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	First-tier Tribunal (Tax)
You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Motorola Ltd v Revenue & Customs [2009] UKFTT 123 (TC) (09 June 2009) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2009/TC00091.html Cite as: [2009] UKFTT 123 (TC)

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[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


 


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 The appeals are largely of historical interest, partly because the equipment with which we are concerned is obsolete and no longer imported, and partly because the tariff was amended significantly with effect from 1 January 2007.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.
17. In the earliest of the three cases, Peacock AG v Hauptzollamt Paderborn (Case C-339/98) [2000] ECR I-8947, the products which fell for consideration were LAN cards, that is network cards designed for insertion in personal computers, whose function was to connect the computers to a local area network; they had no WAN capability. The importer argued that they came within heading 8473 (which at that time included parts and accessories for machines within heading 8471), the customs authority, supported by the Commission, that they were properly classified within heading 8517, by reason of their fulfilling a specific function (of transmitting information) which fell within that heading. At the material time, Note (5)(B) was as follows:

"Automatic data-processing machines may be in the form of systems consisting of a variable number of separate units. A unit is to be regarded as being a part of the complete system if it meets all the following conditions:

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

(b) it is specifically designed as part of such a system (it must, in particular, unless it is a power supply unit, be able to accept or deliver data in a form (code or signals) which can be used by the system).

Such units presented separately are also to be classified within heading No 8471.

Heading No 8471 does not cover machines incorporating or working in conjunction with an automatic data-processing machine and performing a specific function. Such machines are classified in the headings appropriate to their respective functions or, failing that, in residual headings."

18. We mention, parenthetically, that Motorola's position is that the change of wording is insignificant in that the text of Note (5) has been re-arranged while its meaning is intact. Mr Beal did not advance a contrary argument. The particular point at issue in the case was the final paragraph of note (5)(B), which now forms note (5)(E).
19. Advocate General Jacobs dealt with the issue in some detail. His lengthy opinion, which was adopted by the Court, contains this passage:

"74. In the case of machines incorporating an ADP [automatic data-processing] machine, the reference to a specific function presumably relates to machines which use an ADP machine to help them carry out a particular task other than data processing. One might think, for example, of an automated industrial production line. Similarly, for a machine working in conjunction with an ADP machine, I take it to mean that the former is designed to perform a specific function, and is capable of doing so, but that in fact some advantage is derived from its being linked to an ADP machine. A good example here is given in the HSENs - a measuring machine linked by a signal converter to an ADP machine, presumably for the purpose of allowing the ADP machine to process the data from the measurements, and perhaps thus to provide feedback as to which measurements are to be made. There are many instances in industry and elsewhere of such computer-assisted technology.

75. The criterion common to those examples, and it is one which seems to me to flow from a normal reading of the last paragraph of Note 5(B), is that the type of machine excluded from heading 8471 is an entity in its own right performing a specific task which either could also be performed, albeit more laboriously, without an ADP machine or is in any event quite distinct from data processing.

76. That is not the case with network cards. There is no specific function which they can perform without an ADP machine or which is distinct from data processing, since the function which they do perform is to convert signals sent or received by the ADP machines in which they are installed in the course of, or with a view to, processing. In that, they are comparable to any other means whereby ADP machines accept or deliver data but cannot sensibly be described as machines performing a specific task in conjunction with an ADP machine."

20. The cards were found to be properly classifiable, not in heading 8473 but in 8471, as "units" of ADP machines. The Court put it in these terms:

"16. As the national court has observed, network cards are designed solely for automatic information processing machines, they are directly connected to those machines and their function is to supply and accept data in a form which those machines can use. Network cards are thus comparable with any other medium whereby an automatic information processing machine accepts or delivers data in the sense that they have no function which they would be capable of performing without the assistance of such a machine.

17. It is therefore unnecessary to consider whether network cards could be classified as machines within the meaning of Note 5(B) to the Combined Nomenclature, since they cannot in any event be regarded as performing 'a specific function'.

18. Consequently Note 5(B) to the Combined Nomenclature does not preclude network cards from being classified under heading No 8471 …

20. … network cards satisfy the conditions relating to 'units' set out in Note 5(B) to Chapter 84 of the Combined Nomenclature, since they can be connected to the central unit and are specifically designed as parts of an automatic data-processing system."

21. Those comments relate to goods which differ from those we must consider in that they could be used only when they were inserted in the housing of an automatic data-processing machine (in practice a personal computer), and drew their power supply from the host machine. In effect, they became part of the host machine. In addition, they had only a LAN function.
22. In the second of the cases on which Miss Sloane relied, Cabletron Systems, the Court of Justice was required to decide the correct classification of what are described in the judgment as "58 types of equipment designed for controlling, processing, formatting, routing, switching and bridging information between two units of a local area network". The equipment was therefore more sophisticated and varied than that considered in Peacock, but it had no WAN functionality (see para 49 of the Advocate General's opinion). The Court was in addition required to consider two Council Regulations, 1638/94 and 1165/95, which classified, or purported to classify, goods which (it was agreed) included the 58 types in issue in the reference to heading 8517.
23. Advocate General Jacobs had no difficulty concluding that there was no difference in substance between these goods and the network cards considered in Peacock. He put the matter in this way:

"71. It is common ground that all the items in issue are, in accordance with the criteria set out in Note 5(B), connectable to the central processing unit either directly or through one or more other units, that they are specifically designed as part of a system and that they are able to accept or deliver data in a form which can be used by the system. Nor is it contested that, in accordance with the judgment in Peacock, they have no function that they would be capable of performing without the assistance of an ADP machine.

72. It is true that Peacock concerned only one type of network equipment. However, not only is it agreed that the goods in issue here all meet the criteria on which the Court based its ruling in that case but those goods all appear to be covered by the broad definitions in items (4) and (5) of Note I(D) to heading 8471 in the HSENs, as 'control and adaptor units such as those to effect interconnection of the central processing unit to other digital data processing machines, or to groups of input or output units', 'channel to channel adaptors used to connect two digital systems to each other' or 'signal converting units' used on input and output.

73. Indeed, the matter is made even clearer by the recently-agreed amendments to the HSENs, which included 'routers, bridges and hubs used to control and direct communications between the machines in local area networks (LANs) and channel to channel adaptors used to connect two digital systems (e.g. LANs) to each other'."

24. The Advocate General went on to make the following comments:

"86. Cabletron's view appears highly persuasive to me. A computer network meets the definition of a 'system consisting of a variable number of separately housed units' in Note 5(B). Its primary purpose is to share data processing capacity and storage capacity for the data which is to be processed. Given such an arrangement, it is clear that data must be transferred from one part of the system to another efficiently and without distortion, and that the equipment used to transfer it not only forms part of the system but in the transfer process performs no function which does not serve the purpose of data processing.

87. That view is supported by the wording of headings 8471 and 8517. The former is clearly intended for data-processing equipment, the latter for telephony and telegraphy equipment. The transfer of data for the exclusive purposes of an automatic data-processing machine seems a function much more closely related to data processing than to telephony or telegraphy. The terms used in the HS and the CN cannot necessarily always be interpreted on a commonsense basis as having their everyday meaning, but there must be some convincing reason for departing from that meaning.

88. The HSENs define data processing as 'handling information of all kinds, in pre-established logical sequences and for a specific purpose or purposes' and ADP machines as those 'which, by logically interrelated operations performed in accordance with pre-established instructions (program), furnish data which can be used as such or, in some cases, serve in turn as data for other data processing operations'. There does not appear to be anything in those definitions which would exclude equipment of the kinds classified in Regulations No 1638/94 or No 1165/95; on the contrary, the items classified seem to fit well within them.

89. It is true that the HSENs also define telephony or telegraphy as 'the transmission between two points of speech or other sounds (or of symbols representing written messages, images or other data)'. The reference to the transmission of data is, however, very subsidiary in that definition and seems intended to prevent an item which is clearly 'apparatus for line telephony or line telegraphy' from being excluded from heading 8517 simply because the content of the message transmitted does not fall within one of the listed categories.

90. The mention in those notes of 'control and adaptor units such as those to effect interconnection of the central processing unit to other digital data processing machines, or to groups of input or output units', of 'channel to channel adaptors used to connect two digital systems to each other' and of 'signal converting units' used on input and output as falling under heading 8471, on the other hand, indicates a clear intention that items similar to those classified by Regulations No 1638/94 and 1165/95 should be categorised as units of an ADP machine in the form of a system."

25. The Court, agreeing with the Advocate General's opinion, answered the principal question before it firmly; paraphrasing what was then Note 5(B) it made it clear that the goods in issue in that case could be classified only in heading 8471. It also concluded that the two Regulations placing them instead in heading 8517 were invalid. At para 22 of its judgment it put the matter in uncompromising terms:

"The Commission ought to have realised, in the light of the wording of headings No 8471 and No 8517, read in conjunction with the explanatory notes … that it was wrong to classify under heading No 8517 the types of network equipment mentioned in [the Annexes to the Regulations]. That error is manifest and consequently renders those regulations invalid."

26. The Commission's response to the judgment in Cabletron Systems was to recognise that LAN equipment was properly classified in heading 8471 (and excess duty paid on LAN equipment imported in the years 1996 to 1999 was repaid by the respondents to Motorola), but the Commission and most other member States (Germany was an exception) remained of the view that WAN equipment should be classified in heading 8517.
27. The differential treatment of LAN and WAN equipment was considered by the Court of Justice in the third of the three cases relied on by Miss Sloane, Olicom A/S v Skatterministeriet (Case C-142/06) [2007] ECR I-6675. The goods in issue were combined network and modem cards, which provided both LAN and WAN functionality. Advocate General Jacobs had retired by the time this case came before the Court, and the Opinion was given by Advocate General Mazák, who approached the matter rather differently:

"21. I must point out that even though the Court has already determined in a number of cases the classification of electronic circuits (LAN apparatus), it has not yet done so with regard to WAN. Therefore, while it is now clear from the Court's case-law that LAN network cards merely 'supply and accept data' in a form which ADP machines can use and are thus comparable to any other medium whereby that machine accepts or delivers data (that is to say, they have no specific function), the products at issue in this case are combined modem/network cards.

22. Hence, what has been said of LAN cards cannot, in my opinion, be applied by analogy to network cards incorporating a WAN function, inasmuch as, contrary to only 'supplying and accepting data', the latter must also necessarily 'convert' such data/signals. WAN apparatus must actually process the data/signals received by way of 'modulating' and 'demodulating' them (hence the name 'modem') from analogue to the digital form and vice-versa so that they are, on one hand, transmissible in the telephone network (analogue form) and, on the other, compatible with an ADP machine (digital form). I consider the Commission's argument in this respect – that the WAN function, not least as explained in the above paragraph, must be regarded as a function 'other than data processing' – to be well founded.

23. I am of the opinion that on the basis of objective characteristics, the WAN (modem) function indeed falls under telecommunication (that is to say, under heading 8517) and not under data processing (that is to say, under heading 8471). What is more, unlike LAN apparatus, WAN uses telephone lines for communication. May I point out in this respect that the Products were already approved for use in a telephone network and can be readily used as modems.

24. Therefore I conclude that it follows that WAN apparatus – as opposed to the apparatus incorporating LAN function only – performs a 'specific function', because the data sent and received by the modem must inevitably be converted from signals that an ADP machine is capable of processing to signals transferable by way of telephone lines and other similar means.

25. This is confirmed by the HSENs, which explicitly exclude modems from being classified under heading 8471 and, rather, clearly attribute them to heading 8517. The Products' classification under heading 8517 was also confirmed by the CCC. What is more, the HS Compendium of Classification Opinions published by the WCO contains the numerical list of classification opinions adopted by the WCO, drawn up in the order of HS headings and subheadings. The following classification opinion of 13 November 1998 appears therein:

'3. Card designed to be inserted into an [ADP] machine (slot-in card)' ought to be classified under heading 8517.50/3 since it 'converts digital [ADP] machine signals into analogue signals, and vice versa, thus permitting communication with another [ADP] machine through the telephone line system. It also enables the [ADP] machine to send and receive faxes and e-mail, permitting those operations to be achieved even via a cellular (mobile) telephone.'"

28. The Court rejected that view. It began with a description of the cards:

"8. It is clear from the decision for reference that combined cards are the result of development of pure LAN products and that they are designed so that the WAN function cannot be used without the LAN function, the latter, however, remaining operational even if the WAN function is disabled …

9. That type of combined card meets the needs of portable computer users who normally use a local network for communication but who occasionally need to transmit or receive data when they are away from their usual workstation. In such a situation, they can use the WAN function of the card as a modem. That added functionality means that the customers are not obliged to buy a separate modem …".

29. It went on to summarise the reasoning and the decisions it had made in Peacock and Cabletron Systems and then, in a section of its judgment on which Miss Sloane placed great reliance and which, despite its length, it is necessary for understanding to set out in full, it said:

"24. It follows from Note 5(B) to Chapter 84 of the CN [the reference is to the Note in its immediate pre-2007 form] that automatic data-processing machines may be in the form of systems consisting of a variable number of separate units. Subject to Note 5(E) to that chapter, a unit is to be regarded as being a part of a complete system if it meets simultaneously three conditions, that is to say, firstly, that it is of a kind solely or principally used in an automatic data-processing system, secondly, that it is directly or indirectly connectable to the central processing unit, and, thirdly, that it is able to accept or deliver data in a form which can be used by the system. Note 5(C) to that chapter adds that separately presented units of an automatic data-processing machine are to be classified under heading No 8471.

25. Like the network cards which were the subject of the judgments in Peacock and Cabletron, the combined cards, according to the description in the file, simultaneously meet those three conditions since they are used solely when inserted in portable computers, they work only if they are connected to that type of computer and are capable of converting incoming signals into data usable by an automatic data-processing machine and outgoing signals into data usable externally, whether they are transmitted across a local network (LAN) or an external network (WAN).

26. The Danish government and the Commission of the European Communities take the view, however, that, because they are able independently to transfer information in the form of data communication in a line telephony network, without using the portable computers to which they are connected, those cards have a specific function within the meaning of Note 5(E) to Chapter 84 of the CN. Since it is not possible to determine the primary function of such combined cards … the correct tariff heading must be decided by application of Rule No 3(c) of the General Rules for the interpretation of the CN, according to which goods are to be classified under the heading which occurs last in numerical order among those which equally merit consideration. It follows that the combined cards should be classified under heading No 8517 as telecommunications apparatus.

27. That argument cannot be accepted.

28. Firstly, although the combined cards can transfer information in the form of data communication in a line telephony network because they have a modem function, that does not mean, contrary to the submissions of the Danish government and the Commission, that they are able to do so in an autonomous way or that they can operate independently without using the portable computer to which they are connected.

29. It is apparent from the file, firstly, that the modem function of a combined card is operational only if it is connected to an automatic data-processing machine, which transmits to it the necessary instructions and data and, secondly, that that function cannot operate without the LAN function, whereas the latter remains operational even if the WAN function is disabled.

30. Secondly, it follows from the wording of Note 5(E) to Chapter 84 of the CN that the 'specific function' performed by a machine working with an automatic data-processing machine must be a function 'other than data-processing'. Since the combined cards are designed to transfer data between a number of computers and, in order to do so, render incoming external signals comprehensible to the computer and transform outgoing signals processed by it into signals usable externally, regardless of whether the signal received or emitted is analogue or digital, the function which they perform consists of data-processing. It follows that such cards do not perform a 'specific function' within the meaning of that note.

31. Thirdly, although it is true that, at the time of the facts at issue in the main proceedings, the explanatory notes to the Harmonised System of the World Customs Organisation relating to heading No 8517 expressly included modulator-demodulator apparatus amongst telecommunication apparatus for carrier-current line systems or for digital line systems, the fact remains that, according to established case-law, those explanatory notes are an important aid to the interpretation of the scope of the various tariff headings but do not have legally binding force. The content of those notes must therefore be compatible with the provisions of the CN and may not alter the scope of those provisions …".

30. The Court then stated that the cards in question in that case should be classified in heading 8471.
31. Miss Sloane's argument was that there was no material distinction to be drawn between the cards considered in Olicom and the equipment in issue in this case. It is true that, there, they were cards whereas here they are units which are connected to, but not inserted in the housing of, the computers which they serve, but their function was indistinguishable and it is function which is determinative. The Court of Justice had, accordingly, given an answer in Olicom which was sufficient to determine this appeal.
32. The Commissioners' position is that the equipment performs a telecommunications function, which is 'a specific function' within the contemplation of Note 5(E) and is not data-processing—it is no more than the transmission of data. From that it follows, Mr Beal argued, that the appropriate heading must be that which includes telecommunications equipment, namely 8517. The argument was undermined to some extent by Mr Clues' concession that the devices did undertake some form of low-level data processing, though he was reluctant to accept that it was of a character which the draftsman of Note 5(E) had in mind. Nevertheless, said Mr Beal, the apparatus dealt with in Olicom, being designed for insertion in a personal computer, was different from these devices, which stood alone, could be connected in several different ways to the computer or other equipment with which they were to work, had their own power supply and, even if with the addition of a daughter card, could be used for purposes which did not depend on their being connected to an automatic data processing machine. Moreover, the cards considered in Olicom were primarily LAN apparatus whose WAN function was a minor feature; here the WAN function is the more important characteristic.
33. Because this equipment differed in so many ways from that considered in Olicom we could not simply transfer the Court's findings there and apply them uncritically here. It was by no means certain that the Court had provided an answer which could be adopted in that fashion, as Motorola had contended. Mr Beal reminded us of a further comment of Advocate General Jacobs in Peacock, at para 13 of his opinion:

"The development of LANs and the convergence of the technology used in computer data transmission and telephony have engendered uncertainty as to where exactly the distinction is to be drawn between the two types of system."

34. The difficulty of establishing with certainty what was the objective character of devices intended for use with automatic data-processing equipment could be seen, Mr Beal argued, from an examination of other decisions of the Court. He referred us to several such cases, but although it is true that they all deal, in one way or another, with the meaning of "data processing" none is concerned with WAN equipment and, in our view, they add nothing to the more direct jurisprudence of the Court in, particularly, Olicom. We see little benefit, therefore, in our dealing with them further.
35. Mr Beal reminded us of the need to ascertain which of the competing possibilities better reflected the "essential character" of the goods (see Case C-250/05 Turbon International GmbH v Oberfinanzdirektion Koblenz [2006] ECR I-10531 at paras 20, 21)—here it was the WAN capability which constituted the "essential character"—and of the HSENs which the Court of Justice itself had repeatedly said were a useful aid to interpretation of the tariff and an important means of ensuring its uniform application, a point accepted in Olicom at para 31 of the judgment. Likewise we should not lightly disregard Commission guidance which, he said, also promoted uniformity of application of the tariff.
36. All those factors, Mr Beal argued, indicated that it was not possible to conclude with complete confidence that Olicom and the earlier cases were determinative of the classification of these goods. We should first consider whether the doubt could be resolved by the application of the second of the General Interpretive Rules which were of relevance here, namely rule 3(c), which, in case of doubt which could not otherwise be resolved, allocated commodities to the later numerically of the possible alternatives (that is, the Commissioners' preferred 8517). If not, he said, we should follow the guidance of Sir Thomas Bingham MR in R v International Stock Exchange of the UK and the Republic of Ireland Ltd ex p Else (1982) Ltd [1993] QB 534 and refer questions—of which he provided drafts—to the Court of Justice.

Conclusions

37. In our view there can be no real doubt that Miss Sloane is right in her argument that the three cases on which she relied are determinative of the correct classification of these devices. In all three the Commission—whose position is that same as that of the respondents in this case—argued for classification within heading 8517, relying on the use by similar apparatus of telephone or equivalent lines in order to transmit data. That approach seems to us to ignore not only what Advocate General Jacobs said at paras 86 to 90 of his opinion in Cabletron Systems (set out above) but also the observation in his opinion in Peacock, at para 73:

"… I do not consider that the standards used in LAN technology or the distance covered by a LAN are determining factors; the criterion is explicitly one of the function performed and not of the technical means by which it is performed."

38. That approach was adopted by the Court in its decisions in that case, Cabletron Systems and Olicom, as we understand the judgments. True though it is that telephone or equivalent lines are used, it is not that feature which gives the products their "essential character" (the Turbon criterion) or defines their function. We accept Mr Beal's point that there are differences between these products and those considered in Olicom, but we are satisfied that Miss Sloane is right in contending that, so far as application of the tariff is concerned, there is no distinction to be drawn. They all do precisely what the Court described at para 30 of its judgment in Olicom. The fact that they have their own housing and power supply is, in our view, irrelevant; Notes 5(B) and (C) to Chapter 84, as they were at the material time, expressly allow for separate units and, by necessary implication, treat them in the same way as cards or similar devices inserted in the host computer. The argument that the conversion of data from analogue to digital form, or vice versa, is a function other than data processing, so as to engage Note 5(E), was unambiguously rejected by the Court at para 30 of its judgment in Olicom and it is a matter for surprise that the Commissioners continue to argue the contrary.
39. We agree with Miss Sloane, too, that the fact that daughter cards might be inserted in some of the products is not a relevant factor. Even leaving aside the question whether a device with a daughter card performs a function other than data processing, the test is not the use to which goods might be put if modified in some way, but their objective characteristics—essentially, the function of which they are capable—on presentation to the customs authorities. These devices, without daughter cards (which is how we are required to treat them for the purposes of these appeals), have the function, as the Court of Justice has decided, of data processing, and are properly classified in heading 8471. We add for completeness and for the avoidance of doubt that we see no material difference in this respect between the modem, whether used to provide an internet service or for gaming, and the other products.
40. We are not persuaded by Mr Beal's argument that there is room for doubt, such that we should make a reference. It seems to us that the Court of Justice has gone to considerable lengths to make it clear, in each of the cases on which Miss Sloane relied, that products of this kind are proper to heading 8471, and has consistently rejected arguments to the contrary, whether made by the Commission, set forth in the HSENs or advanced by Advocate General Mazák in his opinion in Olicom. We have set out the lengthy extracts from its judgments which appear above in order to demonstrate the strength and consistency of the Court's reasoning. We agree with Miss Sloane that if we acceded to the respondents' request we would, in effect, be inviting the Court to reconsider its judgment in Olicom, which is not an appropriate course for this tribunal to adopt. In those circumstances we decline to make a reference.
41. We conclude, for completeness, with a jurisdictional point which Mr Beal raised. Although it is open to us to direct revocation of the BTI which was issued in respect of the Surfboard modem, and to determine what was the correct classification of that item, it is not open to us to direct the Commissioners to issue a replacement BTI. In addition, if the Commissioners did issue a replacement BTI it would have to reflect the tariff as it is now since a BTI may not be backdated. The tariff, following the 2007 amendment, makes it clear that the modem (and, indeed, the other products) must now be classified in heading 8517. Thus, Mr Beal said, the second of the appeals lacked utility. In a sense, that is correct, but more important is the fact that Motorola, in the past, paid duty which was not due because of the Commissioners' error in issuing a BTI in heading 8517. If the point raised by Mr Beal gives rise to any consequential difficulty the parties cannot resolve for themselves, we give permission to them to apply for a further hearing at which that difficulty may be addressed.
42. Subject to that point, the appeals are allowed. We direct (applying the transitional provisions of para 7(3) of Sch 3 to the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009) that the Commissioners are to pay the appellant's costs, to be the subject of detailed assessment by a costs judge of the High Court if they cannot be agreed.

COLIN BISHOPP

TRIBUNAL JUDGE

RELEASE DATE: 9 June 2009