On 22 November 2012, the European Court of Justice ("ECJ") issued a judgment in joined cases Digitalnet (C-320/11 and C-383/11), Tsifrova Kompania (C-382/11) and M Sat Cable (C-382/11) providing further legal clarity when it comes to the tariff classification in the Combined Nomenclature ("CN") of set-top boxes with a communication function. Unlike the previous ECJ judgment in British Sky Broadcasting Group and Pace (joined cases C-288/09 and C-289/09), which concerned whether certain decoders with a hard disk drive should be classified as a set-top box with a communication function or a recording apparatus, this case concerned, in essence, defining the term "modem" in view of classification of products as set-top boxes with a communication function or other apparatus.
The joined cases involved companies Digitalnet, Tsifrova Kompania and M Sat Cable, whose principal activity is the provision of access to digital television and internet to its customers. The three companies imported identical set-top boxes with a communication function ("set-top boxes") into Bulgaria from Korea under CN subheading 8528 71 13, making them exempt from customs duties (i.e., customs duty rate of nil). Upon inspections, however, the Bulgarian customs authorities disagreed and imposed administrative acts by taking the view that the concerned set-top boxes were not equipped with an integrated modem and therefore should have been classified under CN subheading 8528 71 19, making the customs duty rate of 14 percent applicable.
The involved companies challenged the validity of the imposed administrative acts. The domestic Bulgarian Administrative Court decided to refer several questions to the ECJ, focusing on (1) what the terms "modem" and "access to Internet" should mean; (2) whether the reception of television signals and the presence of a modem allowing access to the internet are two equivalent functions for classification under CN subheading 8528 71 13; and (3) whether it is permissible for the customs authorities to amend the tariff classification of a product without physically inspecting the concerned product.
The ECJ began by reaffirming that in order for apparatus to be classified under CN subheading 8528 71 13, it must be able to:
- receive television signals; and
- incorporate a modem for gaining access to the internet and having a function of interactive information exchange.
Considering that the CN did not define the concept of "modem" and "access to Internet," the ECJ considered the usual meaning of the terms in everyday language, while also taking into account the context in which it occurs and the purposes of the rules of which it forms part. According to equally settled case law, the ECJ followed by reminding that the provisions of secondary Community legislation that must, as much as possible, be interpreted in a manner that is consistent with the International Agreement on trade and information technology products ("ITA"). With that regard, the ECJ proceeded by taking into account the definitions of the terms as given by the WTO panel in past disputes concerning violation of EU's obligations under the ITA. Furthermore, the ECJ re-emphasised that the intended use of a product may also constitute an objective criterion for classification.
Taking the foregoing considerations into account, the ECJ derived that a "modem for gaining access to the internet" under CN subheading 8528 71 13 is to be defined as follows:
"a device which is capable of accessing the internet and of ensuring interactivity or an exchange of information in both directions. It is solely the capacity to gain access to the internet, and not the technique used to achieve this, that is relevant for the purposes of classification."
As to the question whether the reception of television signals and the presence of a modem allowing access to the internet are two equivalent functions for classification under CN subheading 8528 71 13, the ECJ determined that the apparatus must have both characteristics for classification under CN subheading 8528 71 13. This means that these two characteristics are to be regarded as two equivalent functions that the apparatus must perform in order to be classified under CN subheading 8528 71 13.
Finally, the question whether the tariff classification of an imported product may be changed by the customs authorities by means of ex post inspection without any physical inspection of the concerned product, the ECJ acknowledged that, based on Article 78(2) of the Customs Code (EC Regulation 2913/92), the customs authorities of the EU member states may perform ex post inspection of released products and make subsequent change(s) in their tariff classification on the basis of written documents without being required to physically check those released products.
Actions to consider
Considering the definition and criteria given by the ECJ as stated above, it is recommended to test your own set-top boxes being currently imported into the EU, as well as those imported in the past into the EU, against the criteria for classification under CN subheading 8528 71 13. Meeting the criteria may lead to reducing customs duty impact upon importation and possible eligibility for a customs duty refund. On the other hand, whereas the criteria have not been met while use is being made of CN subheading 8528 71 13, this may lead to retroactive levying of customs duties and even possible penalties.