United Kingdom VAT & Duties Tribunals (Customs) Decisions

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Cite as: [2006] UKVAT(Customs) C00229, [2006] UKVAT(Customs) C229

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Tomy (UK) Ltd v Revenue & Customs [2006] UKVAT(Customs) C00229 (19/12/2006)

C00229

CUSTOMS DUTY – baby alarms – whether Regulation No.305/2001 classifying similar products under heading 8527 90 98 applies – yes – whether Reference should be made on the validity of the Regulation – no – if wrong, same conclusion reached on classification as the Regulation

LONDON TRIBUNAL CENTRE

TOMY (UK) LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: DR JOHN F AVERY JONES CBE (Chairman)

CATHERINE FARQUHARSON ACA

Sitting in public in London on 16 and 17 November 2006

Paul Lasok QC, counsel, instructed by Hassan Khan & Co. solicitors, for the Appellant

Ian Hutton, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

This is an appeal by Tomy (UK) Limited against a decision on review dated 4 October 2002 confirming three binding tariff informations (GB1095169687, GB109517180 and GB 109517474) issued on 7 August 2002 classifying for customs duty three types of baby monitors (together "the Products") under heading 8527 90 98 00. The Appellant was represented by Dr Paul Lasok QC, and Customs by Dr Ian Hutton.

In outline a baby monitor comprises the baby unit which transmits and the parent unit that receives. The dispute arises because there is one tariff heading for transmission apparatus for radio-telephony, whether or not incorporating reception apparatus (85 25), and another for reception apparatus for radio-telephony (85 27). After some differences of view between states the Commission issued Regulation No.305/2001 ("the Regulation") classifying one-way baby monitors under 8527 90 98. It should be mentioned that two-way baby monitors exist (but are not in issue in this appeal) in which the parent unit will also transmit and the baby unit also receive. These have been classified under heading 8525 20 99 by another Commission Regulation No.646/2001. The issues in this appeal are whether the Regulation relates to the same products as the Products in issue in this appeal; if not, what is the correct tariff classification; and if it does, whether the Regulation is valid.

The possible tariff headings are as follows:

"8525 Transmission apparatus for radio-telephony, radio-telegraphy, radio-broadcasting or television, whether or not incorporating reception apparatus or sound recording or reproducing apparatus; television cameras; still image video cameras and other video camera recorders; digital cameras;

8525 10 - Transmission apparatus…

8525 20 - Transmission apparatus incorporating reception apparatus….

8527 Reception apparatus for radio-telephony, radio-telegraphy or radio-broadcasting, whether or not combined, in the same housing, with sound recording or reproducing apparatus or a clock:…

8527 90 - Other apparatus:…

- - Other

8527 90 92 - - - Portable receivers for calling, alerting or paging

8527 90 98 - - - Other"

Section note 4 to Section XVI provides:

"Where a machine (including a combination of machines) consists of individual components (whether separate or interconnected by piping, by transmission devices, by electric cables or by other devices) intended to contribute together to a clearly defined function covered by one of the headings in Chapter 84 or 85, then the whole falls to be classified in the heading appropriate to that function."

The Explanatory Notes to 8525 20 10 to 8525 20 99 provide:

"These subheadings include apparatus consisting of all the elements required for transmission and reception, on one cabinet or housing. Such is the case, for example, with walkie-talkies, which contain the batteries or accumulators required for their operation, or with transmitter-receiver apparatus, the power supply unit of which would be separate and connected to the apparatus by cable only.

These subheadings also include units in which the transmitter and receiver elements are located in different furniture units or housing, provided they constitute a functional unit. In order to be regarded as constituting a functional unit, transmitter and receiver apparatus must be installed near each other (for example, in the same premises or on the same vehicle) and have certain elements in common, such as the aerial."

The following General Rules for the Interpretation of the Combined Nomenclature are relevant:

"1. 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 heading or notes do not otherwise require, according to the following provisions.

…

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:

(a) the heading which provides the most specific description shall be preferred to heading providing a more general description….

(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.

…

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."

The Regulation describes the goods classified by it ("the Goods") as follows:

"A product described as a baby-monitoring device, put up in a set for retail sale, consisting of

a transmitter for radio telephony, with a built-in microphone

a portable receiver for radio-telephony combined with a loudspeaker in a housing

two mains adaptors

Both the transmitter and the receiver can operate using either batteries or mains adaptors

The device serves to transmit noises made by a baby in the vicinity of the transmitter and is used to monitor babies with a range of roughly 300 metres."

The Regulation classified the Goods under heading 8527 90 98 giving as reasons:

"Classification is determined by the provisions of General Rules 1, 3(c) and 6 for the interpretation of the Combined Nomenclature, and the wording of CN codes 8527, 8527 90 and 9527 90 98. Neither the transmitter nor the receiver gives the product its essential character.

We heard evidence from Mr Perran Newman, a self-employed engineering consultant with a retainer with the Appellant who is the designer of the Products, who demonstrated them; Mr Stephen Gaikwad, until 14 August 2004 policy adviser to Customs (Customs and International Trade Policy) and now a partner in Vantis Custom House; and Mr Bevan Clues CEng MIEE, expert witness called by Customs. We find the following facts:

(1) The Products comprise three models of baby monitor, the Walkabout Classic, the Walkabout Digital and the Walkabout Premier, to which we shall refer as the Classic, Digital and Premier. All three comprise a baby unit that contains a microphone which picks up the baby's sound and transmits it by radio-telephony to a parent unit that receives the radio signals and reproduces them via a built-in loudspeaker. All three also have a bar graph visual display with increasing numbers of lights illuminating as the volume of the sound increases, the first five lights being green and the last three red, which can be used at the same time as, or instead of the sound. The lights might typically be used if the parents were watching television and might not hear the sound. The Products can be set to output sound only or sound plus lights; on the Classic the sound can be muted so that only the lights show, and the Digital and Premier have a volume control. All three enable two different channels to be selected with a view to minimise interference from other similar products in the vicinity. Both units of all the Products have an on/off switch with a light showing when it is on. The parent unit is portable. Both units may be used with batteries or from the mains.

(2) The Classic model transmits the sound continuously (but the sound can be muted). The Digital and Premier Products have voice activation ("VOX") under which nothing is transmitted until the sound reaches one of two pre-determined settings of 55 and 65 dBA, after which it transmits the sound continuously so long as the sound continues. At the higher setting the baby will be crying loudly before transmission of sound begins.

(3) The Digital and Premier Products have the following additional features: a night light on the baby unit; detection that the baby unit is transmitting; a temperature display of the temperature in the baby's room which is displayed either digitally on the Premier Product or on the moving light display for the Digital Product (including an alarm if the temperature falls outside set limits); a battery low signal for each unit (with different alarm signals depending on which unit has the low battery); and an identifying code setting enabling 16 different combinations to be set to match the other unit so that the parent unit does not receive transmission from another unit in the vicinity set to the same channel. Each of these features give a different signal so that the nature of the problem can be identified. The temperature and low battery signals operate by telemetric signals, by which signals pass between the units but are inaudible. The Premier has a compact parent unit which can be separated from the rest of the parent unit and carried by the parent. When this is removed only the sound can be used as the lights are on the remainder of the unit.

(4) Papers obtained from the Commission show that the Goods contained an "LED monitor" on each unit, which may either refer to an on/off light or to a visual display. There is a description of the goods that the Italian authorities classified which did have a visual display similar to the Products. Papers show that at the 210th Customs Code Committee meeting baby monitors were discussed and a majority of states favoured classification under heading 8525. Customs had no papers on subsequent meetings of the Customs Code Committee at which the Regulation was approved as their records had been destroyed by fire. On the second day of the hearing Mr Gaikwad produced notes which he still had on his computer of the 217th meeting that he attended on behalf of the UK which show that there was a difference in view about classification between Germany and Italy, and the conclusion was that a draft Regulation would classify them under heading 8527 and the CNEN for heading 8525 20 10 to 8525 20 99 (see paragraph 5 above) would be looked at to see if it needed deleting. Mr Gaikwad did not attend the 236th meeting at which the Regulation was approved but he produced an email note received from the UK delegate who attended which showed that Germany had issued a BTI classifying one-way baby monitors under 8527 and Italy under 8525. The Regulation was adopted with three countries opposing it. The note states that "Regulation text was amended to remove reference to Notes 3 and 4 to Section XVI." The notes also show that at the same meeting two-way baby monitors were classified in 8525 without any state objecting. Since Mr Gaikwad received this note in his official capacity as a policy adviser at Customs we accept this record of what was decided at the meeting.

There was a disagreement between the two experts about whether the Products provided "calling, alerting or paging" within heading 8527 90 92. Mr Clues considered that these words were used in a technical sense. Calling means to make a call, as for example in a yacht calling a land station starting a call "BT land station this is Anne Marie", which the land station would reply "Anne Marie this is BT Land Station." Paging is a system whereby a person may be alerted by a tone, audible indication or short message, such as a telephone or door bell ringing, a pager bleeping or vibrating, with or without a displayed message. The process involves sending information in one direction. He did not consider that the Products performed this function; their primary function was the transmission of audio signals from the baby unit so that the parent can hear sounds made by the baby and decide whether to do anything about them.

Mr Newman disagreed with Mr Clues and considered that the Products provided functions whose sole purpose was to alert the parent. These included the light features which displayed the volume of sound visually on all three Products. For the Digital and Premier Products there are the following additional alerts. Secondly, an alarm if no signal is received from the baby unit indicating that it has failed for some reason (continuous beep and flashes). Thirdly, the temperature alarm on the Digital and Premier Products what sounded an alert if the temperature in the baby's room fell outside set limits (one beep and flash which is repeated). Fourthly, if the batteries in either the baby unit (two beeps and flashes) or parent unit (three beeps and flashes) are low. Fifthly, if there is a mismatch between the code settings on each unit an alarm sounds (four beeps and flashes).

On the second day of the hearing, when Mr Clues was not present, Dr Lasok produced extracts from the Data and Telecommunications Dictionary by Julie K. Peterson which included the following definitions:

"alert signal, alerting signal A transmission signal designed to gain the attention of an administrator or user…On telephone networks, alert signals are often used to indicate an incoming call.

calling The act or process of contacting another party or entity across some type of communications medium, or at some distance, with the intention of establishing a link between humans and/or devices."

He also produced the following extracts from Hargrave's Communications Dictionary: by Frank Hargrave:

"alert An indication of a change of state from a normal to an alarm conditon (or to a normal state from an alarm state)….

call (1) The action performed by the calling party in establishing a connection to a destination party…."

Mr Lasok, for the Appellant, contends in outline:

(1) The Regulation is invalid because

(a) Section Note 4 applies to the goods and requires classification under heading 8525 because that heading covers the combined function of transmitting and receiving. It does not mandate classification under heading 8527 because that is limited to receiving.

(b) No reason is given for how the Commission got to GIR 3 since Note 4 applied. If the Commission ignored it the Regulation would be invalid for that reason. If they took Note 4 into account they must have misconstrued it and the Regulation is invalid on that ground. The absence of reasoning is sufficient justification for the Regulation to be invalid, see Sony Computer Entertainment Europe Ltd v Commission Case T-243/01 where the European Court said at [131]:

"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."

(2) The Tribunal should refer the validity of the Regulation (and the classification) to the European Court of Justice.

(3) Subject to that, if the Commission were justified in ignoring Note 4, he accepts the classification under heading 8527.

(4) On the subheading, the Products were for calling, alerting or paging. Parents did not own the Products in order to listen continuously to the baby's sounds; they owned them so as to be alerted to the baby crying.

Mr Hutton, for Customs, contends in outline:

(1) The Regulation was valid and applied the correct methodology. The Commission was under no obligation to explain why Note 4 was not applied. The obvious reason was that the Goods fulfilled two separate functions which are dealt with by two different headings in Chapter 85. No reference to the European Court was necessary or appropriate.

(2) The Regulation clearly applied to the Products. One should not expect a Regulation to deal with every minor feature that may be incorporated in a particular Product.

(3) On the subheading, the Products were not solely for calling, alerting or paging; they were to transmit the baby's sounds continuously, or in the case of the Digital and Premier Products when the sounds exceeded the chosen setting. They are a communication system.

The Appellant is content to proceed on the provisional assumption that the Regulation does apply to the Products, at least so far as the heading level is concerned. Customs contend that it does apply to the Products. We find that it does. The features set out in the Regulation are present in all of the Products. It is unclear whether the Goods classified by the Regulation also had a visual display. We do not consider that additional features, whether or not, as in the case of the visual display, the feature can be used instead of sound, means that the Regulation is inapplicable to the Products.

So far as the validity of the Regulation is concerned we have no power to declare it invalid. We must, however, consider Dr Lasok's contentions about why it is arguably invalid in order to determine whether we should make a reference to the European Court. One can deduce from the stated reasons, particularly the reference to GIR 3(c), that the Commission considered that the Goods were prima facie classifiable under two headings, which must be 85 25 and 85 27; that neither heading was more specific (so that GIR 3(a) did not apply); and that, as stated, neither the transmitter nor the receiver gave the product its essential character (so that GIR 3(b) did not apply), and accordingly the higher numerical heading, 85 27, applied by virtue of GIR 3(c).

We know from Mr Gaikwad's papers that Section Note 4 was not overlooked as there must have been an earlier reference to it that the Customs Code Committee determined to delete. Since the deletion did not change the classification the inference must have been that it did not apply. The likely explanation is that the Commission considered that the transmitter and receiver in the Goods did not contribute together to a clearly defined function within a heading, which must be 8525. While that heading does include transmission apparatus for radio-telephony incorporating reception apparatus, the view must therefore have been taken this means equipment that performs both of these as one end of two-way communication, as in the case of a walkie-talkie. This view is supported by the classification of the two-way baby monitor under heading 8525 by Regulation No.646/2001 which was decided at the same meeting of the Customs Code Committee. We do not consider that the failure of the Regulation to specify why the Commission considered Note 4 to be inapplicable might invalidate it. If the Commission considered that Note 4 was not relevant to the classification, as it must have done in order to delete the reference to it in the draft, it is natural for it not to be mentioned. Nor do we consider that the Commission must have misconstrued Note 4 since there is a reasonable explanation for its not applying. The correctness of the conclusion may be arguable, and indeed three countries voted against it, but this is different from saying that it is invalid. Sony was a different case in which classification had been made by an incorrect application of GIR 3(b), and the mere reference to GIR 1 did not mean that reliance had been placed on a Section Note which would have resolved the classification under GIR 1 without reference to 3(b), as the Court pointed out in [132]. The case was an example of the Commission not referring to a Section Note that was relevant, and relying on GIR 3(b) when it was not relevant.

At first sight the classification in the Regulation is contrary to the Explanatory Note, and the same concern was expressed at the 217th meeting of the Customs Code Committee. The second paragraph of the Explanatory Note can be explained as referring also to separate units containing a transmitter and receiver using a common aerial which operate as one end of two-way communication in the same way as a walkie-talkie contained in one housing.

We turn to the sub-heading. The issue is between 8527 90 92 "Portable receivers for calling, alerting or paging" and 8527 90 98 "Other." The Commission had to conclude that the former was inapplicable in order to make the classification under the latter heading. The Regulation does not state why and Dr Lasok contends that the Regulation is invalid for that reason. Again, while we accept that the former subheading is arguable, it is clear that the view must have been taken that it was inapplicable and we do not consider that the Regulation need set out the reason why it did not classify the Goods under that subheading, any more than it need set out the reason why every other heading from 8527 12 to 8527 90 10 was inapplicable.

Accordingly we do not consider that the case for the possible invalidity of the Regulation to have been made out sufficiently to warrant our making a reference.

We therefore consider that the Regulation applies to classify the Products under heading 8527 90 98 and dismiss the appeal on this basis.

In case we are wrong in considering that the Products are the same as the Goods covered by the Regulation we consider the classification ourselves. We consider that Note 4 does not apply because one cannot find the combined clearly defined function of transmitting and receiving in heading 8525 because the reference to transmission apparatus incorporating reception apparatus is explicable as meaning something like a walkie-talkie which does both as one end of communication, and not something where the transmitter unit transmits only to the receiver unit; we appreciate that the transmitter unit may be transmitting to someone else's unit, and the receiver unit may be receiving from someone else's unit but this is an unwanted function for which it contains features to help prevent happening. This interpretation is not surprising because radio-telephony will normally be two-way (the only other example of one-way communication we can think of is a bugging device). It is only one-way here because one party is a baby. In cases where a baby monitor is two-way it does fall within heading 8525, as determined by Regulation No.646/2001. Accordingly we agree with the Regulation's application of GIR 3(c) and classification under 8527.

So far as the subheading is concerned, we have to consider the meaning of "receiver for calling, alerting or paging" about which the experts disagreed. Essentially the difference was that Mr Clues considered them to be used in a technical sense and Mr Newman as words of ordinary meaning. The fact that references to alerting and calling (we were not shown definitions of paging and therefore do not know whether this was because there were none or they were not copied) are found in technical dictionaries of telecommunications suggests that these expressions are used by technical people but the actual definitions do not seem to us to depart significantly from the ordinary meaning of the words. They all have in common the act of making contact. The same would be true of paging, whether in the traditional sense of a page in a hotel calling out a name, or the modern one of an electronic pager.

We were unable to agree on whether the Products qualify as a "receiver for calling, alerting or paging." The Chairman's view is that in accordance with the dictionaries these are limited to the act of making contact, possibly, as with paging, coupled with a message telling the recipient to do something like ringing a certain telephone number. There are undoubtedly some functions, particularly of the Digital and Premier Products that do perform this function, as in the case of Mr Newman's second to fifth examples in paragraph 11 above. However, he considers that these are additional features and not the main feature of the Products, which is to convey electronically the sound of the baby, whether the output is sound or lights varying with the loudness of the sound. In one sense if, for example, the voice activation is set to operate at the higher level so that it operates only when the baby makes a considerable noise, the parent is alerted by the sound (or lights) then coming on. However, the Products do more than this because once the limit is reached they then transmit the sound (or a visual representation of the strength of the sound). The Chairman does not consider that where the lower setting operates and in all cases with the Classic that there is any calling, alerting or paging. Any sound is being transmitted and the parent has to decide whether to do anything. This goes beyond the act of making contact and so the receiver (since in heading 8527 we are concerned with the receiver) is not for calling, alerting or paging; it is mainly for other purposes. This is so even though he accepts that parents are likely in practice to use the Products, and in particular the Digital and Premier ones, so that they operate to alert them when the baby needs attention.

Mrs Farquharson, who has used similar products herself, considers that at least the Digital and the Premier Products are receivers for calling, alerting or paging because effectively that is their main purpose. She did not, and she considers that other parents do not, in practice use the Products in order to be able to listen continuously to the baby, but in order to be alerted when the baby needs attention. Those Products are therefore a "receiver for calling, alerting or paging" because that is the purpose for which they are used in practice.

In view of this difference of view the Chairman has a casting vote which he exercises in favour of his view expressed above.

Our decision is therefore:

(1) The Regulation classifies Goods that are essentially the same as the Products.

(2) There is no sufficient reason to doubt the validity of the Regulation that would warrant a reference to the European Court.

(3) Accordingly the Regulation classifies the Products under heading 8527 90 98.

(4) If were are wrong about (1) so that the Regulation is inapplicable we would, by the Chairman's casting vote, classify the Products under heading 8527 90 98.

Customs reserved the right to ask for costs. If they propose to ask for an award of costs in principle (leaving aside the figures at this stage) we direct that they apply to the Tribunal within 30 days from the date of release of this Decision, following which the Appellant may respond within 21 days of receiving Customs' application, and the Tribunal will give its decision on the application.

JOHN F AVERY JONES

CHAIRMAN

RELEASE DATE: 19 December 2006

LON/02/7043