United Kingdom VAT & Duties Tribunals (Customs) Decisions

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Cite as: [2008] UKVAT(Customs) C256, [2008] UKVAT(Customs) C00256

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The Bear Factory Ltd v Revenue & Customs [2008] UKVAT(Customs) C00256 (02 May 2008)

C00256

CUSTOMS DUTIES – Tariff classification toys partially stuffed skins – Whether "stuffed toys" within code heading 9503 0041 00 – Whether "other toys representing animals" within heading 9503 0049 90 – Application of GIR 2(a) – Appeal dismissed

LONDON TRIBUNAL CENTRE

THE BEAR FACTORY LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: SIR STEPHEN OLIVER QC (Chairman)

ROBERTA JOHNSON

Sitting in public in London on 23 April 2008

Greg Sinfield, solicitor, of Lovells, for the Appellant

Mario Angiolini, counsel, instructed by the solicitor and general counsel for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

The Bear Factory Ltd ("The Bear Factory") appeals against a review decision of the Respondents ("Customs") dated 24 September 2007 concerning the classification for customs duty purposes of products imported by The Bear Factory. The review decision upheld three BTIs issued on 9 July 2007 which classified the products as stuffed toys.

Commodity Code 9503 00 covers, among other product, "dolls; other toys". Under the heading "- Toys representing animals or non-human creatures" are the following entries:

"9503 0041 - - Stuffed" [rate of duty: 4.7%]

"9503 0049 - - Other" [rate of duty – 0]

The issue for determination is whether:

(a) as the three BTIs (and the Customs decision appealed against) have classified the present product, the product is to be classified at the time of importation as "stuffed toys representing animals or non-human creatures" under Heading 9503 0041 or

(b) as Bear The Factory contends, the product is to be classified as "other toys representing animals or non-human creatures" under Heading 9503 0049, attracting no duty.

The Bear Factory is a subsidiary of Build-a-Bear Workshop Inc, a US Corporation which operates, directly and through franchises, Build-a-Bear Workshops where customers "make" their own customised toy animals.

The evidence consisted of:

(i) samples of each product in its form at the point of importation;

(ii) a product manufactured by a third party consisting of a toy animal skin supplied with a pre-stuffed animal shape which is inserted into the toy animal skin through an opening which is closed and fastened with Velcro to complete the piece and

(iii) oral evidence from Roger Parry, trading director for Europe of Bear Factory; this covered a description of the "Build-a-Bear" product as imported and the in-store experience offered by Bear Factory and the Bear building process.

The products are "skins". They are all of approximately the same size (12-14 inches in length and 6 inches wide, lying flat). Each has some initial stuffing done prior to importation. The degree of initial stuffing varies according to the product. Each has a face that is partially stuffed and in some cases paws and tails contain a small amount of stuffing. When completely stuffed after importation the product will be a 3-dimensional toy animal. We will give more detailed descriptions of the products later; these are drawn from the applications for the BTIs dated 21 May 2007 and from the evidence of Roger Parry. The products arrive in the Community in bags or boxes of 24. They are delivered to retail outlets ("Build-a-Bear Workshops") in the UK operated by The Bear Factory. The Bear Factory's selling technique, which Roger Parry referred to as "an in-store experience" involved customers going through a process in which they and the children brought by them participate in creating their own personalised bears, lambs, dogs or other animals. The first step is to choose the "skin"; then the customer may then choose a heart and a battery operated sound recording to put inside the skin.

Once the sound and the heart are in, the skin is stuffed using a stuffing machine (see below). The stitching on the back of the toy animal around the hole left in the skin to enable stuffing is then secured by pulling and tying a pre-installed thread. The customer then has a choice of a range of accessories designed for use with the toy animals. A personalised "birth certificate" is prepared by a member of staff. The customer then takes his or her purchases to the till where they are packaged and payments are made.

The Bear Factory has a website through which sales are made. For the UK these represent 1.5% of all sales. The goods are sent fully stuffed to the purchasing customers.

Although it is no part of The Bear Factory's selling system, there are exceptional occasions when customers are allowed to purchase the product in an unstuffed state. These customers are typically foreign visitors who intend to have the skins stuffed when they have returned home.

The stuffing machines are the same at each outlet. They are driven by compressed air and break up the stuffing material into light and fluffy fibres. A nozzle fits into the hole in the skin. The limbs and head of the toy animal are stuffed before the body to ensure that the toy animal is evenly filled. The Bear Factory imposes a quality control system to make sure that the same high standards are maintained throughout the UK. Hand stuffing is possible but it does not produce as good an end product as a machine stuffed toy animal.

The Product

The descriptions of the products in the BTIs are as follows:

"LIL COCOA CUB. A partially stuffed plushed toy representing a teddy bear. The bear has a partially stuffed face with two plastic beads for eyes. With small opening at the back as they are designed to be filled, then sewn up at a later date. Brown in colour. Measures approx. 37 centimetres (H).

CHAMP BEAR. A partially stuffed plushed toy representing a teddy bear. The bear has a partially stuffed face with two plastic beads for eyes. With small opening at the back as they are designed to be filled, then sewn up at a later date. Light brown in colour. Measures approx. 37 centimetres (H).

MALTIPOO. A partially stuffed plushed toy representing a dog. The dog has a partially stuffed face with two plastic beads for eyes, stuffed paws and tail. With a dog collar and bone shaped tag. With small opening at the back as they are designed to be filled, then sewn up at a later date. White in colour. Measures approx. 20 centimetres (H) by 38 centimetres (W)."

Except for the initial stuffing found in the products at the point of importation, the skins are virtually hollow. The Bear Factory logo hand tags are attached.

The statutory material

Chapter 95 of the Combined Nomenclature starts with "Notes". Note 1 contains a list of 21 items, none of which applies here; the Chapter is said not to cover those items. Note 3 reads as follows:

"Subject to Note 1 above, parts and accessories which are suitable for use solely or principally with articles of this Chapter are to be classified with those articles."

The words describing the scope of Code 9503 00 read:

"Tricycles, scooters, pedal cars and similar wheeled toys; dolls' carriages; dolls; other toys; reduced-(scale) models and similar recreational models, working or not; puzzles of all kinds:"

The relevant 8-digit code reads:

" - Toys representing animals or non-human creatures

- - 8503 00 41 - - Stuffed

- - 8503 00 49 - - Other"

The General Rules for the Interpretation of the Harmonised System have binding force. The "Explanatory Notes" to those General Rules are "an important aid to the interpretation of the scope of the various headings but do not have legally binding force": see paragraph 25 of BVBA Case C-486/06.

GIR 1 reads:

"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, providing such headings or notes do not otherwise require, according to the following provisions."

Explanatory Note III to GIR 1 provides:

"(III) The second of this Rule provides that classification shall be determined:

(a) according to the terms of the heading and any relative Section or Chapter Notes, and

(b) where appropriate, provided the headings or notes do not otherwise require, according to the provisions of Rules 2, 3, 4 and 5."

GIR 2(a) reads:

(a) any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article. It shall also be taken to include a reference to that article complete or finished (or falling to be classified as complete or finished by virtue of this rule), presented unassembled or disassembled."

The Explanatory Notes to GIR 2 provide, so far as relevant:

"(I) The first part of Rule 2(a) extends the scope of any heading which refers to a particular article to cover not only the complete article but also that article incomplete or unfinished, provided that, as presented, it has the essential character of the complete or finished article."

GIR 3, 4 and 6 read, so far as is relevant, as follows:

"3. Where 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 headings providing a more general description. …

Groups which cannot be classified in accordance with the above rules shall be classified under the heading appropriate to the goods to which they are most akin.

(6) 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 contentions of the parties

Customs say that the imported products are partially stuffed toys possessing, in each case, the essential characteristics of a stuffed toy. It is, they say, relevant and legitimate to have regard to GIRs 2-5; and where, as here, the classification relates to incomplete or unfinished products, i.e. the partially stuffed skins, it must be relevant to have regard to GIR 2(a) whose effect is to extend classification to unfinished products provided they have the essential characters of the finished product. The products are designed to take the stuffing. They have the size and outward appearance of a stuffed toy. They have preset holes for stuffing and pre-threading to facilitate sewing up. All those demonstrate that the products possess the essential characters of stuffed toys. Customs further contend that, regardless of whether the partially stuffed skins have the essential characteristics of a stuffed toy, they would nevertheless fall to be classified under heading 9503 0041 by reason of Note 3 to Chapter 94, as "part of" a stuffed toy, to be used solely or principally in order to make such a stuffed toy.

For The Bear Factory it is argued that GIR 2(a) has no application. The products can be classified using GIRs 1 and 6; those rules therefore have priority to Rules 2-5. Specifically, the first step is to look at the heading which best classifies the product. It is common ground that the appropriate heading is 9503 00, i.e. "toys, representing animals …". Then in comparing the subheadings "stuffed toys" and "other toys" GIRs 1 and 6 lead to the straightforward conclusion that because the products are not stuffed toys at the point of importation, they must therefore be classed as "other". The Bear Factory further contends that even if GIR 2(a) were in principle applicable, it would not apply here because the products do not have the characters of stuffed toys. The essential character of a stuffed toy is the combination of the outer skin plus the stuffing; the empty skins as imported cannot be regarded as having the essential character of that final product. This is because filling out the skins is essential to creating the shape and appearance of the product. At the point of importation neither the stuffing nor any of the essential characters or characteristics are present. Thus GIR 2(a) cannot be invoked to affect the classification of the product.

The Bear Factory further argue that the products at the time of importation are not "parts" for the purposes of Note 3.

Does GIR 2(a) have any application here?

There is an evident priority in the GIRs. Rule 3 comes into effect given that the goods are classifiable under more than one heading. Rule 4 relates to goods which cannot be classified under Rules 1-3. (Rule 5 is not applicable here.) By contrast to Rules 3 and 4 however, there is nothing in the wording of Rule 2(a) or in its Explanatory Notes that can be construed as excluding its application where the classification can be determined by operation of Rules 1 and 6. Rule 2 reads as a provision of general application which, in appropriate situations (such as the classification of incomplete or unfinished articles), must be employed. The Explanatory Note (1) to Rule 2(a) makes it clear that Rule 2(a) actually extends the scope of "any" heading, the one and only qualification being that the article in question has the essential character of the complete or finished article.

The Bear Factory place reliance on the Tribunal decision in Brother International Europe Ltd v HMRC (2007) Decision C-248. The appeal in that case concerned the revocation by Customs of a large number of BTIs which Brother had obtained in respect of "multi-function" machines, on the basis that they were all classed as photocopiers. In arriving at its decision, the tribunal considered the application of GIRs 1, 6 and 3 and, in particular, the order in which these rules must be applied. The decision, in paragraphs 23-25, states that GIR1 is the most important of the GIRs to be applied; it goes on to observe that Rule 6 adopts the same approach at subheading level. The paragraph concludes with these words:

"Thus, before applying any other rule, it is necessary to examine the headings and subheadings which fall for consideration and any chapter and chapter notes of relevance."

We do not think that that passage helps The Bear Factory. Brother was concerned with Rules 1, 6 and 3; we are concerned with Rule 2 which, as already noted, has no such preconditions as are found in GIR 3.

The effect of GIR 2(a)

The effect of GIR 2(a) in the present circumstances is that the expression "stuffed" toy will cover the products so long as (a) the product can properly be said to be an incomplete or unfinished stuffed toy and (b) at the time of presentation the product has the essential character of the complete or finished stuffed toy.

Our approach to that composite question of classification involves applying well-established principles. First, the objective characteristics and properties as defined in the heading are what count; and for that purpose the intended use of the product in question may constitute an objective consideration. (That comes from paragraphs 23 and 24 of BVBA, Case C-486/06.) Second, the fact that the product in question may, as a purely theoretical possibility, be used in a manner that is inconsistent with its intended use as objectively determined, cannot determine the proper classification: see Thyssen [1995] ECR 1-1381. Third, when asking whether a particular product, being a part, is to be treated in the same way as the complete or finished article, it may not be so treated where, to enable the part to be used, the finished article needs modifying by a complex method which may involve buying in some specialised ingredient (such as software). See Medion, Case C-208/06. Fourth, the product falls to be classified at the point of importation.

We now turn to the preliminary stage of the GIR 2(a) test. Are the products complete or finished stuffed toys?

The three products are described in paragraph 10 above. We will take the "Maltipoo Dog" as an example. The animal to which the name relates is a cross between a Maltese terrier and a poodle. It is recognisable as such at the point of importation from the following features:

(i) it is made of a plush, woolly, white texture;

(ii) its head is partially stuffed and it has two plastic beads for eyes; it has the features of a dog;

(iii) it has four legs and a tail and the paws and tail are stuffed and

(iv) a dog collar and a bone shaped toy are attached to the product.

In that state the product can properly be said to be an unfinished stuffed Multipoo puppy or dog. The product is designed to be stuffed as a further process following importation and as part of The Bear Factory's technique for sale to customers. We cannot envisage any other appropriate description. It is not fashioned, and certainly not presented, as a glove puppet, which was the only other description suggested by The Bear Factory. The same goes for the other two bear products, the Lil Cocoa Cub and the Champ Bear.

We move on to the second stage of the GIR 2(a) test. The essential characters of each of the complete or finished articles are those of stuffed toy animals representing, in two cases, brown teddy bears and, in one case, a dog or puppy. Each stuffed toy animal contains all the items comprised in the particular product plus stuffing.

The intended use of each product is that it should be stuffed and so made into a stuffed toy bear or dog as part of The Bear Factory's selling technique. The products, i.e. the skins, are pre-stuffed. That makes each one identifiable as a particular animal. They have preset holes and a form of pre-threading installed into them at the point of importation. Those features demonstrate the intended use of the products.

The products are sold unstuffed only in exceptional circumstances. While it is theoretically conceivable that they could be used in their current states, the possibility is, we think, so remote as to be left out of account for classification purposes.

Stuffing the product in the way it is done at the Build-a-Bear Workshop brings it to the standard required by The Bear Factory and as expected by its customers. The process is not a particularly technical exercise. Certainly it is not complex in the sense recognised by the Court as relevant in Medion. Moreover, we are satisfied that the product can be stuffed by hand without resort to the specially designed stuffing machine; and when so stuffed it becomes stuffed toy animal.

Finally we record that the product is the main constituent of the finished stuffed toy animal. The product gives the character to the finished article. Thus apart from the additional stuffing it can properly be said already to possess all the characteristics of the stuffed toy that it is designed to become.

For those reasons we have concluded that the products have the essential characters of complete or finished articles, i.e. the stuffed toy animals.

In reaching this conclusion we have taken account of GoldStar Europe GmbH, Case C-401/93, where the ECJ were concerned that the classification of the drive mechanisms that were for use with video-cassette recorders; the drive mechanisms were imported separately and the question was whether they had the essential characters of video recordings or reproducing apparatus. The ECJ's conclusion was that the essential character of a video recording was to be found in the combination of the machine and the electronic component. The Bear Factory argued by analogy that the essential character of a stuffed toy is the combination of the outer skin and the stuffing with the result that the imported skins should not be regarded as having the essential characters of the finished product, i.e. the stuffed toys. We have already observed that the partly stuffed skin of the toy animal characterises the finished product. No useful comparison can, we think, be made with the circumstances of GoldStar.

Are the products to be regarded as part of a stuffed toy : Note 3 to Chapter 95?

The Bear Factory argue that "parts and accessories" in Note 3 should be seen as referring to a single concept of items to be used with articles described in the Chapter. The toy animal skins are not parts to be used with a stuffed toy but are the finished article at the point of importation and up to the point of sale. The toy animal skin is the toy which the customer chooses, purchases and, with assistance from a trained member of staff, uses to create his or her own "Best Friend", which is a customised stuffed animal toy. The Bear Factory sells the experience and not just the stuffed toy.

As we read Note 3 in the circumstances of the present case, we think that the products (the partially stuffed animal skins) are to be classified under heading 9503 0041 by virtue of Note 3 to Chapter 95, as "part of" a stuffed toy, to be used solely or principally in order to make such a stuffed toy. We have already observed that the partially stuffed skins are clearly recognisable as parts of the finished product and intended to be used in order to make the finished product, i.e. a stuffed toy. They are, apart from the additional stuffing required, the main part which will go to form the finished product. It is also clear to us that the skins are really only suitable for making such stuffed toys and that they have no other discernible use.

Further, we agree with Customs that The Bear Factory's reliance on the word "with" in Note 3, as operating to prevent the partially stuffed skins from being parts of the stuffed toy, is wrong. In the first place Note 3 is there for guidance and it would be inappropriate to focus on the use of the single word. Secondly, the word "with", apt to be used for "accessories" to be used "with stuffed toys", is to be considered purposively when considering "parts". Parts (such as the partially stuffed skins) would by definition be used in making the finished product and incorporated therein, rather than, strictly speaking, be used "with" the finished product. If The Bear Factory's narrow approach were to be adopted, this would deprive the reference to "parts" of any meaning. Thirdly, we have been referred to the French and the Spanish versions of the Explanatory Notes. These use different expressions and refer to parts and accessories "destined to" the finished products rather than as "suitable for use with".

Conclusion

For the reasons given above, we dismiss the appeal.

SIR STEPHEN OLIVER QC

CHAIRMAN

RELEASED: 2 May 2008

LON 2007/7083