall be classified as if they consisted of the material or component which gives them their essential character in so far as this criterion is applicable'.
    123 It is clear from the wording of that rule that it covers only the classification of '[m]ixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale'.
    124 Moreover, according to the clear terms of general rule 3(b), it provides for the classification of mixtures and composite goods according to the material or component which gives them their essential character. It does not provide for the possibility of classifying mixtures or composite goods according to the function which gives them their essential character.
    125 This interpretation of general rule 3(b) is confirmed by the HSEN to that rule, which provides that 'the factor which determines essential character will vary as between different kinds of goods. It may, for example, be determined by the nature of the material or component, its bulk, quantity, weight or value, or by the role of a constituent material in relation to the use of the goods'.
    126 It is also supported by the case-law of the Court of Justice, according to which, in accordance with general rule 3(b), 'it is necessary, in carrying out the tariff classification of a product, to identify, from among the materials of which it is composed, the one which gives it its essential character. This may be done by determining whether the product would retain its characteristic properties if one or other of its constituents were removed from it' (Case 253/87 Sportex [1988] ECR 3351, paragraph 8; Case C-288/99 VauDe Sport [2001] ECR I-3683, paragraph 25; and Case C-276/00 Turbon International [2002] ECR I-1389, paragraph 26; see also to that effect Case 60/83 Metro [1984] ECR 671, paragraph 15; Case C-121/95 VOBIS Microcomputer [1996] ECR I-3047, paragraphs 19 to 25; and Case C-105/96 Codiesel [1997] ECR I-3465, paragraph 22 et seq.).
    127 It is true that the defendant, in reply to a question from the Court, stated that the component which gives the PlayStation®2 its essential characteristic is the component called 'Emotion Engine'. That statement, however, is at odds with the reasons given in column 3 of the table in the Annex to the contested regulation, according to which it is the video game function which gives the apparatus its essential characteristic. The defendant also confirmed that the `Emotion Engine' is in fact nothing other than the CPU of the PlayStation®2. The CPU is the central component of all automatic data-processing machines and, accordingly, cannot justify its being classified under the heading for 'video games'.
    128 It follows that the defendant was incorrect in using general rule 3(b) as the basis for the contested regulation.
  30. The CFI therefore decided that rule 3(b) was inapplicable to determining a conflict between two functions, as opposed to two components. The CFI went on to deal with Note 1(p), stating that the Regulation could not have relied on it because if it had there would have been no need to apply GIR 3(b) since GIR 1 alone would have resolved the conflict.

    31. 129 The Court also rejects the defendant's argument that it also applied Note 1(p) to Section XVI, which states that Section XVI does not cover 'articles of Chapter 95', for the purposes of classifying the PlayStation®2.
    130 Although, contrary to what the applicant maintains, the possibility cannot be excluded that that note could be applied to determine the tariff classification of the PlayStation®2, it should be borne in mind that, according to the reasons given in column 3 of the table in the Annex to the contested regulation, in the present case classification is determined 'by the provisions of General Rules 1, 3(b) and 6 for the interpretation of the Combined Nomenclature, note 6 to Chapter 85 and the wording of the CN Codes 8524, 8524 39 and 8524 39 90 as well as 9504 and 9504 10 00'.
    131 It is clear from those reasons that the classification of the console described in column 1 was not determined on the basis of Note 1(p) to Section XVI. Contrary to the defendant's assertions in reply to a question from the Court, as well as at the hearing, it is not possible to infer from the mere mention of general rule 1 in the reasons that Note 1(p) to Section XVI was used to determine the tariff classification. General rule 1, which provides that, for legal purposes, classification is to be determined according to the terms of the headings and any relative section or chapter notes and that the other general rules can apply only where such headings or notes do not otherwise require, is far too imprecise to allow those concerned to understand that the classification in this case was determined on the basis of Note 1(p) to Section XVI, as the defendant maintains. Furthermore, the obligation to state reasons which is incumbent on the defendant when it adopts a tariff classification regulation requires the Commission to state clearly the legal basis for the classification, in order to inform the persons concerned of the justification for the measure adopted and to enable the Community Court to exercise its powers of review (see, to that effect, Joined Cases C-63/90 and C-67/90 Portugal and Spain v Council [1992] ECR I-5073, paragraph 16; Case C-353/92 Greece v Council [1994] ECR I-3411, paragraph 19; and Joined Cases C-9/95, C-23/95 and C-156/95 Belgium and Germany v Commission [1997] ECR I-645, paragraph 44). A simple reference to general rule 1 did not fulfil that obligation.
    132 The Court also notes that, even if headings 8471 and 9504 were the only headings under which the PlayStation®2 could have been classified, it would not have been possible to apply Note 1(p) to Section XVI and general rule 3(b) jointly to determine its final classification. In that scenario, Note 1(p) to Section XVI alone would have sufficed to classify the PlayStation®2 under heading 9504, thereby excluding the application of the general rules, especially general rule 3(b) which, in accordance with general rule 1, applies only when headings or section notes do not otherwise require.
    133 In the light of all the foregoing, the Court finds that the defendant committed an error of law in determining the classification of the game console described in column 1 on the basis of general rule 3(b). In addition, since it is common ground between the parties that a possible error in the classification of the console automatically entails the invalidity of the classification of the accompanying CD-ROM, the Court finds that the defendant also committed an error in that regard.
    134 Accordingly, without its being necessary to examine the plea alleging failure to state reasons, the contested regulation must be annulled in so far as it classifies the console described in column 1 of the table in the Annex to that regulation under CN Code 9504 10 00 and the accompanying CD-ROM under CN Code 8524 39 90.
  31. The CFI therefore merely concluded that the Regulation was bad in law for having relied on GIR 3(b) without going any further. But the CFI did say "Note 1(p) to Section XVI alone would have sufficed to classify the PlayStation®2 under heading 9504." The Commission had not relied on Note 1(p) in issuing the Regulation and so could not rely on it to justify it later, but we can. Even if for some reason this did not apply, the application of GIR 3(c) results in the higher number applying which is again 9504. Accordingly we classify the Product under 9504, in full 9504 10 00.

  32. We are fortified in this conclusion by the fact that the Commission services expressed the same view to the Commissioners on 8 January 2004 in reply to the Commissioners' request for advice about what they should do following the Sony case which had put forward the same arguments as the Appellant did before us. The HSC by 28 votes to 9 came to the same conclusion "by application of GIR 1 (Note 1(p) to Section XVI) and 6." This has not yet been published in legally binding form.

  33. It follows that the BTI classification under 8471 is wrong in law and the Commissioners can use that ground as justification for having revoked the BTI. As we have already concluded the fact that the Commissioners did not rely on this reason at the time does not prevent them from relying on it now. It is not a case of the Appellant being deprived of the judgment in the Sony case; the CFI merely upset the Regulation's legal reasoning and left open that the result was unaltered.

  34. From 31 July 2001 when the BTI was revoked, classification under 9504 therefore applies. Before that date the Direction allowing the appeal in the previous Tribunal proceedings by consent had been given on 5 June 2001, and the BTI was amended on 12 June 2001 to 8471. The covering letter of 12 June 2001 states: "This [the BTI] has been amended in accordance with the Tribunal Decision dated 5 June, following the hearing on 30 May. The start date of validity remains 19 October 2000." Mr Beal contended that a BTI could not have retrospective effect because by article 9(4) of Regulation 2913/92 an amendment decision favourable to the person concerned takes effect from the date of notification (with power to defer its effect), or if unfavourable a BTI takes effect from the date of issue under article 12(4); while Mr de Baere contended that a retrospective amendment in favour of the Appellant could have effect. It is not necessary for us to decide this point which has not been fully argued. In allowing the previous appeal by consent it was the understanding of the parties, as shown by the Commissioners' letter of 12 June 2001, that the BTI's original classification under 9504 was wrong and that the direction by consent meant that the classification was 8471. Whether or not it was correct for the original BTI to be amended retrospectively the Tribunal had effectively declared its classification to be wrong on 5 June 2001 and so, at least in relation to the Appellant, classification 8471 applied from that date, and the BTI was amended to confirm that classification on 12 June 2001. That classification applied until the BTI was revoked with effect from 31 July 2001.

  35. We did not understand the Appellant to argue that it had a legitimate expectation that duty would be repaid even though not lawfully due, but we agree with Mr Beal that no precise assurance was given by any Community authority that repayment would be made (see Mehibas Dordtselan BV, Case T-290/97 paragraph 59 to 64), with the result that it had no such legitimate expectation.

  36. In summary, as a result of the Tribunal's Direction by consent on 5 June 2001 the classification of the Product was under 8471, until the revocation of the BTI on 31 July 2001 when it became 9504.

  37. Accordingly we dismiss the appeal. The Commissioners ask for costs. We award them the costs of and incidental to and consequent upon the appeal to be assessed in the absence of agreement in accordance with Regulation 29(1)(b) of the VAT Tribunals Rules 1986.

    38. J F AVERY JONES
    CHAIRMAN
    RELEASE DATE: 15 October 2004

    LON/01/7098

Note 1   OJ (2001) L 189/5. Corrigendum published in OJ (2001) L 181/49.     [Back]

Note 2   The reference to Mbits is incorrect, it should read MB or Mega Byte    [Back]

Note 3   The “graphics chip” has been listed twice by mistake.    [Back]

Note 4   Corrigendum published in OJ (2001) L 191/49.    [Back]

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