CONTINENTAL WINE and FOOD Limitedappellant

E00965

EXCISE DUTY – Excise Duty Directive (92/83/EEC) having direct effect – whether article 16 (intermediate product) or article 20 (ethyl alcohol) applies – Directive incorporates test by reference to tariff classification – Combined Nomenclature (CN) – rum and coconut tasting alcoholic beverage produced from a fermented made-wine base and fortified with distilled alcohol – BTI classifying the beverage under CN heading 2208 – whether beverage properly classified under CN heading 2206 (fermented beverage) or 2208 (spirituous beverage) – objective characteristics to be considered to determine which component gives the beverage its essential character – General Rule of Interpretation (GRI) 3(b) – held the distilled alcohol gives the beverage its essential character – therefore properly classified under CN heading 2208 – therefore article 20 of the Excise Directive applies – appeal dismissed

MANCHESTER TRIBUNAL CENTRE

CONTINENTAL WINE AND FOOD LIMITEDAppellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMSRespondents

Tribunal:JOHN WALTERS QC (Chairman)

MISS CAROLE ROBERTS

Sitting in public in Manchester on 9 and 10 March 2006

Alan Powell, of Triple Two Consulting, for the Appellant

Owain Thomas, Counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

DECISION

The appeal and the Tribunal’s jurisdiction

Continental Wine and Food Limited (“the Appellant”) appeals in terms (according to the Notice of Appeal sent to the Tribunal) against a decision (“the Original Decision”) made by Mr. R. Lamb, an Officer of HM Customs and Excise (predecessors of the Commissioners of HM Revenue and Customs and generally under both styles referred to in this Decision as “Customs”) to reject a claim for repayment of £21,002.73 excise duty and to assess additional excise duty of £31,528.73, communicated to the Appellant by a letter dated 23 January 2003. The Original Decision was in fact confirmed by a decision on review, communicated to the Appellant by Mrs. J. A Birnie, a Reviewing Officers of Customs, in a letter dated 1 April 2003. The assessed duty was paid by the Appellant.
The rejection of the repayment claim, and the assessment, followed from the ruling of Customs Tariff Classification Section (a binding tariff information (“BTI”)) that the Appellant’s product “Bali Tropical Alcoholic Drink with Caribbean Rum & Coconut flavour” (to which we refer in this Decision as “Bali”) should be classified under tariff heading 2208, and not under tariff heading 2206, as contended for by the Appellant.
These are tariff headings of the Combined Nomenclature (“CN”) and, put shortly, heading 2208 covers spirituous beverages, while heading 2206 covers fermented beverages. In detail, these headings are as follows:

“2206 – Other fermented beverages (for example, cider, perry, mead); mixtures of fermented beverages and mixtures of fermented beverages and non-alcoholic beverages, not elsewhere specified or included.

2208 – Undenatured ethyl alcohol of an alcoholic strength by volume of less than 80% vol.: spirits, liqueurs and other spirituous beverages.”

The BTI was issued on 1 November 2002 in response to the Appellant’s request dated 14 October 2002. The Appellant made this request (notwithstanding the fact that the Appellant did not intend to export the product Bali) because Mr. Lamb indicated that a BTI was necessary for the purpose of his consideration of how, if at all, an extra-statutory concession (“ESC” – paragraph 4.8 of Notice 48) which took effect on 27 April 2002 could apply to the product Bali.
Mr. Powell, for the Appellant, suggested in argument that the BTI was invalid because it does not relate to an envisaged import or export operation. This is not right, however, because it is clear from the provision for requesting and supplying a BTI (article 11 of Council Regulation 2913/92/EEC establishing the Community Customs Code) that a BTI may be requested in any circumstances, but that the customs authorities are only bound to supply one where an import or export operation is actually envisaged. In any other case, the customs authorities have a discretion to supply a BTI, and, in this case, the BTI has been supplied by Customs in the lawful exercise of its discretion. It is therefore valid.
The ESC, in short, allowed relief from excise duty to certain mixed beverages, which would otherwise be dutiable under the domestic excise duty legislation as spirits, by waiving the application of a condition laid down by sections 57 and 58 Alcoholic Liquor Duties Act 1979 (“ALDA”) – that a permitted mixture of made-wine, or wine, and spirits in an excise warehouse must be in a proportion not exceeding 12 litres of alcohol to 1 hectolitre (100 litres) of made-wine, or wine – “so long as the resultant product does not assume the essential characteristics of a spirit”. Mr. Lamb needed to know whether the product Bali “assumed the essential characteristics of a spirit” in order to decide whether the ESC applied to it, and he suggested to the Appellant that it should request a BTI to assist him in deciding this issue.
By a letter dated 25 September 2003 sent to Customs by KPMG, who were then representing the Appellant, a further departmental review was requested. This request was treated by Customs as a requirement for a further review within section 14(5)(a) Finance Act 1994 (“FA 1994”). The decisions to be reviewed fell within section 14(1)(b) FA 1994 with regard to the duty assessed and within section 14(1)(bb) with regard to the refusal of the claim for repayment of duty. A different Reviewing Officer, Mr. S. Palmer, was appointed to conduct the review and requested samples for independent organoleptic testing by CCFRA Technology Ltd. (“CCFRA”). CCFRA is, the Tribunal understands, a laboratory accredited by the United Kingdom Accreditation Service to carry out tests such as the organoleptic tests envisaged in this case. Apparently both CCFRA and the Appellant are members of the Wines and Spirits Association. (Organoleptic testing, the Tribunal understands, is a scientific sensory process to identify taste and smell.)
The Appellant objected to Customs’ proposals for testing on a number of grounds and refused to supply the samples unless the specific terms of reference for the testing were agreed between the Appellant and Customs. Agreement for the provision of samples was not reached. Customs applied to this Tribunal for a direction that the Appellant provide the samples requested, without any condition, and that application was dismissed (Tribunal Chairman: Mr. Colin Bishopp) after a hearing on 14 February 2006. In these circumstances the further review was not completed and, pursuant to section 15(2) FA 1994, Customs are assumed to have confirmed Mrs. J. A Birnie’s decision of 1 April 2003.
It is of course not within this Tribunal’s jurisdiction to decide whether or not the ESC should apply to the product Bali. However an appeal lies to this Tribunal under section 16(1)(a) FA 1994 with respect to a deemed confirmation under section 15(2) FA 1994. The Tribunal heard oral evidence from Mr. Palmer. It seems to the Tribunal that, for the purposes of determining the issues in dispute in the appeal, the Notice of Appeal ought to be amended so that it specifies as the decisions appealed against, the deemed confirmation under section 15(2) FA 1994 of Mrs. Birnie’s decision of 1 April 2003, which resulted from Mr. Palmer’s abortive review. We therefore direct an amendment to this effect pursuant to our power under rule 14(1) of the VAT Tribunals Rules 1986 (SI 1986 No. 590). The correctness or otherwise of the BTI (that the product Bali is properly classified under heading 2208) is therefore in issue. The powers of the Tribunal include power to quash or vary the deemed confirmation of Mrs. Birnie’s decision and power to substitute our own decision for the deemed confirmation or Mrs. Birnie’s decision (section 16(5) FA 1994).

The facts

The facts relevant to the dispute are in large part agreed between the parties. An agreed bundle of documents was put in evidence and (as we have said) we heard oral evidence from Mr. Palmer. From the evidence we find the following facts.
The Appellant manufactures the product Bali. It is manufactured by fortification of a fermented wine base made from grape juice concentrate. The drink is flavoured by the addition of rum and coconut flavouring essence.
The product Bali was launched in 1998 at a strength of 17% alcohol by volume (“abv”) and was classified for excise duty purposes as a made-wine falling with CN heading 2206. In this Decision we refer to the product Bali in this formulation as “the Original Formulation”.
In 2002 the product Bali was re-formulated to a higher strength of 21% abv (the Reformulation I formulation) in order to compete with similar products on the market, predominantly imported from other EU Member States. Mr. Powell, for the Appellant, submits, and the Tribunal accepts, that fortification with spirits is carried out to stabilise the product, increase alcoholic strength and reduce raw material costs. Distilled alcohol is cheaper by volume than base wine.
The product Bali in the Reformulation 1 formulation was produced by the Appellant with the aim of taking advantage of the ESC mentioned above.
As we have already said, the Appellant was invited by Customs to apply for a BTI of the product Bali in the Reformulation I formulation in order to assist in the classification of the product Bali for excise duty purposes.
The Appellant’s application for a BTI was made on 16 October 2002. In the application (on form C103) under the heading “Description of the Goods”, the Appellant described the manufacturing process as follows:

“First stage is the fermentation of re-constituted concentrated grape juice (under temperature controlled conditions). This yields an alcoholic strength of approx. 14%.

Having completed fermentation, the base wine is centrifuged and carbon treated to remove any “off flavours” developed at fermentation stage.

The base wine is sweetened with liquid sugar / glucose and fortified with alcohol and rum to ME 22% in accordance with [Customs] regulations in the manufacture of British wine.

White rum flavour and coconut flavour are added to the product at 21.5% immediately prior to bottling.

All stages of the manufacturing process are monitored and tested in house by our technical department. Alcoholic strengths are determined by the Anton Paal density meter.”

The formulation of the product Bali in the Reformulation I formulation, which the Tribunal is considering and to which the BTI relates, is as follows

“Base wine (14% abv)583 litres

Liquid sugar263 litres

Alcohol (96.3% abv)85 litres

Rum (95% abv)61 litres

Flavours6.1 litres”

The elements of alcohol derived from distillation in the Reformulation I formulation are represented by the alcohol and the rum (96.3% of 85 litres, plus 95% of 61 litres i.e. 139.805 litres), while the elements of alcohol derived from fermentation are represented by the base wine (14% of 583 litres, i.e. 81.62 litres). On this basis the ratio by volume of distilled alcohol to fermented alcohol is 63:37.
The description of the goods given in the BTI is as follows:

“A fortified alcoholic beverage consisting of a base wine (derived from the fermentation of concentrated grape juice) to achieve an alcoholic strength of 14% – 583 litres; liquid sugar / glucose mix 263 litres; alcohol (neutral spirit at 96.3%) – 85 litres; Caribbean rum (alcoholic strength 95%) – 61 litres; white rum flavour – 0.1 litres and coconut flavour – 6 litres. Although the bulk volume of the product is derived from the wine base, the greater alcohol by volume is produced from the spirits. In addition taste and smell tests confirm that due to the addition of neutral spirit and rum, the resulting beverage no longer retains the character of a wine, but has the characteristic of a spirituous beverage of heading 2208.”

While the Appellant denies that the product Bali in the Reformulation I formulation has the characteristic of a spirituous beverage by reason of its taste or smell, or for any other reason, Mr. Powell, for the Appellant, accepts, and the Tribunal finds, that “although the bulk volume of the product is derived from the wine base, the greater alcohol by volume is produced from the spirits”.
The date of start of validity of the BTI is 1 November 2002. On receipt of the BTI the Appellant stopped production of the product Bali in the Reformulation I formulation considered above, and further reformulated the product using a higher strength base wine, thereby reducing the proportion of added spirits, so that the greater alcohol by volume was produced from the fermented wine base, and not from the spirits. This further reformulation of the product Bali was submitted to Customs’ Classification Unit and was classified as falling within CN Heading 2206 (the made-wine category), with a date of start of validity of 14 November 2002. The Appellant re-commenced production of the product Bali using this further reformulation on 15 November 2002.
The further reformulation of the product Bali which the Appellant started to produce on 15 November 2002 – and which we will refer to as “the Reformulation II formulation” – is as follows

“Base wine (17% abv)715 litres

Liquid sugar180 litres

Alcohol (96.3% abv)37 litres

Rum (95% abv)61 litres

Flavours6.1 litres”

The elements of alcohol derived from distillation in the Reformulation II formulation are represented by the alcohol and the rum (96.3% of 37 litres, plus 95% of 61 litres i.e. 93.581 litres), while the elements of alcohol derived from fermentation are represented by the base wine (17% of 715 litres, i.e. 121.55 litres). On this basis the ratio by volume of distilled alcohol to fermented alcohol is 43:57.
The Appellant submits that the product Bali in its Original Formulation and in the Reformulation I formulation has the same organoleptic characteristics (this refers to the taste and smell of the product). The Appellant also submits that the product Bali in the Reformulation II formulation has the same organoleptic characteristics of the product in the earlier two formulations. The Appellant submits that the source of the alcoholic content of the product (whether from distillation or fermentation) does not affect the organoleptic characteristics of the product, and indeed that the source of the alcoholic content, whether from distillation or fermentation, will vary from batch to batch, because fermentation is a natural process. The Appellant points out that the rum and coconut must remain constant – as they do in the formulations being considered – as these are, in the Appellant’s submission, the major contributors to the essential organoleptic characteristics of the product Bali, and, if they did not remain constant, consumer and customer complaints would arise, due to variability of the product. We accept these submissions and find facts accordingly.
The Tribunal did not see, smell or taste a sample of the product Bali. Mr. Palmer tasted samples from one formulation accepted by Customs to be properly classified as 2206 (a fermented beverage) and from the Reformulation I formulation (the formulation in dispute). The samples were unidentified when he tasted them. His evidence was that he could taste coconut and rum in both samples. He accepted that he was not an expert in tasting (i.e. in assessing organoleptic characteristics of a product) and confirmed that he could detect no difference in taste between the samples.
The reason why the Appellant did not submit samples of the product Bali to be organoleptically tested by CCFRA was that it insisted that such testing should take the form of a comparison of the organoleptic characteristics of the product Bali in the Reformulation I formulation and in the Original Formulation or the Reformulation II formulation, the Appellant maintaining that there was no, or no significant difference between the organoleptic characteristics. Customs on the other hand, and this was Mr. Palmer’s evidence, insisted that this was the wrong basis on which to invite CCFRA to carry out organoleptic testing. They insisted that as the review was a review of the BTI, the testing should be of the product Bali in its Reformulation I reformulation in isolation.
At the hearing, the Tribunal indicated that it would reconsider Mr. Bishopp’s decision not to direct that a sample of the disputed product, i.e. the product Bali in its Reformulation I reformulation, be provided for testing by CCFRA.
We have decided not to disturb Mr. Bishopp’s decision. We have concluded that testing by CCFRA is not necessary for us to reach a decision in this appeal. We note that Mr. Thomas, for Customs, stated that he was content to rest on the evidence as it presently stands.
We accept the evidence of Mr. Palmer that there is no or no significant difference in the taste and smell of the product Bali in its Original Formulation and in the Reformulation I reformulation. We also accept his evidence that the product in both formulations smells and tastes of rum and coconut.
The Tribunal was shown an empty bottle of the type in which the product Bali is put up for sale. It is a large (70 cl) glass bottle, produced for normal sale to the off-licence trade, with an art-work design featuring palm trees with the word “Bali” prominently displayed, and with the description “Tropical Alcoholic Drink with CARIBBEAN RUM & COCONUT flavour”. The word “Caribbean” is repeated in stylised lettering.
We find from this evidence that the product Bali is marketed as a drink with characteristics designed to evoke tropical places (Bali and the Caribbean) and a tropical lifestyle of relaxation, and a tropical taste of rum and coconut. We take note of the fact that rum is and is commonly known to be an alcoholic beverage and, in fact, a spirituous beverage, specifically mentioned under CN heading 2208.
The product Bali is sold in the UK market with a retail price of between £5 and £7.
Mr. Palmer applied a general test in considering whether to uphold the BTI. This was on a provisional basis pending testing of the product Bali in the Reformulation I reformulation by CCFRA, and subject to any evidence that such testing might produce. The test was set out in his letter dated 27 February 2004 to KPMG, then acting for the Appellant, and was, relevantly, as follows:

“Three tests are applied to products that are comprised of a mixture of fermented beverage and added alcohol to establish whether it should be characterised as a spirituous or a fermented beverage … :

Whether the spirituous or fermented liquor contributes more to the overall volume of the liquor.
Whether the spirituous or fermented liquor contributes more to the alcohol content of the liquor.
Whether the external characteristics of the product (for example, how it is labelled and presented) are those of a spirituous or fermented beverage.

If both of the tests looking at the relative contributions to the product show that it is made up of more spirituous rather than fermented liquor, the product would be classified as a spirit and will be duties as such. If similarly, both of these tests show that a product is comprised primarily of the fermented element, then the fortified product will retain its duty status as a made-wine or wine.