Koyo (UK) Ltd v Revenue & Customs [2004] UKVAT(Customs) C00186 (22 January 2004)
C00186
CUSTOMS DUTY – valuation of goods where prompt payment discount available but not in fact earned – Code article 29 and Implementing Regulation article 144 considered – discounted price held to be the correct basis for valuation only where in fact earned – Notice 252 considered to be misleading – appeal dismissed.
LONDON TRIBUNAL CENTRE
KOYO (UK) LTD Appellant
THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents
Tribunal: MR RICHARD L BARLOW (Chairman)
MR R BATTERSBY
Sitting in public in London on 13 November 2003
Mr N Jennings of Messrs Mazars, chartered accountants, for the Appellant
Ms S Moore of counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents
© CROWN COPYRIGHT 2004
DECISION
- The appellant appeals against a decision contained in a letter dated 21 May 2003 which confirmed the Commissioners' earlier decision to issue a post clearance demand note dated 22 March 2002, served on the appellant on 25 March 2002, for customs duty in the sum of £53,852.34 and VAT in the sum of £156,125.92. Those demands arose from the importation by the appellant of bearings manufactured in Japan and supplied to the appellant by Koyo Seiko Co Ltd. The appellant is a subsidiary of Koyo Seiko Co Ltd.
- The review was delayed, although it had been requested within the 45 day period allowed by section 14(3) of the Finance Act 1994, so that, by reason of section 15(2) of that Act, the appeal is against the deemed confirmation of the decision under appeal, although the appellant did not submit an appeal until after the belated review. The appellant did not take any point about the delay of the review and the respondents did not take any point about the appeal being out of time. So far as it is necessary to do so we extend the time for the appellant's notice of appeal down to the date on which it was received by the tribunal.
- The facts were agreed and we set out only those we consider to be relevant.
- The relevant importations occurred on various dates from June 1993 and the demand note relates to those made within the three years before its issue. Nothing turns on the precise amounts or facts of any particular importation and we were not asked to consider any of them separately.
- All the importations were carried out on the same terms as to payment and it is those terms which give rise to the dispute between the parties.
- The appellant was required, by an agreement dated 25 June 1993, to pay Koyo Seiko Co Ltd for supplies made to it by that company either 180 days after the bill of lading date or 45 days after that date. In the latter case the appellant would be entitled to a 5% discount. In fact we hold that 180 days and 45 days after the bill of lading date means 'up to' 180 or 45 days after that date which is the natural meaning of the words used. That agreement was confirmed by a 'revision' in October 1996 and a 'renewal' in January 1999. The material term remained unaltered in substance and nothing turns on the different nomenclature of the documents or variations in their wording.
- The appellant agrees with Customs and Excise that on no occasion since June 1993 has it ever taken advantage of the 5% discount offered for payment within 45 days of the bill of lading date. It is also agreed between the parties that the goods were, in all material cases, imported into the UK within the 45 day period, having taken approximately 28 days to reach the UK from Japan and having arrived approximately that number of days after the bill of lading date, or about 17 days before the opportunity to take advantage of the discount expired.
- The appellant therefore could have made the payments in time to achieve the discounted price but, as Mr Jennings stated, for good commercial reasons decided not to do so; in summary, because the cash flow advantage from delayed payment outweighed the extra cost of the goods. That evidence was not disputed and we find that the situation was as just described on each occasion when goods relevant to this case were imported. The payment procedures were typical of those endemic within the dealings between the two companies.
- However, the issue that arises is whether the customs duty and VAT at importation should have been accounted for on the discounted price available but not achieved (as the appellant contends) or on the non-discounted or full price (as Customs and Excise contend).
- The basis of Mr Jennings' contention is a passage from public notice 252 issued by Customs and Excise and entitled 'Valuation of imported goods for customs purposes, VAT and trade statistics'. We were shown the January 2002 edition updated in July 2002 but both parties asked us to proceed on the understanding that the notice was materially the same throughout the period under consideration. The relevant passage is in paragraph 3.16 which is headed in the manner now adopted in such notices, as if answering a question, namely "Can I leave out any items from the customs value?". That heading is followed by the words "Yes. The following items may be left out of the customs value". The relevant paragraph is (d) which reads:
"(d) Discounts. Trade, quantity or cash and prompt settlement discounts can be left out, in other words the price paid or payable net of these discounts is acceptable. However, in the case of cash and prompt settlement discounts, where you pay the gross price for the goods on a regular basis you may be asked to demonstrate that the discount is genuinely and freely available".
It is easy to see how the appellant concluded that the value for customs purposes was the potentially discounted price whether or not the discount was actually earned in any particular case or indeed in any case at all. The first sentence quoted from the notice is silent as to whether the discount has to be earned before it can be taken into account but the second sentence makes it clear that the discounted price is 'acceptable' even where the person concerned pays the gross price "on a regular basis".
"On a regular basis" is a phrase that might in the past have been taken to imply, by use of the word basis, some pattern or deliberate intention but in current English usage a phrase in the form 'on a … basis' is often merely a substitute for an adverb and in this case we regard that phrase as meaning simply regularly without any particular suggestion of a pattern or deliberate intention.
- In that context regularly or on a regular basis are both imprecise and ambiguous. Regularly can mean at consistent intervals (as regular as clockwork) or it can mean frequently or usually (we regularly shop in Oxford Street).
- The notice is extremely misleading if the correct state of the law is that the discount cannot be taken into account unless it was in fact earned by prompt payment or compliance with one of the other possible conditions that might be applicable (e.g. quantity).
- However, Customs and Excise do not have the power to alter the law by issuing notices, except where statutes specifically give them that power and even then their powers are usually restricted to making requirements for record keeping and similar ancillary matters. The tribunal can only apply the law and, however misleading a notice may be, it does not follow that the tribunal can ignore the actual legal position.
- Ms Moore argued that the notice, by referring to genuine and freely available discounts means only that, although the correct position is that the discount can only be taken into account where it is actually earned, there is an element of flexibility which Customs and Excise will apply in cases where occasionally an importer who usually earns a discount does not do so in a particular case.
- That argument is not acceptable or correct. If the correct legal position is that the discount can only be taken into account where it is earned, Customs and Excise cannot dis-apply the law by issuing a notice any more than they can change the law in that way.
- Additionally, the notice simply does not bear that interpretation. The second sentence merely recites that Customs and Excise may require proof that the discount is genuinely and freely available in cases where the gross amount is paid regularly. In other words, according to the notice, someone who never takes advantage of the discount is still entitled to value the goods at the discounted price as long as the discount is genuinely and freely available. That is not the same thing as saying the discounted price will only apply where the discount is usually or regularly earned in fact. The Notice suggests that the discounted price is the proper basis for the value except in cases where the availability of the discount is a sham.
- Ms Moore recognised that the notice is at best imprecise because it does not attempt to set out how often a discount needs to be earned before that can be described as being "on a regular basis". Mr Jennings pointed out that the notice introduced an element of arbitrariness if it meant by "on a regular basis" that the number of times the discount was earned determined the issue without regard to the amounts involved. An importer who obtained no discount on a large number of small consignments but did obtain it on a few very large consignments would be penalised where in the opposite case he would be rewarded. Mr Jennings argued that that suggested that the notice meant that the discounted price should be taken to apply to all cases where the discount was available, whether it was earned or not, because that at least removes the arbitrariness.
- Turning then to the law, we have to consider principally article 29 of the Community Customs Code (Council Regulation EEC 291/92) and article 144 of the Implementing Regulations (Commission Regulation 2454/93).
- Article 29, so far as is material, reads:
"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 provided
…
(d) that the buyer and the seller are not related, or [where they are that the relationship did not influence the price]".
The words in square brackets summarise the effect of paragraphs 1(d) and (2) but as Customs and Excise did not suggest that the relationship of the Koyo companies affected the price we have not considered it necessary to set them out. Neither party considered articles 29(1)(b), 29(3), 32 or 33 to have any relevance and we agree.
- The important words in article 29 are "the price actually paid or payable for the goods" and those words come into sharper focus in article 144 of the implementing regulation which reads (so far as material):
"1. For the purposes of determining customs value under Article 29 of the Code of goods in regard to which the price has not actually been paid at the material time for valuation for customs purposes, the price payable for settlement at the said time shall as a general rule be taken as the basis for customs value".
The goods in this case were ones to which article 144 applied because the price had "not actually been paid" at the time for valuation because payment was made some time after importation. In fact payment was made 180 days or thereabouts after the bill of lading date and approximately 152 days after importation (bearing in mind the 28 day transit time).
- The phrase "the price payable for settlement at the said time" gives rise to a certain degree of ambiguity, at least on the facts of this case, if not in all cases. The "said time" is the material time for valuation as is clear from the fact that that is the only time referred to in the regulation. Neither party raised any issue as to the precise time in question for these importations but it was agreed that it always fell within the 45 day period within which the discount could have been claimed by early payment.
- Two possible interpretations then come into question. Is the 'price payable for settlement' at the time for valuation the price which would be paid if payment were made on that date or is it the price which actually thereafter becomes payable under whatever terms the parties have negotiated? We have emphasised the word 'payable' because it appears at first sight to be referring to the price which could be paid if it were to be paid on that date, i.e. the price able to be paid at that time rather than the actual price paid at some other time. The appellant argues that that is the correct interpretation and that the price that would have been paid on the date for valuation if it had been paid on that date would have been the discounted price because the 45 days had not expired.
- The first difficulty with that argument is that article 144 only applies where the price has not in fact been paid and so some mechanism is needed to decide what that price may have been in cases of doubt. Emphasising the word payable and giving it the sense of 'capable of being paid' could be said to answer that point. In other words the argument put forward by the appellant would provide a possible logical basis for determining the value of the goods where the discount is still available at the relevant time even if it would not be earned.
- However, Ms Moore argues that the phrase 'at the said time' does not mean that it has to be assumed that the payment was made at the time for valuation and that the price (or in fact the prices) 'payable for settlement' are the prices agreed between the parties to the transaction provided that they are agreed at, or as it might be said, 'by the said time'. In other words in the phrase 'the price payable for settlement at the said time' the word 'payable' really means that which it has been agreed will be paid at a future date. That is of course compatible with the fact that the provision deals with payments that are not made by that time and are therefore in the future.
- On the other hand, that argument raises another difficulty in that the provision does not explicitly provide for any method of determining which of more than one price will apply where the agreement between the parties contemplates more than one possibility.
- Article 144 therefore is capable of more than one interpretation and is ambiguous. It seems likely that it was that ambiguity that led to the wording adopted in notice 252.
- Article 144 does not stand alone or in isolation. It is in the implementing regulations and is intended to implement article 29 of the Code. That provision refers to the price actually paid or payable and in principle that means the price paid as a matter of fact. Again, use of the word payable might suggest some ambiguity but it can equally be explained by the fact that the price may not yet have been paid.
- Additionally, article 144 refers to the price payable for settlement at the time for valuation as being only the general rule which clearly implies that there will be exceptions.
- We therefore hold that the price 'payable' in cases where payment has not been made at the valuation date is to be interpreted as meaning the price that will in fact (i.e. 'actually') be paid.
- Clearly there can be cases where that price is not known at the time for valuation. Where the importer does not know if he will be able to take advantage of a discount more than one possible price may still be available depending on when payment is made, what quantity of goods is purchased in a given period, or other factors still uncertain at the time for valuation. Article 78 of the Code and articles 254 to 259 (which deal with incomplete and provisional declarations and their adjustment) appear to remedy that situation. The importer has to declare the price on whatever basis it appears will apply but on the understanding that an adjustment may later be necessary.
- We do not consider it necessary to examine in detail exactly how those provisions might apply to this case because on the facts of this case the price actually payable could always be identified at the time for valuation.
- This case concerns importations made in the three years ending on 22 March 2002 (the date the demand note was drawn up). The discount had been available since 25 June 1993 but had never been taken up so that by the time of the earliest importations covered by the demand (March 1999) six years had elapsed without any discount having been earned and indeed from March 2001, as Customs and Excise contended without demur from the appellant, the appellant's new finance manager was not even aware that the discount was available.
- The reason the discount was not taken up was said to be that the appellant had always been overdrawn at the bank so that it was cheaper to incur the additional cost of full payment rather than to borrow from the bank to earn the discount. We find that to be the case.
- Mr Jennings emphasised the difficulty that importers would have in deciding what price to declare in cases where they thought the discount might still be earned but were unsure if it would be and he relied on that as supporting the argument that the regulations must mean that the discounted price is to be declared even where it may not be taken up. Whilst there may be such cases this was certainly not one of them. By the date of importation the date for payment at the discounted rate was only about 17 days in the future and it would not be difficult for the appellant to predict accurately whether it would be able to earn the discount. Indeed, there came a time when that prediction became very easy, as the appellant must have realised that it was not going to earn the discount, never having done so over a period of several years.
- However, even if there are cases where the prediction will be difficult for some importers that is not a reason for giving the regulations an incorrect meaning, especially as they also cater for adjustments after the facts become clear.
- Article VII of the General Agreement on Tariffs and Trade 1994 (GATT) requires the contracting parties to give effect to the principles, inter alia, that the value of goods for customs purposes should be 'based on the actual value of the imported merchandise'. The agreement for the implementation of the article refers to the price actually paid or payable and the interpretative notes to that agreement state that the price actually paid or payable is 'the total payment made or to be made by the buyer'; all of which is consistent with our interpretation of the Code and Implementing Regulations. It is true that the version of the GATT provided to us at the hearing post dated the Code but the EU has had ample time to amend the Code if it had been thought inconsistent with the GATT of 1994.
- Additionally section 21(3)(d) of the VAT Act 1994 makes it quite certain that a discounted price can only be used for the purpose of valuing importations for VAT purposes if that discount is actually earned, where the discount is a prompt payment discount. Whilst it is not necessary for the same method of valuation to apply for customs purposes as for VAT it would be somewhat surprising if a different valuation applied.
- Those provisions therefore re-enforce our conclusion but our decision is based on the interpretation of the regulations themselves in our reasoning set out in paragraphs 27 to 29 above.
- Ms Moore asked us to consider referring a question or questions to the Court of Justice of the European Communities if we were uncertain about the correct position but as we entertain no real doubt about the correct legal position and as we do not consider the point to be one of any great difficulty we decline to do so.
- Our conclusion is therefore that the correct value for customs purposes and for the VAT on importation is the full price paid without deduction of the discount and accordingly the appeal is dismissed.
- Customs and Excise did not seek their costs and we make no order.
- We add that in our opinion Notice 252 should be revised, though of course we have no power to direct that it should be.
RICHARD L BARLOW
CHAIRMAN
RELEASED: 22 January 2004
LON/03/7017
