[2009] UKFTT 154 (TC)

TC00120

Appeal Number: Man/07/7013 

FIRST TIER TRIBUNAL TAX

EXCISE DUTIES – Black Cherry Liqueur – alcoholic beverage 22% abv produced from fermented and distilled alcohol – duty determined by reference to customs duty tariff classification – whether product within heading 2206 or 2208 – correct classification: 2208 – Appeal dismissed

DECISION NOTICE (FULL REASONS) 
Rule 35(2) The Tribunal Procedure (First Tier Tribunal) (Tax Chamber) Rules 2009 

	RICHARD CEDRIC HART JONES	Appellant

	- and -

         THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)

Sitting in public at Manchester on 9 and 10 June 2009

Appellant  appeared in person

Owain Thomas counsel instructed by the Solicitor’s office of HM Revenue & Customs, for HMRC

© CROWN COPYRIGHT 2009

DECISION
The Appeal
1.	The Appellant was appealing against HMRC decision on review dated 27 February 2007 which upheld a classification of the Appellant’s product Black Cherry Liqueur under Commodity Code (CN) heading 22.08 as a spirituous beverage. The Appellant contended that the correct classification was 22.06, a fermented beverage.
2.	The underlying issue in this case was the correct rate of excise duty on the product.  Essentially the excise duty on alcoholic products depends not only on the alcoholic content but also on the means of manufacture, and is determined by reference to the customs duty tariff in force throughout the European Community, namely the Combined Nomenclature, or CN which forms Annex 1 to Council Regulation 2658/87/EEC. Thus the Excise Directive 92/83/EEC provides for fixed rates of taxation of spirits only when products fall within headings 22.07 or 22.08 of the CN and for a lower rate of taxation for products which fall within heading 22.06.
The Evidence
3.	The Tribunal heard evidence from the Appellant. The witnesses for HMRC were:
(1)	Susan Fiona Burling, the Sensory Quality Supervisor in the Department of Consumer and Sensory Science at Campden Brewing Research Institute (formerly Campden & Chorleywood Food Research Association).
(2)	Elizabeth Sampson, Gillian Higginson, Annette Baldwin, Alison Roache, Angela Latham, Valerie Savery, Sally James and Susan Clements who were engaged as sensory assessors on the Descriptive Panel in the Department of Consumer and Sensory Science at Campden Brewing Research Institute.
(3)	Hazel Watts, HMRC Officer who made the decision on review.
4.	HMRC commissioned Campden Brewing Research Institute to carry out a sensory assessment on the Appellant’s product. Campden Brewing Research Institute used the Free Description Test method to assess the product. Ten trained assessors were asked independently to describe the sensory characteristics of the sample which can include appearance, odour, flavour and texture/mouth feel. No indication was given to the assessors of the objective of the test and the assessment was undertaken in a controlled environment. The assessors were told that the product was alcohol in case they had an adverse reaction to it. The assessment used three of the bottles given by the Appellant. One bottle was kept as a retained sample. The three bottles were mixed together and then approximately 30ml of the sample was poured into small glasses which were then covered with watch glasses prior to presentation to the assessors. The glasses were presented to the assessors in individual sensory booths. Each assessor tasted the sample and then recorded her individual comments along with an indication of the perceived intensity. The contents of the assessor’s forms were then collated into a table summarising the findings of the panel. 
5.	The Tribunal received in evidence witness statements of Jody Alexander and Wendy Millington who were also sensory assessors but unable to attend the hearing.
6.	An agreed bundle of documents was presented in evidence.
The Facts Found
7.	The focus of the Tribunal’s decision was the correct classification of the product as described in the Appellant’s Application for Binding Tariff Information (BTI) dated 20 July 2006. 
8.	The Tribunal was not impressed with the Appellant’s evidence, in which he sought to deny previously made statements about the nature of the product. He was unable to supply the Tribunal with a sample of the finished product. The Appellant explained that the product was a prototype and no samples were available. The Tribunal noted that the dispute had been ongoing since September 2005 when HMRC advised the Appellant that his liqueurs were to be re-classified as spirits. The liqueurs at that time were in existence.
9.	Since September 2005 the Appellant has been engaged in correspondence with HMRC putting forward various proposals regarding the composition and external characteristics of the product with the purpose of securing HMRC’s agreement that the product constituted made wine within the lower rate of excise duty. HMRC’s position was that no decision could be made until the Appellant supplied full and clear written details of the product.
10.	The Tribunal considered that the Appellant was abusing the review and Appeal process by viewing it as a means of negotiation which meant that at the hearing the Tribunal was dealing with a moving target in respect of the product to be classified under the Combined Nomenclature. The purpose of the Appeal was to determine the classification of the product described in the Appellant’s Application for Binding Tariff Information (BTI) dated 20 July 2006. If the Appellant wished to put forward a product fundamentally different from that in the BTI, he should submit a fresh application. 
11.	The BTI dated 20 July 2006 gave the product the trade name of Black Cherry Liqueur with a 22 per cent alcohol by volume (abv). The Appellant suggested at the hearing that the product did not have a name. He was looking for a name more compatible with home made wide. The Appellant persisted with the name of Black Cherry Liqueur in his correspondence with HMRC upto the hearing (see the Appellant’s reply to HMRC statement of case dated 5 March 2008, letter to Ms Rebecca Taylor dated 5 July 2008). The Tribunal is satisfied that the product’s trade name was Black Cherry Liqueur.
12.	The composition of the product was agreed between the parties,  namely:

Ingredients	Volume	
Made wine @ 6 per cent abv	0.510 litre	
Ethanol @ 96 per cent abv	0.200 litre	
Black Cherry Juice to 68 BRIX	0.170 litre	
Sucrose (for sweetening)	0.090 litre	
Cherry Flavour (without alcohol)	0.025 litre	
Malto Dextrin	0.005 litre	
Total to 1 litre	1.000 litre	

13.	The Appellant’s letter dated 12 January 2006 to HMRC supplied details of various recipes for his products. The Appellant pointed out that it was more economical to use spirit rather than fermented liquor to increase the alcoholic strength of the product. The costs of buying in 96 per cent abv ethanol were much lower than the costs of producing  the same quantity of alcoholic strength by fermentation. HMRC counsel considered that the Appellant’s reliance on the ethanol to provide the high alcohol content and his  reluctance to sacrifice the quantity of ethanol for fermented liquor were relevant in determining the character of the final product as a spirituous beverage. The Tribunal agrees with counsel’s observation. 
14.	The Appellant described the process for making the product in the BTI application dated 20 July 2006 as:
“Made wine produced by fermenting sucrose solution with yeast at 20 degrees centigrade to 6 per cent abv and left to clear naturally (not filtered). All other ingredients were mixed with the made wine”.
15.	The Appellant gave a confusing account of the process at the hearing. He, however, in cross examination confirmed that the process was that described in his letter of 6 March 2006 which stated that
“We ferment sucrose sugar solution with yeast to varying alcoholic strength between 1 per cent abv and 10 per cent abv. 10 per cent being used in these formulations. After fermentation is complete the made wine is fined using bentonite and gelatine or other suitable wine fining agent. The made wine is left to clear naturally, no special treatment being necessary to achieve a brilliantly clear fermented liquor.
The wine is then fortified and mixed with the other components listed (black cherry juice, ethanol, sugar, flavouring and malto dextrin) to make the fruit wine.
16.	The critical feature of this process was that the made wine acted as the base for the Appellant’s products. The Appellant used 200 demi-johns for fermenting the made wine but only had one main mixing vessel. Thus it did not appear that the Appellant produced cherry wine and then added the ethanol, which raised the issue of whether the fermented wine base was a fermented beverage. HMRC letters dated 2 and 21 July 2008 requested clarification from the Appellant about whether the made wine base was a fermented beverage. HMRC explained that the wine base appeared to be a fermented liquid not a beverage (a drink for human consumption). The Appellant did not provide a satisfactory response to the question posed by HMRC. At the hearing the Appellant said that he viewed HMRC enquiry  as a shot in the dark and a ploy. He had  no idea what HMRC meant by beverage. The Tribunal was not impressed with the Appellant’s response. HMRC  explained clearly what they meant by a beverage,  a drink for human consumption, which was capable of a straightforward answer. Having regard to the Appellant’s evasive responses, and the method of production, the Tribunal decides  that the made wine base was a fermented liquid rather than a fermented beverage.
17.	The Appellant supplied HMRC with photographic proofs of the label for the product. The label described the product as Black Cherry Liqueur. Further the label stated that drink neat at room temperature or chilled, delicious refreshing long drink with coke and lemonade and ice. The Appellant considered that the labels carried no significance. He pointed out that he had written to HMRC on several occasions to enlist their help with the new label designs and product name. The Appellant’s comments demonstrate his misunderstanding of the process, it was not for HMRC to help him with the label design. The Tribunal places weight on the label proofs because they were indicative   of how the product would be marketed. The label proof confirmed the description of the product as a liqueur. The proposed use of the product, drinking neat or a refreshing long drink with coke and lemonade was characteristic of a spirit rather than a fermented wine.
18.	  The outcomes of the sensory assessment test were that six assessors used eight descriptions which indicated that the product was strong or very strong in alcoholic spirit. Two assessors considered the product to be low in alcoholic content. The final two assessors scored the product as alcohol/spirit 3/5, and marzipan spirit 4/5. Every assessor regarded the product as sweet. The other descriptions used by the assessors included: fruit liqueur; warming sensation; and cherry brandy.
19.	The Appellant was critical of the reliability of the results from the sensory assessment test. He considered that there were significant variations between the assessments of the individual assessors. Further the assessors were not experts in alcohol tasting. Their high scores for alcohol strength indicated that they had no appreciation of the different strengths for alcoholic beverages. The 22 per cent alcohol value for the product was relatively low when compared with the values for whisky and other similar spirits. The Appellant pointed out that Mrs Watts, the review officer, shared his view that the main conclusion to be drawn from the test was that the product had an alcoholic taste which did not favour one party’s position over the other.
20.	HMRC counsel offered a contrary view of the test. He argued that the assessors were competent and trained to perform assessments across a wide range of products. Further the Appellant had misunderstood the purpose of the test which was to analyse the sample not to compare the sample with other types of alcohol. The free description method fitted with the legal test for classification which was based on the objective characteristics of the product. Counsel acknowledged that the sensory assessment did not play a significant role in Mrs Watts’ reasoning which was based on the three stage test used by HMRC for the classification of alcoholic products. In his view Mrs Watts probably made a mistake in not giving the assessment more weight. Counsel submitted that the results of the sensory assessment test were compelling, strongly supportive of the proposition that the product was a spirituous liqueur.
21.	The Tribunal was impressed with the evidence of the individual assessors. They were experienced tasters of a wide range of products and understood what was required of them. The fact that they were not experts in alcohol tasting did not in the Tribunal’s view detract from the quality of their evidence. The Tribunal accepted HMRC’s counsel submission that their role was to analyse the characteristics of the sample before them not to provide a comparison with other alcohol products. It was inevitable that there would be variation between individual assessors. The use of a panel of ten assessors, however, reduced the likelihood of significant variation and improved the reliability of the test. The outcome was a coherent picture of the organoleptic (taste and smell) characteristics of the product. The Tribunal found that the picture painted by the assessors was one of a syrupy alcoholic product with a kick which was sweet with a warming effect.  This picture was one of a spirituous liqueur rather than a fermented wine.
22.	The Tribunal noted that Mrs Watts based her decision on the  results summary and did not take into account the individual assessments. The Tribunal considers that had Mrs Watts examined the individual assessments she might have placed more weight on the test results in arriving at her decision.
Summary of Tribunal’s Findings of Fact
23.	The Tribunal finds that
(1)	The product went by the trade name of Black Cherry Liqueur. 
(2)	The alcoholic value of the product by volume was 22 per cent.
(3)	The base wine (fermented liquor) constituent contributed more to the overall volume of the product.
(4)	The ethanol (spirituous liquor) constituent contributed more to the alcohol content of the product.
(5)	The commercial viability of the product depended upon the use of a  high volume of  ethanol in the mix, the cost of which was significantly lower than that of the fermented base wine.
(6)	The made wine base for the product was a fermented liquid rather than a fermented beverage.
(7)	The proposed use for the product was portrayed as drinking neat or a refreshing long drink with coke and lemonade. The proposed use was characteristic of a spirit rather than a fermented wine.
(8)	The picture painted by the assessors was one of a syrupy alcoholic product with a kick which was sweet with a warming effect.  This picture was one of a spirituous liqueur rather than a fermented wine.
Reasons for the Decision
24.	The dispute in this case was whether the Appellant’s product Black Cherry Liqueur should be classified under Commodity Code (CN) heading 22.06, a fermented beverage or heading 22.08 as a spirituous beverage.
25.	Heading 22.06 states that – 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.
26.	Heading 22:08 states that – Undenatured ethyl alcohol of an alcoholic strength by volume of less than 80 per cent volume; spirits, liqueurs and other spirituous beverages.
27.	Mrs Watts, the review officer, applied the three stage test to decide the tariff classification of the Appellant’s product. The test was as follows:
(1)	First she determined whether the spirituous or fermented liquor constituent contributed more to the overall volume of the product.
(2)	Second she determined whether the spirituous or fermented constituent contributed more to the alcohol content of the product.
(3)	If both these tests showed that the product was made up of more  fermented than spirituous liquor then it was classified under Heading 22.06. Conversely if both tests favoured the spirituous element the product was classified under Heading 22. 08.
(4)	If both tests showed different results then the third stage of the test was brought into play. The third test examined the external characteristics of the product including the way it tasted, labelled and marketed.
(5)	In this Appeal the first and second stages showed different results. Mrs Watts decided that the outcome of the third stage was inconclusive. Thus she applied General Interpretation Rule 3 (c) of the CN and classified the product to the last heading in numerical order, 22.08.
28.	It was necessary to explain the three stage test because it formed the basis of the Appellant’s case. He argued that Mrs Watts was wrong in deciding that an assessment of the third stage was inconclusive. The Appellant considered that the external characteristics of the product showed that it was a fermented beverage. He explained that he did not sell the product on its label or bottle. The Appellant retailed his product at exhibitions where prospective buyers would be given a sample to taste to encourage them to buy. According to the Appellant the taste defined the characteristics of the product.  He considered that the cherry juice determined the dominant flavour and features of the product by making it very sweet and tasting of almonds. The added alcohol gave it a real taste which excited the taste buds.  The Appellant contended that the product was essentially a fortified wine, not a liqueur.
29.	HMRC counsel pointed out that the Commissioner’s policy which encapsulated the three stage test was a rational and pragmatic approach to deal with problems arising from the Excise Directive. The Tribunal, however, was required to determine the dispute in accordance with the legal provisions set out in the CN, not the Commissioner’s policy. The Tribunal agrees with counsel’s submission.
30.	  Article 20.3 of Council Regulation 2913/92/EEC defines the European Union’s tariff and statistical nomenclature (the Tariff) which sets up the Community Customs Code. Customs duties which are legally due on the importation of goods are determined by reference to the Tariff which comprises among other things the Common Nomenclature of goods (CN). The CN consists of three elements:
(1)	The nomenclature of the Harmonised System;
(2)	The community subdivisions to the Harmonised System;
(3)	The preliminary provisions, additional section or chapter notes and footnotes relating to CN sub headings.
31.	The Appeal concerned the interpretation of two headings of the CN which is found in Annex 1 to Council Regulation 2658/87/EEC. Part 1 of the Annex contains the General Rules for the Interpretation of the CN. Part 2 contains the headings themselves which amount toa comprehensive goods nomenclature designed to classify all goods imported.
32.	 The General Rules for the Interpretation of CN which were appropriate in this Appeal were Rule 1, and Rule 3.
33.	 Rule 1 provides: 
"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 heading and any relative sections or chapter notes and, provided such headings or notes do not otherwise require, according to the following provisions. "
34.	Rule 3 provides 
"3. When 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 most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods; 
(b) mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3(a), shall be classified as if they consisted of the material or component which gives them their essential character in so far as this criterion is applicable; 
(c) when goods cannot be classified by reference to 3(a) or 3(b), they shall be classified under the heading which occurs last in numerical order among those which equally merit consideration”. 
35.	The Court of Justice has repeatedly set out the requirement for objectivity in classifications. In Holz Green GmbH v Oberfinanzdirektion München (Case 309/98)
"...It is settled case law that, in the interests of legal certainty and for ease of verification, the decisive criterion for the classification of goods for Customs purposes is in general to be sought in their objective characteristics and properties, as defined by the wording of the relevant heading of the CN.
36.	In Siebrand BV v Staatssecretais van Finnancian (Case C – 150/08) the Court of Justice confirmed that the organoleptic characteristics of a product   and its intended use may constitute objective criteria for the purposes of classification (see paragraphs 36 and 38).
37.	 Holz Green GmbH referred to the application of  explanatory notes as an aid to interpretation:
The explanatory notes drawn up as regards the CN, by the Commission (CNENs) and as regards the HS by the Customs Co-operation Council (the HSENs), may be an important aid to the interpretation of the scope of the various tariff headings but do not have legally binding force”. 
38.	 The HSEN to Heading 22.06 provides:
“All these beverages may be either naturally sparkling or artificially charged with carbon dioxide. They remain classified in the heading when fortified with added alcohol or when the alcohol content has been increased by further fermentation, provided they retain the character of the products falling in the heading”.
39.	The original HSEN to Heading 22.06 (pre- 2001 form) did not include the final proviso about retaining the character of the product. Thus the new HSEN emphasised that a beverage to be classified under Heading 22.06  not only had to be a fermented beverage fortified with added alcohol but also had to retain its character as a fermented beverage after fortification.
40.	In resolving the dispute the Tribunal, therefore, identified the objective characteristics of the product in order to find which CN Heading supplied the best description of the product. The golden rule in the interpretation and application of the CN was that a product can only be classified under one Heading. General Interpretation Rule 1 required the Tribunal to limit its consideration to the terms of the heading and any relative sections or chapter notes. The Tribunal, however, may have regard to the explanatory notes in interpreting the scope of the headings. There were no section or chapter notes which assisted with the classification of the Appellant’s product. The only relevant explanatory note was the HSEN for 22.06 
41.	On the face of it the product was a mixture of a fermented wine and spirit which was capable of being classified under two separate Headings of 22.06 and 22.08. Rule 3(b) came into play by requiring the product to be classified as if it consisted of the component which gave the product its essential character. The HSEN for 22.06 used a similar formulation in explaining the scope of the heading. Thus in order for the product to classified as fermented wine it must retain the essential character of a fermented wine after fortification.
42.	HMRC counsel argued that the Tribunal should look no further than the respective descriptions in Headings 22.06 and 22.08 to determine the correct classification of the product. In counsel’s opinion it was unnecessary to apply Rule 3(b). According to counsel the objective characteristics of this product was of a spirituous liqueur which matched the classification of liqueur under Heading 22.08.
43.	The approach advocated by counsel was not the one adopted by the Court of Justice in Siebrand BV. The Court of Justice applied Rule 3(b) and decided which component, fermented or distilled alcohol, gave the product its essential character. Likewise the Tribunal in Continental Wine and Food Limited v HMRC  Commissioners (Decision Number E00965) considered that Rule 3b was engaged because the product was a made up of different components. The Tribunal decided that it would be perverse to hold that the product was not a mixture of different constituents. The Tribunal in David Travers v HMRC Commissioners (Decision Number E01045) took a more relaxed approach deciding that there was no fundamental difference between a Rule 1 or a Rule 3(b) interpretation because they both applied the test of the essential character of the product.
44.	On balance the Tribunal preferred the approach taken by the Court of Justice in Siebrand BV and the Tribunal in Continental Wine and Food Limited. The two principal constituents of the Appellant’s product were a base wine (fermented liquor) and ethanol (spirituous liquor), which enabled the product to be classified under two potential Headings: 22.06 and 22.08. Rule 3(b) required the Tribunal to consider which of those two constituents gave the product its essential character. The Tribunal’s findings on the objective characteristics of the product at paragraph 23 above demonstrated that the spirituous liquor element defined the essential character of the product. The Tribunal found that it was a syrupy alcoholic product with a kick which was sweet with a warming effect. The product was marketed as a liqueur which could be drunk neat or as a refreshing long drink with coke or lemonade. The trade name of the product was Black Cherry Liqueur. The base wine element of the product was a colourless alcoholic liquid rather than a fermented beverage. The Tribunal holds that the Appellant’s product had the objective characteristics of a liqueur, which is named within CN Heading 22.08.
45.	The Tribunal decides that the correct classification for the product is CN Heading 22.08. The product is, therefore, liable to excise duty as a spirit. The Tribunal dismisses the Appeal. 

                                 MICHAEL TILDESLEY OBE
TRIBUNAL JUDGE
RELEASE DATE: 9 July 2009

MAN/

Notes

1. The Tribunal directed that the costs regime which operated prior to 1 April 2009 applied to this Appeal. 
2.	A party wishing to Appeal this decision to the Upper Tribunal must seek permission by making   an application in writing to the Tribunal within 56 days of being provided with full written reasons for the decision. An application for permission must identify the alleged error(s) in the decision and state the result the party making the application is seeking.