United Kingdom VAT & Duties Tribunals (Customs) Decisions

Arcadia Group Limited v Revenue and Customs [2006] UKVAT(Customs) C00211 (28 February 2006)

CO211

CUSTOMS DUTY – customs value of imported goods - Appellant imports goods from outside the member states and initially pays the full amount of the invoice to the supplier –the contract between the Appellant and the supplier provides that, if the goods do not meet the contractual standards, then the Appellant will carry out remedial work and send a debit note to the supplier –remedial work carried out by Appellant before goods released for free circulation - at the time the goods are released for free circulation the amount payable by the Appellant to the supplier is the net amount of the invoice less the charges for the remedial work - whether the customs value of the imported goods is the amount invoiced by the supplier – no – or the net amount which remains after the charges for the remedial work have been deducted from the amount invoiced – yes – appeal allowed - Council Regulation (EEC) No 2913/92 (The Community Customs Code) Art 29

LONDON TRIBUNAL CENTRE

ARCADIA GROUP LIMITED

Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS

Respondents

Tribunal: DR A N BRICE (Chairman)

MR R K BATTERSBY

Sitting in public in London on 5 and 6 December 2005

Valentina Sloane of Counsel, instructed by KPMG LLP, for the Appellant

Philippa Whipple of Counsel, instructed by the Acting Solicitor of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006


 


DECISION

The appeal

1. Arcadia Group Limited (the Appellant) is based in the United Kingdom and is a retailer which sells garments to the public. Its group contains such household names as Top Shop/Top Man Limited, Dorothy Perkins Retail Limited, Burton Retail Limited, Evans Limited and Principles Retail Limited. The Appellant imports garments into the United Kingdom from countries outside the member states. The Appellant's contract with its suppliers provides that, where imported goods arrive in a faulty condition, the Appellant will undertake remedial work and debit the supplier with an appropriate charge.
2. On 9 February 2001 the Appellant sent to the Respondents two repayment claims for the amounts of £86,953.43 and £81,058.88 respectively making a total of £168,012.31.The claims related to customs duty on importations in 1998, 1999 and 2000. The claims were made because the Appellant had accounted for customs duty on the full price of certain importations. However, after the goods had entered the European Community, but before they were released for free circulation, the Appellant had remedied defects in the goods and had informed the suppliers of the debit charge for the remedial work.
3. On 4 February 2001 the Respondents refused to pay the claims. This decision was upheld on review on 1 July 2002. After the review decision correspondence took place between the parties and on 8 January 2004 the review decision was confirmed on different grounds.
4. The Appellant appealed because it was of the view that the customs value of the imported goods was the price actually paid by the Appellant to the supplier, that is the amount of the original invoice sent to the Appellant by the supplier less the amount of the charge for remedial work debited by the Appellant to the supplier.

The issue

5. Thus the issue for determination in the appeal is whether the value of the goods for the purposes of customs duty is the net amount which remains after the charges for the remedial work have been deducted from the amount invoiced by the supplier (as argued by the Appellant) or the full amount invoiced by the supplier (as argued by the Respondents).

The evidence

6. A bundle of documents was produced by the parties. Oral evidence was given on behalf of the Appellant by Mr Robert Keith Inglis, the Appellant's Head of Imports and Ms June Richardson, the Appellant's Supplier Manager. Witness statements containing evidence on behalf of the Respondents, and given by Mr Victor Richard Palmer, then a Senior Officer of HM Customs and Excise, and Mr David Christopher Wythe, then a Senior Officer of HM Customs and Excise, were not objected to by the Appellant and so were admitted in evidence at the hearing as evidence of the facts stated in them.

The facts

7. From the evidence before us we find the following facts.

The Appellant's contracts with its suppliers

8. The Appellant purchases goods from a very large number of suppliers, including suppliers who are outside the member states. The conditions of trade which apply to all contracts between the Appellant and its suppliers are contained in a Supplier Handbook (the Handbook). The Handbook outlines the minimum standard of service which the Appellant requires from its suppliers. It is 269 pages long and very detailed. The aim of the Handbook is said to be to reduce time and costs and to remove error from the supply chain in order to meet the needs of the Appellant's customers in a cost effective way. This is to be done by keeping to quality assurance requirements, meeting the packing, labelling, documentation and shipping instructions for imports, and keeping to the trading conditions. In particular, the Appellant requires that the goods which it imports should be "ready for the shop" with the correct labels and barcodes. All these matters are fully described in the Handbook which contains separate sections dealing with, for example, components and trims, manufacturing guidelines, presentation guidelines, export packaging, hanging merchandise, delivery loading sequences, delivery procedures etc, etc.
9. The Handbook contains a section entitled "General Conditions of Trading". This section provides that, where goods do not comply with the contractual terms, the Appellant can reject them or "take off an amount to cover our losses arising from your not keeping to the agreement". The Handbook also provides that, if the goods do not meet the contractual terms, the supplier must pay for the Appellant's warehouse costs, administration costs, storage costs and other relevant costs. The Handbook later states that the Appellant does not intend to make money from charging suppliers for poor performance; charges are set at rates which would only cover the disruption to planned work. They are set at realistic rather than penalty rates. The Appellant aims for all stages of the supply chain to be efficient and accurate so that it does not need to make any charges. The Appellant prefers not to reject goods but to process them to bring them up to standard and then to deduct an amount from the invoice price.
10. When the Appellant contracts with a supplier it agrees a price which assumes compliance with the conditions set out in the Handbook. Failure to comply with any condition is, therefore, a breach of contact and renders the importation of less value to the Appellant who has to carry out remedial work to bring the importation up to the required standard. The contract with the supplier, therefore, provides for the Appellant to reduce the price of the importation when the supplier fails to comply with any of the conditions in the Handbook. For simplicity, efficiency and certainty the Appellant has standardised the amount by which it will reduce the price of sub-standard goods and the Handbook sets out standard charges for different categories of faults.
11. Section 3 of the Handbook sets out the charges that are made to suppliers when they supply defective goods. The charges have been standardised and include the cost of processing (doing the remedial work), the cost of inspection and administration, the cost of reporting and notification to the supplier and the cost of loss of sales while the goods are being processed (but not loss of profit on sales). These are the costs suffered by the Appellant because the goods are defective. For example, there is a charge of 25 pence for tagging, de-tagging, re-tagging or re-boxing and of 50 pence for splitting a pack into singles. There is a minimum charge of £50 per consignment and a maximum charge of 5% of the selling price of the goods. When the charges were fixed the Appellant undertook time and motion studies so that the charges would reflect the time taken to do the remedial work.
12. The Handbook defines a debit note as:

"This is a note we raise to cover for example shortages, items not delivered, handling charges or processing charges. Basically the figure on the debit note is the amount of your invoice which we will not pay."

.

13. We accept the evidence of Mr Inglis that, if goods are not compliant with the contract terms, they have to be extracted from the supply chain so that they can be rejected or remedied. The terms and conditions provided that, if goods did not comply with the contract terms, the Appellant could reject them or could take off an amount to cover its losses arising from the supplier not keeping to the agreement. The Appellant's preference was not to reject the goods but to process them in order to bring them up to standard and to take an amount off the price to cover the Appellant's losses. For simplicity, consistency and ease of application the reductions in price had been standardised and a system of charges had been developed which were intended to be a realistic and fair reflection of the loss suffered by the Appellant in respect of each kind of defect. The charges included the cost of the remedial work, the cost of administering the remedial work; the administration of the processing; reporting the defaults to the supplier; and costs arising from loss of sales. Thus the charges reflected the loss suffered by the Appellant as a result of the goods not being in accordance with the contractual terms. The Appellant made no profit from the charges.

A typical supply chain

14. Mr Inglis provided us with the chronology of a typical supply chain which we accept as applying to the importations the subject of this appeal. On a typical importation the supplier despatches the goods to the Appellant on day 0. On day 7 the supplier asks the Appellant for payment (through banking channels) of the full amount of the invoice. On day 12 the Appellant's bank presents the call for payment to the Appellant. On day 15 the Appellant has an irrevocable commitment to pay within 30 days and, in accordance with international banking rules, acceptance or rejection must be in full; there is no option to part pay or offset an outstanding debit note. The goods arrive in the United Kingdom on day 21 and on that day the simplified entry (under the customs freight simplified procedures) is carried out. It normally takes a week to unload a consignment and so on day 28 the goods will have arrived in temporary storage at one of the Appellant's distribution centres. On days 28 and 29, while the goods are in temporary storage, the goods are inspected and the documents checked, in order to verify the quantity of the goods and whether the quality complies with the terms of the Handbook.
15. If the goods are up to standard then, on day 29, a goods received note is entered into the Appellant's stock records and that authorises payment to the supplier. The goods are then taken into the Appellant's customs warehouse and the Appellant sends a supplementary declaration of importation to the Respondents. When the goods are required in one of the Appellant's stores they leave customs warehousing and go into free circulation. The goods do not usually stay long in the customs warehouse because the Appellant likes to put all the goods into its stores as soon as possible. When the goods are released for free circulation the tax point occurs and at that stage the goods enter a different customs regime. A form is submitted by the Appellant to the Respondents at the end of the month in which the goods are released for free circulation and that triggers the liability to account for customs duty which is payable by the fifteenth day of the following month. Thus the Appellant pays customs duty when the goods are released for free circulation. In connection with the importations the subject of this appeal the customs value of the goods which were up to standard was treated as the full invoice value.
16. If the goods are not up to standard then this will be detected by the Appellant's staff employed to examine the goods in temporary storage. They have hand held computer terminals. If on days 28 and 29 defects are detected in the goods then the fault is entered into the hand held terminal and the computer raises a processing order recharge form and immediately and automatically sends an email to the supplier informing the supplier of the defects and the approximate charge for remedying them. If the supplier wants further information he may ask for it. On days 28 to 35 the Appellant will process the goods by carrying out remedial action either internally or by contracting out to third parties. This work is undertaken while the goods are in temporary storage and before they have been entered for any customs regime. Once the remedial work has been completed the processing order recharge form is validated and entered onto the Appellant's computer and the supplier is notified that his account with the Appellant will be debited. Between days 35 to 42 the supplier is sent a further email, and then a letter, with an indication of the exact charges which the Appellant will make and which will reduce the price the Appellant will pay. The Appellant then debits the supplier's account. On the same day the finished goods are entered into the Appellant's stock records, a goods received note is issued and thereafter the goods are treated as perfect goods.
17. Thus before day 43 all the goods (both perfect and defective) will have been released for free circulation and put into the Appellant's shops. At the point when the goods are released for free circulation the Appellant will have paid to the supplier the full invoice price and will have paid customs duty on the full invoice price but the transaction is not yet complete. On days 49 to 56, when the supplier will have had two weeks to query the charges, a debit note is issued to the supplier by the Appellant and that debt is recovered by the Appellant. We accept the evidence of Mr Inglis that a debit note is issued rather than an invoice because the debit note is an adjustment by the Appellant to the invoice already issued by the supplier and provides the supplier with an accounting basis on which to make settlement. It also reflects the fact that the invoice price was the agreed price for perfect goods but not for defective goods. A credit note would only entitle the Appellant to adjust a future invoice from the same supplier and there might not be a future supply from that supplier.
18. The transaction is completed when the supplier settles the amount of the debit note by means of bank transfer or cheque. As far as the transactions the subject of this appeal are concerned, it was at that stage that the Appellant sought recovery of the customs duty previously overpaid and recovery was sought only when the debit note had actually been paid by the supplier.
19. Where goods were sent by airfreight they arrived at the distribution centre earlier but otherwise the same procedures were followed.

The legality of work undertaken in temporary storage

20. On 26 June 2000 the Respondents informed the Appellant that they had been unsure of the degree of handling of goods which was allowed when the goods were in temporary storage. They had sought further clarification from the European Commission who had referred to Article 52 of Council Regulation (EEC) No 2913/92 (the Community Customs Code) which stated that the only form of handling allowed for goods in temporary storage was such as was "designed to ensure their preservation in an unaltered state without modifying their appearance or technical characteristics". The Respondents went on to say that the other processes which had previously been accepted as appropriate for taking place in temporary storage, such as the pressing or re-labelling of garments, might no longer be considered as acceptable,
21. The Appellant replied on 24 July 2000 and asked for some clarification and on 7 August 2000 the Respondents replied accepting some of the points made by the Appellant. The Respondents' letter concluded by saying "I will be consulting other colleagues regarding possible action (and problems) but in the meantime I suggest you follow your current practices". On 17 October 2003 the Respondents required the Appellant to stop carrying out remedial work on goods while they were in temporary storage. The Appellant immediately complied with that requirement.

The arguments

22. It was agreed that the customs value of goods was the price actually paid or payable and that the material time for determining the customs value was when the goods were released for free circulation.
23. For the Appellant Ms Sloane argued that, in this appeal, the price actually paid or payable on the date that the goods were released for free circulation was the reduced price because by then the supplier had been notified of the faults and the charges which would be debited to him. The Appellant had initially accounted for customs duty on an amount which did not reflect the price in fact payable for those goods and was therefore entitled to the repayment claimed.
24. For the Respondents Ms Whipple first argued that the price reduction made by the Appellant was either a charge to compensate for losses and/or a penalty rather then a reflection of the diminution of the value of the imported goods. Secondly, she argued that the price reduction was a charge within the meaning of Article 33 of the Community Customs Code and, as it was not specifically mentioned in Article 33, it could not be deducted. Thirdly, she argued that the Appellant's claim did not meet the requirements in Article 145 of Commission Regulation (EEC) No 2454/93 (the Implementing Regulation). And, finally, she argued that the fact that the remedial work was unlawfully carried out while the goods were in temporary storage affected the customs value of the goods.
25. In reply the Appellant argued that the price reduction was not a charge but that the debit note had the same effect as a credit note or discount issued by the supplier. Secondly, it argued that the general rule was contained in Article 144 of the Implementing Regulation which applied in this appeal; Article 145 contained derogations from Article 144 in circumstances which did not apply in this appeal. Finally the Appellant argued that the fact that the remedial work might have been unlawful did not affect the customs value of the goods and, in any event, the work had been carried out with the knowledge and endorsement of the Respondents.

Reasons for Decision

26. In approaching the arguments of the parties we first consider what is the customs value and what is the material time for determining the customs value. We then have to decide upon the effect of the price reduction in this appeal. There appears to be no legislation or authority which deals directly with a price reduction made by way of debit note such as was used in this appeal. However, there are provisions and authorities which deal with similar matters and these were relied upon by both parties. The arguments raised the following questions: is the price reduction a charge to compensate the Appellant for losses and/or a penalty rather than a reflection of the diminution of the value of the goods? Is the price reduction a charge within the meaning of Article 33 of the Community Customs Code? Is the price reduction to be treated like a cash discount or a credit note? Are Articles 144 and/or 145 of the Implementing Regulation relevant? And does the fact that the remedial work was unlawfully carried out while the goods were in temporary storage affect the customs value of the goods?
27. Thus the questions we have to consider are:

(1) What is the customs value?

(2) What is the material time for determining the customs value?

(3) Is the price reduction a charge to compensate for loss and/or a penalty?

(4) Is the price reduction a charge within Article 33 of the Code?

(5) Is the price reduction to be treated like a cash discount or credit note?

(6) Are Articles 144 and/or 145 of the Implementing Regulation relevant?

(7) Does the fact that the remedial work was carried out illegally affect the custom value?

28. After considering each of these questions separately we stand back and consider the issue in the appeal.

(1) What is the customs value?

29. The first question concerns the customs value. We are indebted to Ms Sloane for her careful summary of the framework of the legislation.
30. In 1968 customs value was the open market value. The original Community legislation about valuation was Council Regulation (EEC) No 803/1968 dated 27 June 1968. Article 1 provided:

"1. For the purposes of applying the common customs tariff, the value for customs purposes of goods imported shall be taken to be the normal price, that is to say, the price which they would fetch … on a sale in the open market between a buyer and seller independent of each other."

31. Originally the General Agreement on Tariffs and Trade (GATT 1994) also provided that the value for customs purpose was the "normal price" or "open market" price. The provisions were contained in Article VII as:

"2(a) The value for customs purposes of imported merchandise should be based on the actual value of the imported merchandise upon which duty is assessed, or of like merchandise, and should not be based on the value of merchandise of national origin or on arbitrary or fictitious values.

(b) "Actual value" should be the price at which, at a time and place determined by the legislation of the country of importation, such or like merchandise is sold or offered for sale in the ordinary course of trade under fully competitive conditions…."

32. However, later in 1994 the concept of "open market price" or "normal price" was replaced with the concept of "transaction price". Following the Uruguay Round of Multinational Trade Negotiations the contracting parties concluded an Agreement on the Implementation of Article VII of GATT 1994 (the Implementation Agreement). Part I of that Agreement related to the rules on customs valuation and Article 1 of Part I provides:

"The customs value of imported goods shall be the transaction value, that is the price actually paid or payable for the goods when sold for export to the country of importation adjusted in accordance with the provisions of Article 8 … .

33. Annex I of the Implementation Agreement contains the interpretative notes and the relevant parts of the Note to Article 1 provide:

"1. The price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. The payment need not necessarily take the form of a transfer of money. …

3. Activities undertaken by the buyer on the buyer's own account, other than those for which an adjustment is provided in Article 8, are not considered to be an indirect payment to the seller, even though they may be regarded as of benefit to the seller. The costs of such activities shall not, therefore, be added to the price actually paid or payable in determining the customs value."

34. Article 8 of the Implementation Agreement provides that certain matters shall be added to the price actually paid or payable for the imported goods and also provides that no other addition shall be made except as provided in the Article. There is no similar Article which sets out the deductions which may be made.
35. Thus the present rule for customs valuation in international trade is the price actually paid or payable.
36. In Community legislation the relevant provisions are found in Articles 28 to 36 of the Community Customs Code and in Articles 144 and 145 of the Implementing Regulation. The relevant parts of Article 29 of the Code provide:

"Article 29

1. The customs value of imported goods shall be the transaction value, that is, the price actually paid or payable for the goods when sold for export to the customs territory of the Community, adjusted, where necessary, in accordance with Article 32 and 33 …

3. (a) The price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods and includes all payments made or to be made as a condition of sale of the imported goods by the buyer to the seller or by the buyer to a third party to satisfy an obligation to the seller. The payment need not necessarily take the form of a transfer of money. Payment may be made by way of letters of credit or negotiable instrument and may be made directly or indirectly.

(b) Activities … undertaken by the buyer on his own account … are not considered to be an indirect payment to the seller, even though they might be regarded as a benefit to the seller or have been undertaken by agreement with the seller, and their cost shall not be added to the price actually paid or payable in determining the customs value of imported goods."

37. Article 32 of the Code (like Article 8 of the Implementation Agreement) sets out the additions which must be made to the price actually paid or payable and the list is exhaustive. Article 33 sets out some charges which are not to be included in the customs value.
38. Thus, in the light of both the international and the Community legislation, we conclude that the customs value of imported goods is the transaction price, namely the price actually paid or payable.
39. Applying that principle to the facts of the present appeal we express our views on the plain meaning of the words in the primary legislation. The first relevant phrase in Article 29 is "the transaction value". In our view this value has to be determined in the light of the contractual arrangements for the transaction which, in this appeal, are found in the Handbook. This makes it clear that the price paid or payable by the Appellant to the supplier is the full invoice price but only if the goods are perfect. The contractual arrangements also make it clear that, if goods are defective when they arrive, then the full invoice price will not be payable and that a deduction from the price will be made. The next relevant phrase is "the price actually paid or payable". Looking at the transaction as a whole the price actually paid or payable for defective goods is the invoice price less the amount debited to the supplier. We are supported in our view by the provisions of Article 29.3(b) which provides that any activities undertaken by the buyer are not to be added to the price actually paid or payable.
40. The Respondents relied upon Case C-15/99 Sonner GmbH v Hauptzollamt Bremen [2000] ECR-I 8989 at paragraphs 23 and 24 to support their argument that the buyer's costs of ensuring that goods were in conformity with the contract provisions were to be included within the customs value. Sonner concerned the costs of analyses designed to establish the conformity of imported goods (honey) with the national legislation of the importing member state. The German buyer (Sonner) purchased the honey, which originated in Russia, from a German company (Kessler) before the honey had been cleared through customs. The contract between Kessler and Sonner provided for Kessler to be paid the "costs of completing the transaction". These costs were invoiced separately by Kessler to Sonner and included the expenses of analysing the samples. Under German law Kessler was obliged to take samples after importation to establish that the quality of the honey complied with German regulations. Sonner declared only the price of the honey for customs purposes.
41. At paragraph 22 of its judgment the Court of Justice stated the transaction value, that is the price actually paid or payable, had to be calculated on the basis of the conditions on which the individual sale was made. Kessler contracted to deliver to Sonner honey which accorded with national regulations. The analyses performed after importation were necessary to establish the quality of the honey so that the goods were delivered in accordance with the contract. Thus the costs of the analyses had to be regarded as an integral part of the transaction value within the meaning of what is now Article 29 of the Community Customs Code because the analyses were necessary for the goods to be delivered in accordance with the contract. The costs of the analyses were therefore part of the "payments made as a condition of the sale of the imported goods by the buyer to the seller to satisfy an obligation of the seller" within the meaning of what is now Article 29(3)(a) of the Community Customs Code.
42. We therefore conclude that the price actually paid or payable has to be calculated on the basis of the conditions on which the individual sale was made. In this appeal the sellers contracted to deliver to the Appellant perfect goods but failed to do so. The remedial work was not performed to establish the quality of the goods nor was it performed so that the goods could be delivered in accordance with the contract. The goods were delivered as defective goods before the remedial work was undertaken. It was acknowledged that the goods had not been delivered in accordance with the contract and the remedial work was performed under the contract under which the seller agreed to accept a reduced price.
43. We conclude that, in this appeal, on the plain meaning of the words in Article 29, the price actually paid or payable for the defective goods is the invoice price less the amount debited by the Appellant to the supplier.

What is the material time for valuation?

44. The second question which we have to consider concerns the time for making the customs valuation. The legislation which is relevant to the material time for valuation is contained in Articles 67, 201 and 214 of the Community Customs Code.
45. Article 67 provides that the date to be used for all purposes is the date of the acceptance of the declaration by the customs authorities. Articles 201 and 214 of the Community Customs Code provide:

"Article 201

1. A customs debt on importation shall be incurred through-

(a) the release for free circulation of goods liable to import duties; or

(b) the placing of such goods under the temporary provision procedure with partial relief from import duties.

2. A customs debt shall be incurred at the time of acceptance of the customs declaration in question.

Article 214

Save as otherwise expressly provided for by this Code … the amount of import duty or export duty applicable to goods shall be determined on the basis of the rules of assessment appropriate to those goods at the time when the customs debt in respect of them is incurred."

46. Thus Article 214 provides that the amount of import duty is determined when the customs debt is incurred and Article 201 provides that the customs debt is incurred at the time of the acceptance of the customs declaration on the release for free circulation.
47. We therefore conclude that the material time for valuation is the time of the acceptance of the customs declaration on the release for free circulation which, in this Decision, we refer to as the release for free circulation.
48. Applying that rule to the facts of this appeal we find that, at the date of release for free circulation, the price paid or payable was the reduced price. At that date the Appellant had informed the supplier of the amount which would be debited to the supplier. The Respondents argued that, at the date of release for free circulation, the goods were in perfect condition and so the customs value should be the full invoice price. We do not agree because that would be to re-instate the open market value for the price paid or payable. Further, the Respondents' argument ignores the provisions of Article 29.3(b) under which activities undertaken by the buyer have to be ignored.

(3) Is the price reduction a charge to compensate the Appellant for losses and/or a penalty rather than a reflection of the diminution of the value of the goods?

49. The third question is whether the price reduction is a charge to compensate the Appellant for losses and/or a penalty or a reflection of the diminution of the value of the goods.
50. Miss Whipple for the Respondents argued that the charges made by the Appellant were in fact compensation for the supplier's breach of contract and were made to compensate the Appellant for a wide range of losses and possibly contained a penal element. They were not a reflection of the diminution in the value of the goods as required by Article 29. Even if part of the charge related to the failure to meet the specifications for the goods, that part was not separately identified. She relied upon Explanatory Note 3.1 of the Technical Committee entitled "Goods not in accordance with contract" and on the documentary and oral evidence before the Tribunal. Miss Whipple also relied upon the terms of the Handbook and the evidence of Mr Inglis and argued that these supported the view that the charges were in fact liquidated damages for breach of contract.
51. Article 18 of the Implementation Agreement established a Committee on Customs Valuation and also a Technical Committee on Customs Valuation to carry out certain designated responsibilities. In Hauptzollamt Karlsruhe v Gebrüder Hepp GmbH & Co KG Case C-299/90 [1991] ECR-I-4301 Advocate General Mishco said, in paragraphs 16 and 20 of his Opinion, that the opinions of the Technical Committee on Customs Valuation, which took various forms including explanatory notes, were persuasive and should carry "a lot of weight".
52. Explanatory Note 3.1 deals separately with damaged goods, goods not in accordance with specification, and replacement goods. As far as damaged goods are concerned, paragraph 9 provides that the method of valuation could be flexible, namely a re-negotiated price or the full price originally paid or payable reduced by an amount equal to the cost of repairs or refurbishing. As far as goods not in accordance with specification are concerned, the Note states in paragraph 10 that the customs value would be influenced by the nature of the non-conformity. Paragraph 11(ii) states that if the buyer seeks an amount of redress from the seller which is predicated on damages resulting from the non-specification rather than on a measure of the non-specification itself, then the price actually paid or payable still exists for customs valuation purposes and the value will be based on transaction value.
53. In our view the price payable in this appeal is the full price reduced by an amount equal to the cost of repairs or refurbishing. We do not consider that the Appellant is seeking redress from the seller in the form of damages for non-specification but is rather seeking charges based on a measure of the non-specification itself. We go back to the fact that the contract provides that the invoice price is the price payable but only if the goods are perfect. If the goods are not perfect then a reduced price is payable and that is the contract price or the transaction price. The price reduction is related to the non-specification and the seller knows in advance what price reduction will be made depending upon the defect. We accept the evidence of Mr Inglis that the price reduction represented the cost to the Appellant of the remedial work which followed as a result of the goods not being in accordance with the contractual terms. The charges are not meant to be a penalty and the Appellant made no profit from them.
54. We are confirmed in this view by the judgment of the Court of Justice in Hauptzollamt Itzehoe v H J Repenning GmbH [1986] ECR 1873 which was cited to us by the Appellant. There beef was imported at an invoice price. However, it was later found that the beef had been damaged by thawing before despatch which reduced the value by 17%. The contract provided for no refund of the purchase price by the seller but the buyer was indemnified by the transport insurance. The Court of Justice held, in paragraph 19, that where goods are purchased free of defects but are damaged before being released for free circulation, the price actually paid or payable, on which the transaction value is based, must be reduced in proportion to the damage suffered.
55. We therefore conclude that the price reduction is not a charge to compensate the Appellant for losses and it is not a penalty but rather that it reflects the diminution of the value of the goods to the Appellant.

(4) Is the price reduction a charge within the meaning of Article 33 of the Code?

56. The fourth question is whether the price reduction was a charge within the meaning of Article 33 of the Code.
57. The Respondents argued that the price reduction made by the Appellant could not be deducted from the full invoice price because it was not mentioned in Article 33 of the Community Customs Code. The Respondents agreed that the list in Article 33 was not exhaustive but argued that it indicated the type of deduction permitted under the Code from which the conclusion could be drawn that other types of deduction were not permitted.
58. The Appellant argued that it was artificial to call the price reduction a charge just because the amount was fixed in advance; that was done because it would be impractical for the Appellant to negotiate reductions individually. The Appellant relied upon the definition of a debit note in the Handbook. It also relied upon the preamble to the Implementation Agreement. It argued that customs values could not depend on the label which a party chose to attach to a transaction as this would undermine the need for the uniform application of the Community Customs Code repeatedly emphasised by the Court of Justice in, for example, Case C-247/04 Transport Maatschappij Traffic BV v Staatsecretaris von Economische Zaken judgment of 20 October 2005 at paragraph 27. In any event the charges mentioned in Article 33 were all charges made by the supplier to the buyer which would normally be considered part of the price paid or payable by the buyer to the seller. In the present appeal the charges were deducted by the buyer from the price it paid to the seller. Also, the charges mentioned in Article 33 were not exhaustive.
59. Article 33 of the Code provides that, provided certain named charges are shown separately from the price actually paid or payable, they are not included in the customs value. The named charges are charges for transport after arrival in the customs territory of the Community; charges for assembly or maintenance; charges for interest under a financing agreement; charges for the right to reproduce imported goods; buying commissions and import duties.
60. The preamble to the Implementation Agreement recognises the need to provide uniformity and certainty and the need to preclude the use of arbitrary or fictitious customs values.
61. We note that Article 33 appears in Chapter 3 of Title II of the Code which contains Articles 28 to 36. Thus Article 29 also appears in Chapter 3 and so both Articles should be considered together. Article 29 states the general rule and Article 33 clarifies those matters which are not included in the price paid or payable. We agree with the Appellant that customs value cannot depend on the label which a party chooses to put on a transaction; it is necessary to have regard to objective criteria and decide what the substance of the transaction is. The price reduction, or charges, made by the Appellant do not appear to us to be of the same type as the charges mentioned in Article 33. We agree with the Appellant that Article 33 refers mainly to charges made by the seller to the buyer and not, as in this appeal, a price reduction notified under the contract by the buyer to the seller. Also, Article 33 seeks to establish the price paid or payable for the imported goods, and not for services supplied by the seller or another person to the buyer, such as transport, assembly or interest.
62. We are of the view that the price reduction in this appeal is not the same type as the charges mentioned in Article 33 of the Code and so the fact that it is not mentioned in Article 33 does not lead to the conclusion that it cannot be deducted from the price paid or payable.

(5) Is the price reduction equivalent to a credit note or discount?

63. The fifth question is whether the price reduction in this appeal is the equivalent of a credit note or discount.
64. The Appellant argued that the substance of the price reduction in this appeal was that of a credit note or discount issued by the supplier. The Appellant relied upon the advisory opinions and explanatory notes given by the Customs Cooperation Council (known since 1994 as the World Customs Organisation (WCO)) and the Technical Committee on Customs Valuation established under Article 18 of the Implementation Agreement.
65. WCO Commentary 4.1 considers price review clauses and paragraph 5 provides that:

"in contracts containing a review clause, the transaction value of the imported goods must be based on the total final price paid or payable in accordance with the contractual stipulation. … As to the practical aspects of the matter, where the price review clauses have already produced their full effect by the time of valuation, no problems arise since the price actually paid or payable is known".

66. Miss Whipple for the Respondents argued that these provisions were not relevant because the Appellant's contracts with its suppliers did not contain a provisional price. We do not agree. The Handbook makes it clear that the contractual arrangements are that the Appellant will only pay the full invoice price for perfect goods and that, if defective goods are supplied, the invoice price will be reduced. Also, at the time of valuation (that is, when the goods are released for free circulation) no problems arise in this appeal because at that date the price actually payable is known.
67. Advisory Opinion 5.1 on cash discounts states that, since the transaction value is the price actually paid for the imported goods, a cash discount given by the seller to the buyer, which was available but not yet made at the time of the valuation, should be allowed in determining the transaction value. Advisory Opinion 15.1 states that, where the invoice reflects a discount for quantity, the price actually paid was the discounted price. Miss Whipple, for the Respondents, argued that discounts were not relevant in this appeal. We agree that there are no discounts in this appeal but we note that Advisory Opinion 5.1 emphasises that the price actually paid must be reduced to take into account a cash discount, even if it is not available at the time of valuation.
68. On the other hand Advisory Opinion 8.1 on credit notes states that where goods have received the benefit of a credit note made in respect of earlier transactions the credit was part of the price paid and had to be included in the transaction value. That would lead to an increase in the customs value.
69. From the Commentary and Advisory Opinions we conclude that a price reduction by way of discount is deducted from the price paid or payable for the purposes of customs valuation. We also conclude that where part of a price is paid by way of a credit note received in respect of an earlier transaction the price paid or payable is increased by the amount of the credit note. Thus the general principle is that the price actually paid is the invoice price less discounts or the invoice price with a credit.
70. We agree that there is no specific guidance about how price reductions by means of a debit note should be dealt with. However, in the absence of specific guidance we are of the view that the debit notes issued by the Appellant served the same purpose as a discount issued by the supplier and that supports the view that a price reduction by means of a debit note should be deducted from the full price to establish the price actually paid or payable.

(6) Is Article 144 or 145 relevant in this appeal?

71. There was a dispute between the parties as to whether Article 144 or 145 of the Implementing Regulation was relevant in this appeal. Articles 144 and 145 now provide

"Article 144.

For the purposes of determining customs value under Article 29 of the Code of goods in regard to which the price has not actually been paid at the material time for valuation for customs purposes, the price payable for settlement at the said time shall as a general rule be taken as the basis for customs value.

Article 145

1. Where goods declared for free circulation are part of a larger quantity of the same goods purchased in one transaction, the price actually paid or payable for the purposes of Article 29(1) of the Code shall be that price represented by the proportion of the total price which the quantity declared bears to the total quantity.

Apportioning the price actually paid or payable shall also apply in the case of the loss of part of the consignment or when the goods being valued have been damaged before entry into free circulation.

2. After release of the goods for free circulation, an adjustment made by the seller to the benefit of the buyer, of the price actually paid or payable for the goods may be taken into consideration for the determination of the customs value in accordance with Article 29 of the Code, if it is demonstrated to the satisfaction of the customs authorities that:

(a) the goods were defective at the moment referred to in Article 67 of the Code [which is the date of the acceptance of the custom declaration].;

(b) the seller made the adjustment in performance of a warranty obligation provided for in the contract of sale concluded before release for free circulation of the goods;

(c) the defective nature of the goods has not already been taken into account in the relevant sales contract.

3. The price actually paid or payable for the goods , adjusted in accordance with paragraph 2, may be taken into account only if that adjustment was made within a period of 12 months following the date of the declaration for entry to free circulation of the goods."

72. Article 145 was amended after the date of the importations the subject of this appeal. Originally Article 145 consisted of both indents of what is now Article 145.1 and Articles 145.2 and 145.3 were added in 2002.
73. The Respondents argued that Article 144 did not apply because, at the time of valuation (when the goods were released for free circulation), the Appellant had paid the full amount of the invoice to the supplier. Although the amendment to Article 145 did not apply in this appeal it demonstrated that permitted deductions from the customs value were made expressly and should not be inferred and also that exceptions were carefully circumscribed. Article 145.1 did apply but the Appellant's claim did not meet the requirements in Article 145.1 Under that Article the relevant time was when the goods were released for free circulation and at that time the goods were in perfect condition. Also, the charges made by the Appellant related to breaches of specification affecting the presentation of the goods and did not reflect any defect in the goods.
74. The Appellant argued that Article 145 was irrelevant. The second indent of Article 145.1 allowed for exceptions for damaged or defective goods and enabled an importer to pay customs duty only on the part of a consignment which remained undamaged at the time of entry into free circulation; the Appellant did not need to invoke this provision because, at the material time for valuation, a reduced price had already been agreed under the contract and the general rule in Article 144 applied and the customs value was the price payable.
75. We are of the view that Article 144 does apply in this appeal. The material time for valuation was the time of release for free circulation. At that date full settlement as between the buyer and seller had not been made as the contractual debit procedure was not complete. Accordingly, the price payable for settlement at that time (namely the invoice price less the amount of the debit note) should be taken as the basis for customs value.
76. Further, in our view Article 145 does not apply. We accept that when the goods were released for free circulation they were in perfect condition but only because of the activities undertaken on them by the Appellant. The value of such activities is to be left out of account by Article 29.3(b). That also accords with the general principle of customs duties which is to charge duty on the price, and not the value, of goods imported into the Community. The price of the defective goods in this appeal when they were imported into the Community was the invoice price less the contractual charges. It would be contrary to the general principles of customs duty to charge duty on a value added by the Appellant within the territory of the Community. Also, we do not agree that the charges did not reflect any defect in the goods. The Handbook makes it clear what the Appellant's requirements are and any contractual breach of those requirements gives rise to a charge. If the goods are not defective no charge is made.

(7) Does the fact that the remedial work was unlawfully carried out while the goods were in temporary storage affect the customs value of the goods?

77. The final question is whether the fact that the remedial work was unlawfully carried out while the goods were in temporary storage affects the customs value of the goods.
78. Articles 46 to 68 of the Community Customs Code contain the provisions which apply when goods are imported. Article 46 provides that goods shall be unloaded with the permission of the customs authorities and shall not be removed without their permission. Article 48 provides that goods presented to customs shall be assigned a customs-approved treatment or use which includes the placing of goods under a customs procedure (which includes customs warehousing or release for free circulation). Article 50 provides that, until they are assigned a customs-approved treatment or use, goods have the status of "goods in temporary storage". Article 52 states that the only form of handling allowed for goods in temporary storage was such as was "designed to ensure their preservation in an unaltered state without modifying their appearance or technical characteristics".
79. The goods which were the subject of the importations the subject of this appeal were, at the time of the importations, subjected to remedial work by the Appellant while they were in temporary storage and before they were placed n a customs warehouse or released for free circulation. Thus, the extent of the remedial work which was carried out in temporary storage exceeded that allowed under Article 52.
80. The Respondents argued that the fact that the remedial work was carried out unlawfully meant that the Tribunal should not interpret Article 29 in favour of the Appellant. If the Appellant had acted lawfully the remedial work would have taken place when the goods were in a customs warehouse and, under Article 112 of the Community Customs Code, the customs value of the goods would be the value of the defective goods.
81. The Appellant argued that any such illegality was irrelevant to the customs value of the goods. The customs value was the price actually paid or payable for the substandard goods. The fact that the Appellant carried out work on the goods to bring them up to standard before they were released for free circulation did not affect the customs value. When the goods were released for free circulation they were up to standard but only because the Appellant had performed the remedial work after importation and such work had to be ignored under Article 29(3)(b). In any event, the remedial work was carried out with the knowledge and endorsement of the Respondents.
82. We record that, at the relevant time, there was a genuine misunderstanding by both the Respondents and the Appellant about the extent to which remedial work could be undertaken by the Appellant while the goods were in temporary storage. As soon as the matter had been clarified the Appellant changed its procedures. However, the fact remains that the remedial work should not have been undertaken in temporary storage but, in our view, that cannot change the customs value of the goods. If the remedial work had been undertaken in the customs warehouse, rather than in temporary storage, then the customs value would have been the value if the goods before the remedial work.

Conclusions

83. Our answers to the questions raised by the arguments of the parties are:

(1) that the customs value of imported goods is the transaction price, namely the price actually paid or payable and that, on the clear meaning of Article 29, in this appeal the price actually paid or payable for the defective goods was the invoice price less the amount debited by the Appellant to the supplier;

(2) that the material time for valuation is the time of the acceptance of the customs declaration on the release for free circulation and that in this appeal at the date of release for free circulation, the price paid or payable was the reduced price;

(3) that the price reduction made by the Appellant was not a charge to compensate the Appellant for losses and was not a penalty but rather it reflected the diminution of the value of the goods to the Appellant;

(4) that the price reduction in this appeal is not the same type as the charges mentioned in Article 33 of the Code and so the fact that it is not mentioned in Article 33 does not lead to the conclusion that it cannot be deducted from the price paid or payable;

(5) that the debit notes issued by the Appellant served the same purpose as a discount issued by the supplier and that supports the view that a price reduction by means of a debit note should be deducted from the full price to establish the price actually paid or payable;

(6) that Article 144 of the Implementing Regulation is applicable in this appeal but that Article 145 is not; and

(7) that the fact that the remedial work was unlawfully carried out while the goods were in temporary storage does not affect the customs value of the goods.

Decision

84. In the light of those conclusions we now turn to consider the issue in the appeal and decide that, on the clear words of Article 29, the value of the goods for the purposes of customs duty is the net amount which remains after the charges for remedial work have been deducted from the amount invoiced by the supplier.
85. That means that the appeal is allowed and the Appellant may make an application for costs.

DR A N BRICE

CHAIRMAN

RELEASE DATE: 28 February 2006

LON/2002/7032

17.01.06