[2009] UKFTT 326 (TC)

TC00269

Appeal number LON/06/7076

CUSTOMS DUTY – customs value – whether payments a condition of sale of imported goods – whether royalties or licence fees – whether buyer free to obtain such goods from other suppliers

FIRST-TIER TRIBUNAL

TAX

PROLAB NUTRITION EUROPE LIMITED

Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS
Respondents

TRIBUNAL: BARBARA MOSEDALE (Chairman)

SHARWAR SADEQUE

Sitting in public in London on 10 and 11 September 2009.

Ms S Choudhury, Counsel, instructed by Butterworth Jones, Accountants, for the Appellant

Mr S Singh, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

1

DECISION

Introduction

  1. HMRC visited the Appellant in late 2005 and enquired into the terms of their business. This led to HMRC issuing a decision letter on 26 May 2006 and a post clearance demand on 1 June 2006 for £81,710 which relatedcertain invoices for “export and trademark distribution rights” between 30 October 2003 and 16 May 2005. The decision was upheld on review on 23 August 2006. The Appellant appealed. The demand was later reduced to £77,211.94 on the grounds that the calculation was wrong as by mistake HMRC had included some product invoices in the schedule (on which duty had already been paid).

Background

  1. The Appellant company has been in business since the early 1990s. Its business was and still is the wholesale import of specialist sports nutritional supplements. Almost from its inception, its main supplier was Sportika Export Inc (“Sportika”) a company based in the USA which specialised in exporting these specialist nutritional supplements. The Appellant imported a number of brands but products (“Prolab goods”) manufactured by Prolab Nutrition Inc. (“Prolab Inc”) became for some years its most important line. In fact in 1993, the Appellant which had been incorporated under the name Strength Systems UK, changed its name with the consent of Prolab Inc to Prolab Nutrition Europe Ltd.
  2. Sportika had created a niche for itself in US, where many of these nutritional supplements are produced, as an exporter of such products. It was for a number of brands, including Prolab, the sole exporter for the manufacturer. It was therefore in a position to give its customers exclusive distribution rights for these brands.
  3. The Appellant and Sportika had a close business relationship and until 2003 there was no written contract between them for their business dealings. Mr Alden, director and owner of the Appellant was and remains a close friend of Mr White, a director of Sportika. When Sportika took on a new brand of products as an exclusive exporter, it would first offer the exclusive distribution rights in Europe to the Appellant.
  4. In practice, where the Appellant took up the offer of exclusive distribution rights in Europe for that brand, Sportika would invoice the agreed price for the goods and then a few days later invoice an amount which was calculated to be almost (but not exactly) the same as the total price for the goods. Customs duty was paid on the first invoice but not the second, which was stated to be for “export and trademark distribution rights”. The post clearance demand was for duty to be paid on these export and trademark distribution rights invoices in the period 30 October 2003 to 16 May 2005.

Law

  1. Article 28 of Council Regulation 2913/92 (which is the Community Customs Code) provides that “the provisions of this chapter shall determine the customs value for the purposes of applying the Customs Tariff of the European Communities and non-tariff measures laid down by the Community provisions governing specific fields relating to trade in goods.”
  2. Article 29 of the same Council Regulation provides that:

“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 Articles 32 and 33…..”

  1. From the above Article it can be seen that the Appellant must pay customs duty on the customs value of the imported goods. The customs value is the “transaction value”. The transaction value is “the price actually paid or payable for the goods…adjusted where necessary, in accordance with Articles 32 and 33…”
  2. Article 29(3)(a) defines what is the price actually paid or payable. It is as follows:

“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 of the seller…”

  1. It is therefore critical to decide whether the payments in question which were paid to Sportika were made as a condition of sale of the imported goods. That is not the end of the matter, however, as Article 29(1) states that the transaction value is the price paid or payable for the goods but “adjusted, where necessary, in accordance with Articles 32 and 33”.
  2. Article 33 is a list of sums which are to be deducted from the transaction value and Article 32 is a list of items which are to be added. Article 33 deals with items such as warehousing, transport & buying commissions and it was not suggested that it has any relevance in this case. In so far as relevant, Article 32 provides:

“(1) In determining the customs value under Article 29, there shall be added to the price actually paid or payable for the imported goods…

…

(c) royalties and licence fees related to the goods being valued that the buyer must pay, either directly or indirectly, as a condition of sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable.”

  1. The effect of Article 32(1) is therefore to add to the price actually paid or payable additional amounts including payments of royalties and licence fees. In all cases they can only be added to the price where they are paid “as a condition of sale” of the goods in question.
  2. At first glance this provision does not appear to add anything to Article 29(1) which already provides that the transaction value includes the total payment made by the buyer to or for the benefit of the seller as a condition of sale. As royalties and licence fees can only be added to the price where they are paid as a condition of sale, clause 32(1)(c) seems superfluous. A royalty or licence fee paid as a condition of sale which is therefore liable to be added to the price under 32(1)(c) would in any event have been subject to duty under clause 29(3)(a).
  3. However, it may have two purposes. Firstly the reference in Article 32(1)(c) to “indirectly” might be intended to capture payments to third parties: if that is the distinction it makes no difference in this case where the disputed payments were from buyer to seller. Alternatively, its purpose may be merely to put beyond doubt that Article 29 applies to royalties and licence fees (if they are paid as a condition of sale). Ms Choudhury’s take on the word “indirectly” was that it could be referring to payments which were invoiced separately, as in this case. We do not agree. Article 29(1) applies to all payments which are made as a condition of sale of the goods in question whether or not they are invoiced separately. Liability to duty would not be affected by payments split between invoices. If confirmation of this proposition were required, the Tribunal notes that in the case of Unifert Handels GmbH v Hauptzollampt Münster C-11/89 (which was not cited at the hearing) a sum invoiced separately from the purchase amount was nevertheless held to be part of the price paid under the forerunner of Article 29.
  4. Article 32(5) provides:

“Notwithstanding paragraph 1(c):

(a)Charges for the right to reproduce the imported goods in the community shall not be added to the price actually paid or payable for the imported goods in determining the customs value; and

(b)Payments made by the buyer for the right to distribute or resell the imported goods shall not be added to the price actually paid or payable for the imported goods if such payments are not a condition of the sale for export to the Community of the goods.”

  1. Article 32(5)(b) does not appear to add anything to Article 29, except that it is confirming that distribution rights which are a condition of the sale of the imported goods should be added to the transaction value. It was not suggested that Article 32(5)(a) had any relevance in this case: the Appellant was not reproducing the imported goods.
  2. There has been an assumption by both parties at least up to the hearing that the case turned on Article 157 and 159 of Commission Regulation 2454/93 (the implementing regulation). This sets out the meaning of “royalties and licence fees” referred to in Article 32(1)(c) above. However, as can be seen from the foregoing analysis, the meaning of “royalties and licence fees” is not relevant if the payment is in any event caught under Article 29. This is because Article 32 only adds items to the transaction value: it does not allow deductions from the transaction value as ascertained in accordance with Article 29.
  3. Article 157 of Commission Regulation 2454/93 provides:

1.For the purposes of Article 32(1)(c) of the Code, royalties and licence fees shall be taken to mean in particular payment for the use of rights relating:

-to the manufacture of imported goods (in particular, patents, designs, models and manufacturing know-how), or

-to the sale for exportation of imported goods(in particular, trade marks, registered designs), or

-to the use or resale of imported goods (in particular, copyright, manufacturing processes inseparably embodied in the imported goods).

2.Without prejudice to Article 32(5) of the Code, when the customs value of imported goods is determined under the provisions of Article 29 of the Code, a royalty or licence fee shall be added to the price actually paid or payable only when this payment:

-is related to the goods being valued, and

-constitutes a condition of sale of those goods.”

  1. Where there is a payment of a royalty or licence fee, Article 159 of Commission Regulation 2454/93 (the implementing regulation) provides for an exceptionunder which the payment is not to be added to the price paid or payable:

“A royalty or licence fee in respect of the right to use a trade mark is only to be added to the price paid or payable for the imported goods where –

-the royalty or licence fee refers to the goods which are resold in the same state or which are subject only to minor processing after importation,

-the goods are marketed under the trade mark, affixed before or after importation, for which the royalty or licence fee is paid, and

-the buyer is not free to obtain such goods from other suppliers unrelated to the seller.”

  1. The parties agreed that the Appellant’s payments in respect of which HMRC are demanding duty fell into the first two sub-paragraphs of Article 159 but disagree about whether the last condition applies.

The Appellant’s case

  1. The Appellant’s case is that although the customs value of imported goods will include royalties and licence fees which the buyer must pay as a condition of the sale of the imported goods in question, royalties and licence fees which relate to trade marks are only included in the price paid or payable for the imported goods if all three conditions in Article 159 are met. The Appellant considered that the payments at issue in this appeal were within the meaning of “royalties and licence fees”. Firstly, the Appellant considered that Article 157, which gives examples of royalties and licence fees must be taken to include distribution rights not least because Article 32(5)(b) refers to payments for distribution rights. In any event, the Appellant considered that the payments were for both distribution rights and trade mark usage. The Appellant then considered that the exception in Article 159 applied and that the Appellant was within this. In particular, although the Appellant accepted that the first two sub-paragraphs of Article 159 were met, it considered that the last one was not: the Appellant considered it was free to source goods elsewhere.

HMRC’s case

  1. HMRC’s primary submission was that the payments at issue in this case were a condition of the sale of the goods to the Appellant and part of its customs valuation. If they failed on that, they considered that the payments were not excepted from customs valuation because of Article 159. HMRC considered the payments were at least mainly for exclusive distribution rights and did not think they were “royalties and licence fees” and even if they were, the Appellant was not free to source goods elsewhere.

Facts

  1. The following are the Tribunal’s findings of fact. Mostly the facts were not in dispute but where they were we set out the dispute and our finding of fact. As stated earlier, the business relationship between Sportika and the Appellant was governed by unwritten agreements, but this changed in 2003.
  2. The Appellant entered into a written agreement with Sportika on 1 August 2003. It was called “Distribution Agreement”. The terms in so far as relevant are set out below. This agreement did not set out how much Sportika would be paid either for the goods purchased or the “export trademark and distribution rights”. Clause 4.1 merely provided “All orders in respect of the products…shall be subject to the following terms and conditions – 4.1.1 the price payable for the products from time to time shall be as agreed upon by the parties….”
  3. The evidence of Mr Alden and Mr White was that the purpose of that written agreement was to demonstrate to Natrol, a US based company which in 2003 bought out Prolab Inc, the closeness of the relationship between the Appellant and Sportika and in particular that Sportika already had an effective distribution chain for Prolab goods into Europe. The two men were concerned that Natrol would by-pass the two companies and sell Prolab goods directly into the UK. No other distribution agreement was entered into in respect of any other goods supplied to the Appellant by Sportika. Their evidence was even in respect of Prolab goods the terms on which they actually did business remained unchanged during the existence of the written agreement.
  4. In 2005 Natrol opened a warehouse in the UK and the Appellant was directed to buy Prolab goods from there and not from Sportika. It seems the Distribution agreement was never formally brought to an end but it became defunct as the Appellant ceased to source Prolab goods from Sportika and Sportika ceased to be able to exclusively supply Prolab goods.
  5. HMRC challenged the evidence that the purpose of the two agreements was window dressing to convince Natrol to leave Sportika as the sole exporter of Prolab goods, suggesting that the agreement was worthless as Natrol was not a signatory and that it failed in its stated purpose as Natrol did in the end by-pass Sportika. The Tribunal, however, accepts the Appellant’s account: there is no reason to doubt the evidence of Mr Alden or Mr White on this and indeed the account makes sense. It seems a reasonable supposition that Natrol would take a distribution chain backed up by written contracts more seriously than one without. On the other hand, if the purpose of the agreement had been simply to put the oral contract between the two companies into writing as contended by HMRC, it would not have been limited to Prolab goods.

The distribution agreement

  1. The agreement applied to the “products” which were defined in clause 1.1.1 as “the entire line of PROLAB Nutrition products from time to time during the currency of this agreement or any renewal thereof manufactured by or for the seller, whether bearing its trademarks or not; and as per Schedule 1”. There is no definition of “the seller”. Logically, this must be a reference to Prolab Inc (Sportika is the “exporter”). AlthoughProlab Inc is intended to be referred to as the “manufacturer” it is clear that elsewhere in the agreement definitions are not rigidly adhered to.
  2. No Schedule has been found. Mr Alden and Mr White’s evidence was that the Distribution Agreement applied to all Prolab goods from time to time. They were unable to produce any schedule and doubted that it had ever existed. Indeed clause 1.1.1 makes complete sense without a schedule: without a schedule the “products” are all products made by (or for) Prolab Inc at any time. We find that the Distribution Agreement was intended to apply to all Prolab products manufactured at any time. On its face, it is clear that it was not intended to apply to goods other than Prolab goods and HMRC did not suggest otherwise.
  3. Territory is defined in clause 1.3 as “the geographical area the exporter is granting to the importer for rights of distribution is the country of United Kingdom and the European Union”. Clause 2.1 provided “the Exporter hereby appoints the importer as a distributor for the marketing and selling of the products in the territory.” The Appellant was defined as the Importer.
  4. Clause 2 dealt with the Appellant’s exclusive rights:

“During the period of this agreement the exporter shall not:-