United Kingdom VAT & Duties Tribunals (Customs) Decisions

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Cite as: [2008] UKVAT(Customs) C00252, [2008] UKVAT(Customs) C252

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Umbro International Ltd v Revenue & Customs [2008] UKVAT(Customs) C00252 (12 February 2008)

C00252

CUSTOMS DUTY – whether Chinese company acted as buyer's agent for appellant company in purchases of sportswear from China – no – appeal dismissed

MANCHESTER TRIBUNAL CENTRE

UMBRO INTERNATIONAL LTD Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: David Demack

Miss Susan Stott FCA CTA

Sitting in public in Manchester on 15 November 2007

Mr Paul Chaisty QC and Mr Nigel Bird instructed by Steven P. Hodkinson, general counsel for Umbro for the Appellant

Mr Mario Angiolini, counsel, instructed by the General Counsel and Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2008

DECISION

Introduction

In this appeal by Umbro International Ltd ("Umbro") the sole question for decision is whether between 15 September 2003 and 15 August 2006 PNH Limited ("PNH"), a Chinese company, acted as Umbro's buying agent in its purchases of sportswear from China.

The question arises out of a customs duty repayment claim of £830,238.59 made by Umbro on 9 August 2006. Umbro made the claim based on the decision of the Court of Justice of the European Communities ("the ECJ") in the case of Overland Footwear Ltd v Commissioners of Customs and Excise (Case C-468/03) [2005] All ER 234. In the letter containing the claim, Umbro maintained that it had followed the practice of Overland in overstating the customs value of sportswear imported from China in failing to identify and separate out buying commissions within the price of its importations. That claim was rejected by the Commissioners for Her Majesty's Revenue and Customs ("the Commissioners") on 19 December 2006 on the basis that PNH had throughout acted as Umbro's principal supplier, and not as its buying agent. The claim was further rejected on review, and it is against the decision on review, made on 9 May 2007, that Umbro now appeals.

In the appeal, Umbro was represented by Mr Paul Chaisty QC leading Mr Nigel Bird, and Mr Mario Angiolini of counsel appeared for the Commissioners. They produced an agreed bundle of copy documents, and we took oral evidence from Mr Michael Jones, the supply chain manager of the customs and shipping division of Umbro, Mr Chan Kin Chung, a director of PNH, and Mr Idris Ismail Patel, a higher officer of the Commissioners. From the witnesses' evidence and the contents of the agreed bundle, we make the following findings of fact.

The facts

Umbro is a highly successful and long established importer and wholesaler of sportswear goods, its main claim to fame possibly being the fact that it supplies the English international association football team with its team shirts. It has no manufacturing facility of its own, but rather sources its branded supplies i.e. supplies bearing its logo, from both domestic and foreign manufacturers. Nowadays most of it supplies are manufactured in the Far East, mainly in China. Chinese goods are subject to customs duty quotas. The goods concerned in the present appeal were all manufactured in China by the Dongguan Haiqi Sports Garment Co. Ltd ("Dongguan"), and included replica England football shirts.

In order to maintain control over its supply chains, Umbro has factories audited on its behalf by CSCC, a third party audit company. Only when a factory has been successfully audited to ensure that its manufacturing facilities comply with Umbro's Corporate Social Responsibility policy, and satisfy its employee safety and legal compliance requirements, is it authorised to manufacture Umbro branded products; and even then Umbro maintains absolute discretion as to whether a factory is used to manufacture its products.

Each Umbro branded item is marked with a unique identifying label to prevent any one other than Umbro or its licensees marketing it.

For over 15 years Umbro has retained PNH in connection with its importation of goods from China. PNH is not a manufacturer, nor has it a manufacturing facility. Rather, it sources goods from various manufacturers, including corporate members of the group of which it is part. Dongguan is part of the same group as PNH.

In finding that PNH is not a manufacturer, we reject a claim by the Commissioners that representatives of Umbro had informed them that PNH manufactured the goods imported from China as being mistaken. Our finding is based on the evidence of Mr. Patel. He made the claim in a document entitled 'Report on the Buying Commission Repayment for Umbro' said to be based on notes he made, at least in part, at a meeting with Mr. Jones held on 7 November 2006. In those notes, Mr. Patel made no mention at all of Mr. Jones having said that PNH was the manufacturer – a point that was, not surprisingly, seized upon by Mr. Chaisty in Mr. Patel's cross-examination. Nor is there any other evidence in the Report to support the Commissioners' claim.

We infer that PNH is well aware of the factories which have been successfully audited by CSCC, and places Umbro's orders only with companies whose factories have been approved by audit. We find that PNH is free to place orders with any approved manufacturer without reference to Umbro, and without informing Umbro of where and when an order has been placed. That arrangement would appear to be have arisen as a result of Umbro and PNH having had a long and successful trading relationship based on mutual trust and having little formal structure.

Having presumably carried out its own market research and determined what sportswear it wished to purchase from China in the relevant period, Umbro provided PNH with full details of the required products, including the necessary quality and quantity, and set target prices it was prepared to pay for them. Those prices were based on its extremely wide knowledge of the markets for the products, and the retail prices it expected its licensees and distribution networks to achieve.

The target prices set by Umbro took account of the fact that PNH was responsible at its own expense for negotiating prices with manufacturers, visiting them, obtaining samples of the products, scheduling delivery dates, ensuring that the products fell within EC customs duty quotas and performing a number of quality control functions for Umbro. PNH also had to insure the products and pay for their transport, storage and delivery. Thus, in agreeing a contract price with Umbro, PNH had to take into account all manufacturing costs, the cost of all the services we have just listed, and its own profit.

Only when a contract price had been agreed did Umbro submit a written purchase order to PNH that contained the following terms and conditions:

"ALL ORDERS

This order will be considered invalid without the authorised signature of the Buyer. Goods supplied against this order not of the same merchantable quality as the sample accepted by the Quality Control Department, may be re-charged to the supplier. Rectification costs may also be charged to the supplier.

All individual deliveries are to be complete. Deliveries to be free at the Supplier's risk to our warehouse, as and when specified unless stated otherwise. No remains will be accepted. We reserve the right to cancel without prior notice any part of the whole of this order which is not shipped to the agreed date.

The supplier is entirely responsible for ensuring that the merchandise is manufactured to our agreed specification and in accordance with the advance sample approved by the consignee.

Invoice and Packaging list must quote our order number, item ref. Number to assist our Accounts Department in reconciling the account.

All packing is free.

No variations of this order will be permitted unless our written consent is obtained.

Merchandise specifically restricted to Umbro (Umbro Logo) shall not be sold or disposed of by you in any way without our prior permission.

NON-UK ORDERS ONLY

We require an allowance of seven working days for unpacking and checking and checking goods and for notification of shortages.

Merchandise returned by Umbro Customers because it does not come up to the standard of the sample, will be returned at the Supplier's expense and a debit raised against the suppliers account.

Any increase charges due to (a) a failure to provide correct documentation (b) failure to supply samples for approval to time thus causing a late shipment, or (c) deferment of a Letter of Credit for reasons created by the Supplier, will be charged to the Supplier.

Any import duty and / or penalties levied as a result of failure to supply the correct Documentation will be charged to the Supplier.

Any charges which we incur due to the late receipt of documents (especially Export Licences) will be charged to the Supplier, original export licence must be sent by courier immediately it is available to Umbro International, Cheadle.

TERMS OF INSURANCE

Initial Cargo Clauses (All risks) including war, strikes, riots and civil commotion risks.

Cover should be from suppliers warehouse to final warehouse of consignee in United Kingdom.

Period should cover up to 60 days after arrival at U.K. Port or until delivery at consignees final warehouse in United Kingdom.

Insurance should cover C.I.F. price plus agreed uplift as shown overleaf."

In any given case, PNH was then responsible for finding a manufacturer capable of meeting Umbro's product specification, production run and timeously supplying the goods in question. As we have already mentioned, in the instant case all the imported sportswear was manufactured by Dongguan.

Mr Jones explained, and we accept, that if PNH suggested a price acceptable to Umbro, the latter did not historically enquire of the margin of profit PNH anticipated to achieve from an order; and such profit might vary from order to order, or even within a single order. Umbro accepted that PNH would make a greater profit on some orders than on others.

The purchase order in any particular case having been placed by Umbro with PNH, the latter in turn placed an order with Dongguan. On delivery of the goods, Dongguan invoiced PNH for them. PNH then invoiced Umbro in a higher sum, the difference between the two invoice prices representing PNH's gross profit. Payment was made by Umbro on its being invoiced.

In support of the claim that PNH was throughout its buying agent, Umbro produced a screen dump (or screen print) from an internal Umbro computer system, said to be used to record the details of its agents and their factories. In the factory name field was the reference "PNH-HQ1 Dongguan Haiqi Sportswear Company Limited". Mr Jones explained the field as denoting the name of the company undertaking the manufacturer of a product. He accepted that it was not standard practice to preface the name of a factory with a code such as "PNH-HQ1", but nevertheless maintained that the code indicated that it was PNH that had put forward Dongguan for approval, the reference HQ would be based on that company's name, and the number "1" would indicate that it was the first company Umbro had dealt with with the name Haiqi in its title. Mr Jones further claimed that reference to PNH in a name field approximately halfway down the page clearly indicated PNH to be Umbro's agent and not a manufacturer. It is unclear when the screen dump was originally produced: it may post-date Umbro's claim to the Commissioners, or pre-date it. But whichever may be the case, we consider it to be of little help in establishing PNH's status.

In the invoices raised by PNH to Umbro no buying commission was specified. No mention was made of PNH being Umbro's agent, each invoice being raised "for account" Umbro. The quantity of each item supplied was included in the invoices, as was its size, the price per item, and the total per item. Each such total was then aggregated into a grand total. For completeness, we should perhaps explain that each invoice included details of the Chinese export licences under which the relevant transactions took place. No details of any relevant EC import quotas were given.

One transaction said to be typical was invoiced by PNH to Umbro on 8 September 2003 in the sum of $15,134.95 (tab 15, p.78). The goods forming it were invoiced by Dongguan to PNH on 3 September 2003 in the sum of £13,321.96 (tab 15, p.79 as translated into English at tab 15, p.80). In the latter invoice PNH was simply described as "purchaser", a description applied in all the invoices before us. In none of the Dongguan invoices was there any mention of Umbro.

In evidence, Mr Chung claimed that all transactions between PNH and Dongguan were carried out at arm's length. As his evidence in that behalf was not challenged by the Commissioners, we accept it as fact. But again, it takes matters no further.

In addition to being a director of PNH, Mr. Chung is also a director of Dongguan. Ideally he would have given evidence of the contractual arrangements between Umbro and Dongguan, but did not do so. His failure in that behalf did nothing to assist Umbro in proving that Dongguan acted as its buying agent; on the contrary, it indicated to us that he had nothing to contribute to Umbro's claim in that regard, and that Dongguan had no documentary evidence positively to support Umbro's case.

Following release of the judgment in the Overland case, on 9 August 2006 Umbro wrote to the Commissioners saying that it had for some time been overpaying customs duty on its importations from China, and seeking a refund. Mr Patel visited Umbro on 6 November 2006 to investigate. On 19 December 2006 he rejected the claim up to 20 August 2006, but allowed it thereafter saying that he was doing so because "there was evidence of some sort that a buying agent was involved". (That evidence consisted of the agreement to which we refer in the next following paragraph). Umbro then sought a formal review of Mr Patel's decision; and, as we mentioned at the outset, it resulted in the original decision being upheld.

On 21 August 2006 Umbro entered into a formal written agreement appointing PNH its buying agent. That agreement has, at least until now, been accepted by the Commissioners as the basis of allowing certain claims for the refund of customs duty by Umbro since its coming into force. Umbro argues that the agreement has made no material difference to its dealings with PNH. It accepts that there are, however, what it describes as two "immaterial" differences, namely (1) that buying commissions are now calculated at a fixed rate, and (2) such commissions are now separated out on invoices raised by PNH to Umbro.

The Law

Umbro's claim arises under the EC Customs Code (Council Regulation 2913/92), the relevant parts whereof have the following effect.

When goods arrive in the United Kingdom customs duty falls to be paid on them. Duty is paid on the "customs value" of the goods, calculated as follows:

(a) first the price actually paid or payable for the goods when sold for export to the United Kingdom (the "transaction value") is taken (Article 29 of the Customs Code);

(b) that price is then adjusted in the manner set out in Articles 32 and 33:

(i) Article 32 requires commissions and brokerage charges to be added to the transaction value, but expressly excludes the addition of "buying commission";

(ii) provided the relevant elements are itemised separately, Article 33 requires various elements (including buying commissions) to be excluded from the calculation

"Buying commission" is defined in Article 32.4 as "fees paid by an importer to his agent for the service of representing him in the purchase of the goods being valued". In the instant case, Umbro maintains that those fees are represented by the difference between the price paid for the goods by PNH, and the price it charges Umbro.

We pause there to say that, until 2006, Umbro simply declared the customs value as the transaction value, i.e. the value of the imported goods as set out on PNH's invoices. Umbro now maintains the correct prices were those shown on Dongguan's invoice and that it should have declared those prices. Thus, throughout the period the full prices (or transaction values) declared by Umbro were subject to the payment of duty.

The Customs Code permits customs declarations to be altered or amended in one of two ways:

(a) Article 65 permits the declarer / importer to amend the declaration before the goods are released.

(b) Article 78 provides that the customs authorities "may on their own initiative or at the request of the [declarer] amend the declaration after the release of the goods". Article 78(3) provides: "Where revision of the declaration … indicates that the provisions governing the customs procedure concerned have been applied on the basis of incorrect or incomplete information, the customs authorities shall, in accordance with any provisions laid down, take the measures necessary to regularise the situation, taking account of the new information available to them".

Umbro's claim for revision of its customs declarations and its consequent repayment claim referred to, and relied upon, the Joint Customs Consultative Committee ("JCCC") Paper (05) 71 entitled "Policy change: adjustment to customs value concerning buying commission" issued by the Commissioners in December 2005. That Paper stated that the Commissioners had revised their policy in respect of retrospective adjustments to customs values in certain situations as a result of the Overland judgment. The Paper explained that, under Article 33 the Customs Code, certain elements should not be included in the customs value provided they were shown separately from the price paid or payable for the imported goods; and that the Overland case related to a situation where, at the time of declaring the goods for free circulation, the importer had failed to show a buying commission separately from the price actually paid or payable.

The Paper further explained the Overland judgment as ruling that where the Commissioners, after receiving a customs declaration under the provisions of Article 78 and 236 of the Customs Code, found that the declared customs value erroneously included a buying commission, they were required to regularise the situation by reimbursing the import duties applying to that commission. The Paper also informed importers that, in an amendment to their policy, in future applications to revise a customs value under Articles 78 and 236, the Commissioners would now consider them where Article 33 elements, such as buying commission had been erroneously included in the declared customs value, subject to the provision of satisfactory evidence. In dealing with the discretion conferred by Article 78, the Commissioners must first consider whether the amendment is "possible in principle". The Overland case shows, for example, if physical examination of the goods is required and if such examination is not possible the Commissioners may properly refuse to consider revision. If, on the other hand, all that is required is a consideration of "accounting or contractual documents" an amendment is possible in principle and ought not to be refused out of hand. Following such "first assessment" the Commissioners must either reject the application by reasoned decision, or amend it as requested. In accordance with Article 78 if, in the light of the facts notified, the Commissioners conclude that the relevant provisions of the Code have been applied "on the basis of incorrect or incomplete information" then they must take measures to regularise the situation (see paragraph 52 of the Overland judgment). If the import duties paid exceed those which ought properly to have been paid in accordance with the Code, then "the measure necessary to regularise the situation can consist only in reimbursement of the overpaid amount". Article 236 restricts reimbursement of overpaid duty to three years "from the date on which the amount of those duties was communicated to the debtor. Any "manipulation" by the declarer will disqualify the application for repayment.

As we understand it, Umbro accepts the Commissioners' interpretation of the Overland judgement as contained in the JCCC paper so that we may rely on it in reaching our conclusion.

Introduction to the submissions

In the statement of case, the Commissioners pleaded that since the terms and conditions of the purchase orders addressed to PNH referred to the contractual obligations of "the supplier", and one such term stated that "the supplier is entirely responsible for ensuring that the merchandise is manufactured to our agreed specification and in accordance with the advance sample approved by the consignee [Umbro]", it could be "inferred" that at all material times PNH was in fact the manufacturer of the goods, and not Umbro's buying agent. But in his submissions to us, Mr Angiolini maintained that it had never been any part of the Commissioners' case that PNH was the manufacturer for, in the review decision under appeal, it had been said that Umbro had "supplied invoices which show an audit trail from the manufacturer of the goods to PNH and then on to Umbro". Mr Angiolini relied on that statement to claim that in using "manufacturer" rather than "supplier" to describe PNH the draftsman of the statement of case had "misunderstood" the position. As Mr Chaisty correctly submitted in response, the Commissioners are required by rule 8 of the VAT Tribunals Rules 1986, as amended, to set out in the statement of case "all matters and facts relied upon", and made no application either to correct their "misunderstanding" and gave no notice that they intended to change their case to that subsequently advanced before us. The Commissioners' behaviour was both unacceptable and unprofessional. We express the hope that it will never recur.

The Commissioners' case presented to us consisted of a claim that PNH was not Umbro's buying agent, but rather was either:

(a) a selling agent, i.e. it acted as agent for the manufacturer; or

(b) a principal seller, and so acted as purchaser when buying from the manufacturer, and then as vendor when selling to Umbro.

Mr Chaisty also correctly observed that large parts of the evidence of Mr Jones and Mr Chung claiming that PNH acted as Umbro's buying agent went unchallenged, and that the Commissioners at no point presented their case that PNH was either a principal supplier to Umbro, or acted as agent for Dongguan. Fortunately, we consider ourselves able to overcome that problem, but must again record that the Commissioners' behaviour was unacceptable and unprofessional.

Before turning to consider the submissions of the parties, we may conveniently note at this point that both accept the correctness of the following extract from judgment of Lord Jessel MR in Ex parte Bright re Smith (1879) 10 Ch D 566, page 570 where he observed that, "There is nothing to prevent the principal from remunerating the agent by a commission varying according to the amount of profit obtained by the sale. At present there is nothing to prevent his paying a commission depending on the surplus which the agent can obtain over and above the price which will satisfy the principal. The amount of commission does not turn the agent into a purchaser".

Submissions for the Commissioners

Mr Angiolini maintained that much of the evidence of Mr Jones and Mr Chung as to the nature of the relationship between Umbro and PNH amounted to a gloss on what actually occurred in each transaction, and should be rejected as not credible: they were seeking retrospectively to create an agency relationship where none existed. What PNH did was largely undisputed. The question was: on whose account did PNH act, its own or that of Umbro? In Mr Angiolini's submission, most of Umbro's evidence was entirely consistent with PNH having acted as principal, and having applied a variable mark-up on sales. Whilst Umbro's witnesses used "agent" to refer to PNH, that did not necessarily support the conclusion that its legal relationship with Umbro was one of agency. As Sir John Donaldson MR observed in Potter v Commissioners of Customs and Excise [1985] STC 45 at page 51:

"The use of the word 'agent' in any mercantile transaction is, of itself, wholly uninformative of the legal relationship between the parties and the use of the words 'independent agent' takes the matter no further. Either is consistent with a self-employed person acting either as a true agent who puts his principal into a contractual relationship with a third party or with such a person acting as a principal."

Mr. Angiolini invited us to read that observation together with the following passage from Bowstead on Agency 18^th Edition, paragraph 1-031:

"Each transaction must be examined on its facts, considering the extent to which an agent's duties are appropriate … The ways in which the parties describe themselves are not conclusive. There is no magic in the word 'agency'. It is often used in commercial matters when the real relationship is that of vendor and purchaser".

Mr. Angiolini also cited in support of the Commissioners' case the following statement by Rix LJ at paragraph 22 of his judgment in Mercantile International Group v Chuan Soon Huat Industrial Group [2002] EWCA Civ 288:

"It seems to me that an essential fact for present purposes was that there was "no written document showing the relationship between the parties, or stating the terms on which the business was to be carried on between them" (per Mellish LJ in Ex parte White, re Nevill (1871) LR 6 Ch App 397 at page 399) and therefore the court had to proceed entirely by analysing the course of dealing between them. That showed that the supposed "agent" had acted entirely on his account …"