Recently the European Court of Justice of the European Communities (“ECJ”) ruled on the classification of digital camcorders which contain recording functionality, which was not activated at the time of import. Neither the manufacturers of the camcorders nor the distributors offered to activate the DV in function or to enable a third-party to do so, either in the product information or in instruction manuals. By contrast, in the same period, the distributors imported camcorders in respect of which it was clearly stated that they had the DV in function.
The camcorders concerned have the option to receive data from other appliances and then to be used as recorders to record digital sequences from a computer through a so-called “DV-in” function.
At the time of the acceptance of the customs declaration, the camcorders concerned did not have the DV-in function, i.e. did not have the capability to record external video signals.
The DV in capability could be enabled only by re-programming the ‘erasable programmable read-only memory’, which required either a new piece of equipment, or the motherboard to be changed by a qualified engineer.
The importers argued that any modification, including modification of the software controlling the DV function, made without the agreement of the manufacturer, would constitute an infringement of intellectual property rights.
The camcorders were either to be classified under subheading:
- 8525 40 91, “Other video camera recorders: Only able to record sound and images taken by the television camera”, subject to 4.9% duties, or;
- 8525 40 99, “Other video camera recorders: Other”, subject to 14 % duties.
It is settled case law that the decisive criterion for customs classification of goods is their objective characteristics and properties as defined in the wording of the relevant heading of the Combined Nomenclature (“CN”) and the notes to the CN sections or chapters. It is, according to the ECJ, irrelevant whether the manufacturer of the product intended or not to emphasise a particular characteristic.
According to Article 2(A) of the General Rules for the Interpretation of the CN, an incomplete or unfinished article is to be treated in the same way as a complete or finished article, provided that it has the essential characteristics of the complete or finished article.
German and French Customs classified the digital camcorders under subheading 8525 40 99 of the CN as “other video camera recorders: other” (customs duty 14%). Dutch customs classified the camcorders under subheading 8525 40 91 (customs duty 4.9%).
According to the ECJ, camcorders covered by subheading 8525 40 91 differ from those under subheading 8525 40 99, by the capability of the latter to be able to record sounds and images originating from external sources, i.e. sources other than the integrated camera or microphone.
The ECJ considered the following elements relevant to classify the camcorders in subheading 8525 40 91 (with the function to record external video signals).
First, the modification of the camcorders in order to activate the DV-in function is relatively complicated. It is, however, for the national court to determine the complexity of the modifications to be made in order to activate the DV-in function, and to establish the similarity and independent character of the functioning of the camcorders compared with camcorders presented with an active DV-in function.
If the activation of the DV-in function may be easily made by a user without special skills and without the camcorder being subjected to modification of its hardware and if the camcorder has similar characteristics and operates with active DV-in function without requiring external hard- or software, the camcorders must be classified under subheading 8525 40 99. If not, the camcorders have to be classified under subheading 8525 40 91.
For the classification of consumer electronic products, Inactive (“dormant”) functions must also be considered.
In this case, it appears unlikely that the camcorders have to be classified as camcorders containing the capability to record external video signals because of the complexity of the activation of that function.
- inactive but embedded “dormant” functions can easily be activated, without modifications of hardware, and;
- the device subsequently operates with the activated function without requiring external hard- or software;
- in a manner similar to such devices with (expressly advertised) a similar function;
the product has to be classified in consideration of the initially inactive function.