Appeal Numbers LON/02/7018

[2009] UKFTT 123 (TC)

TC00091

Appeal numbers LON/02/7018

LON/02/7019

CUSTOMS DUTIES — tariff classification — stand-alone WAN apparatus and modem — whether to be classified before 1 January 2007 in heading 8471 (automatic data-processing machines and units thereof) or heading 8517 (electrical apparatus for line telephony) — Peacock, Cabletron Systems and Olicom considered — all goods properly classified in heading 8471 — reference to Court of Justice unnecessary — appeals allowed

FIRST-TIER TRIBUNAL

TAX

MOTOROLA LIMITED

Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS

Respondents

TRIBUNAL: Judge Colin Bishopp

Alex McLaughlin

Sitting in public in London on 16 to 18 February 2009

Valentina Sloane, counsel, instructed by Vantis Custom House, for the Appellant

Kieron Beal, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

1

DECISION

Introduction

1.We are required in two linked appeals to determine the correct tariff classification for customs duty purposes of three items of wide area network (WAN) apparatus, agreed by the parties to be representative of several others, and of a modulator-demodulator, a device whose name is usually abbreviated to modem. Formally, the appeals are against a decision on review made on 8 February 2002, in relation to the WAN items, and a binding tariff information, or BTI, of 5 November 2001, upheld on review, relating to the modem. The appeals are largely of historical interest, partly because the equipment with which we are concerned is obsolete and no longer imported, and partly because the tariff was amended significantly with effect from 1 January 2007. However, at stake are large claims made by the appellant, Motorola Limited, by which it seeks to recover what it maintains were overpayments of duty. There are other appeals pending in which similar issues arise.

2.The appellant’s position, in summary, is that all the equipment was properly classified in tariff heading 8471, which applies to “units of automatic data processing machines”. The Commissioners argue that it falls within heading 8517, which is appropriate for “electrical apparatus for line telephony or line telegraphy”. During the period in respect of which the repayment claim has been made, headings 8471 and 8517 were treated differently for duty purposes. Motorola was required to pay duty at the rate exacted on commodities within heading 8517. The 2007 amendment of the tariff eliminated both the scope for argument about the correct classification of equipment of this kind and the differential rates of duty: all goods within that heading now attract duty at the nil rate.

3.Before us, Motorola was represented by Valentina Sloane and the Commissioners by Kieron Beal, both of counsel. We had samples of the representative products, with comprehensive technical specifications, and heard oral evidence about the characteristics and functioning of the equipment from Kevin Ruddock, a senior project manager employed by Motorola, and Bevan Clues, an expert witness called by the respondents. Mr Clues produced some reports, which we have also considered. We intend no disrespect to the witnesses in saying that we found what they said of limited help. The nature of the devices can be found from perusal of the technical information provided with them and, though it is not a criticism of him, much of what Mr Clues said depended for its validity on the question we must determine, that is the correct interpretation of the tariff. For these reason we have not found it necessary, or helpful to understanding, to deal with the oral evidence in any detail.

The products

4.A general description of the types of product with which we are concerned, and the manner in which they function, was provided by Advocate General Jacobs in his opinion in Case C-463/98, Cabletron Systems Ltd v The Revenue Commissioners [2001] ECR I-3495, an opinion to which we shall refer again later:

“7. It is thus common for computers to be linked together in networks. The smallest of these, typically covering a single building or complex of buildings, are called LANs [local area networks]. Larger areas may be covered by MANs (metropolitan area networks) and WANs (wide area networks). Different networks can be connected together to allow communication between them and ultimately the vast majority of them (together with many home computers) are linked on a global level to form the internet.

8. The physical links between machines may take different forms, including infrared beams. Most commonly, however, some form of cable is used - within LANs usually coaxial, twisted-pair or fibre-optic cable. In order to communicate over the cable, each computer must possess a network card of the type considered by the Court in Peacock [Case C-339/98, discussed below].

9. Where WANs are concerned, or where geographically separate networks are interconnected, it is usually necessary for part of the communication to use a rented or public telecommunication link. Because of differences between the technologies used in computer networks and in telecommunications, it was at first always necessary for the communication to pass through a modem (modulator-demodulator), which converts signals between the digital form used by most computers and the analogue form used at each end of a telecommunication link. Now, however, telecommunication networks often use digital techniques and a modem is no longer always required.

10. A specific difference between telecommunication and LAN technologies is that in the former, a ‘point-to-point’ link is set up between the two communicating parties for each communication. At the end of the communication, the link is ‘torn down’, and the parties are no longer in contact. In a LAN, however, all the computers forming part of the network are constantly connected. A communication from one of those machines to another is ‘broadcast’ over the whole network but only accepted by the designated recipient or recipients …

12. Thus, LANs and computer networks in general comprise physically, in addition to their constituent computers and the cables between them, a number of types of equipment …

13. Such devices all perform different functions at a detailed level, but they all operate in the general area I have outlined above. Their common function may be summarised as that of ensuring that all authorised communications, and no others, reach the intended addressee(s) undamaged and by the most efficient route possible. They do this, using a variety of techniques, by performing a number of tasks, including verifying, correcting, regenerating and forwarding data, converting data transmissions from one standard to another and filtering, switching, (re)directing, delaying or blocking communications. The types of equipment in issue in the present case all fall within this broad category.”

5.The three devices selected as representative samples of the WAN equipment imported by Motorola, for the most part from the USA, were designed for use in one or more of the ways described in that passage. They have several features and functions in common, but differ in their sophistication. Briefly described, they are:

• Motorola Vanguard 320: a router designed to provide for the connection of a modest Ethernet-based LAN to a WAN. Its classic use was to connect a branch office to a main office; one of these devices would normally be used in the branch office, and a more sophisticated device at the main office. The device had a motherboard, a single LAN port and a single serial port. It was capable of handling several different communications protocols (that is, means of transmitting data reliably and efficiently to other machines using the same protocol). It had two expansion slots, able to accommodate cards (“daughter cards”) which could be purchased as optional extras; we shall describe daughter cards in more detail shortly.
• Motorola Vanguard 6425: a more powerful machine than the Vanguard 320, operating in a similar fashion but able to handle a larger LAN and a greater volume of traffic. It had one LAN port, but three serial ports, which could be used to connect to a WAN or for other purposes. Mr Ruddock gave the example of a supermarket which might use the serial ports to connect to a WAN, an intruder alarm system and a refrigeration unit failure alarm; such a configuration would allow the alarms to be monitored at a remote site. The device had three expansion slots.
• Motorola Vanguard 8400: an IGX 8400 Series router, manufactured by Cisco Systems, rebranded as a Motorola product. This device was considerably more sophisticated than the other Vanguard devices, and was designed to provide for a large number of connections, for example as the head office hub connecting the LANs of several branch offices. Although the design and functions of this device differed from those of the others—it was a hub rather than a simple router—its essential characteristic relevant to this appeal, of using telephone circuits for long-distance transfer of data, was the same.

6.Daughter cards could be added to all of the devices in order to enable them to handle other types of information, such as voice or video, or to use other communication methods, such as ISDN or serial. Additional software, to drive and control the daughter card and make use of its added function or functions, was normally necessary; usually it was installed on the computer to which the device housing the daughter card in an expansion slot was linked. Mr Ruddock’s unchallenged evidence was that the expansion slots were usually, though not invariably, vacant when the devices were imported, that daughter cards were separately imported and that they could be fitted either by Motorola before supply to the customer of the device or by the customer himself. He also told us that many users of the devices did not purchase cards, but utilised only the basic functions of the devices.

7.The remaining device, a modem sold under the name Surfboard SB4100, was designed to provide a broadband connection between a user and an internet service provider, by means of a cable whose primary purpose was the provision of a television service. The user might be a domestic or a business subscriber. The device was much simpler than the Vanguard products, allowing for only one connection, usually of a single computer, by the subscriber. It was apparent from the literature provided with this device that it could also be used to connect a gaming machine to the internet, thus enabling its user to play games against others in remote locations, but Mr Ruddock’s recollection was that it was more commonly used to enable its user to enjoy a conventional, general purpose, internet service. The modem could not accommodate daughter cards.

The tariff

8.The relevant tariff, generally known as the Combined Nomenclature or CN, was that prescribed by Council Regulation 2658/87/EEC (since replaced by Council Regulation (EC) No 450/2008) and set out in its annually revised Annex 1. It is an essential characteristic of the tariff that each commodity has one, and only one, place in it. The dispute between the parties is an essentially simple one since they are agreed that there are only two possible places for these devices, namely headings 8471 and 8517. It is not necessary for the purposes of this appeal to examine other parts of the tariff, nor to consider it below heading level.

9.At the relevant time, that is from 1 January 1996 until the comprehensive revision which took place with effect from 1 January 2007, heading 8471 applied to:

“Automatic data-processing machines and units thereof; magnetic or optical readers, machines for transcribing data onto data media in code form and machines for processing such data, not elsewhere specified or included.”

10.The text of heading 8517, during the same period, was:

“Electrical apparatus for line telephony or line telegraphy, including line telephone sets with cordless handsets and telecommunications apparatus for carrier-current line systems or for digital line systems; videophones.”

11.Motorola’s case is that there is clear jurisprudence of the Court of Justice indicating that apparatus of this kind was properly classified in heading 8417, and that the Commissioners, some other member States and the European Commission had all, persistently, taken an excessively narrow view of that jurisprudence. By focusing not on the function of the equipment but on the fact that it happened to use telephone lines to perform that function they had fallen into the error of classifying such equipment in heading 8517. That heading was suitable for conventional telecommunications equipment, but not for devices such as these, satisfying a quite different purpose. The tariff, when properly applied, could accommodate these goods only in heading 8471.

12.The Commissioners’ position, in short, is that it is the manner in which the devices operate which is determinative. That they all use telephone or equivalent lines in order to perform their principal function,namely the transmission of data from one site to another, which is not, as the appellant says, irrelevant but the feature which makes it clear that they must be regarded as “electrical apparatus for line telephony”. They are stand-alone machines designed and intended for that purpose, and that purpose alone. They are excluded from heading 8471 because they are not automatic data processing machines or units of such machines; the process of converting a signal received in one form into another form (in these cases, the conversion of a digital signal to analogue form and the reverse, and the application to the data of the requisite transmission protocols) cannot be regarded as data processing, since the data is merely converted from one form to another, without being modified or altered in substance, nor used for any purpose. The process thus performed constitutes a distinct function, which dictates that the devices come within heading 8517.

13.The wording of the two headings, taken alone, does not point clearly in one direction rather than the other. Miss Sloane relied on the jurisprudence of the Court of Justice to which we have referred, while Mr Beal sought to distinguish it, or at least to argue that it was not determinative of the issue in these appeals. We shall deal with the case law in some detail later; first it is necessary to consider the other aids to interpretation of the tariff, the General Interpretative Rules, or GIRs, which form part of the Annex and have binding force. Two of the rules are of relevance here. Mr Beal relied also on the Harmonised System Explanatory Notes, or HSENs, which are not binding but are highly persuasive.

14.Rule 1 of the GIRs, which dictates the application of the remaining rules and must therefore always be addressed first, provides that

“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 headings or notes do not otherwise require, according to the following provisions.”

15.The terms of the headings being insufficient to resolve the matter, it is necessary to turn to the section and chapter notes. There are, in this case, no relevant section notes, nor any chapter notes which might assist in the application of heading 8517. Note (5) to Chapter 84, however, is of critical importance. So far as material to these appeals, it provided (at the relevant time) that

“(A)For the purposes of heading No 8471, the expression ‘automatic data-processing machines’ means:

(a)digital machines, capable of

(1)storing the processing program or programs and at least the data immediately necessary for the execution of the program;

(2)being freely programmed in accordance with the requirements of the user;

(3)performing arithmetical computations specified by the user; and

(4)executing, without human intervention, a processing program which requires them to modify their execution, by logical decision during the processing run …

(B)Automatic data-processing machines may be in the form of systems consisting of a variable number of separate units. Subject to paragraph (E) below, a unit is to be regarded as being a part of the complete system if it meets all of the following conditions:

(a)it is of a kind solely or principally used in an automatic data-processing system;

(b)it is connectable to the central processing unit either directly or through one or more other units;

(c)it is able to accept or deliver data in a form (code or signals) which can be used by the system.

(C)Separately presented units of an automatic data-processing machine are to be classified in heading No 8471.

(D)[immaterial]

(E) Machines performing a specific function other than data processing and incorporating or working in conjunction with an automatic data-processing machine are to be classified in the headings appropriate to their respective functions or, failing that, in residual headings.”

The parties’ arguments

16.The application of the Note and its slightly different predecessor has been considered by the Court of Justice in several cases, three of which relate specifically to equipment of a similar kind. It was, Miss Sloane argued, the judgments of the Court in those three cases which made it clear beyond doubt that only heading 8471 was appropriate; the Commissioners’ continuing insistence that they fell within heading 8517 revealed a fundamental misconception of what the Court had said.