Report for the Hearing in Case C-79/89

I — Facts and procedure

1. Facts of the dispute before the national court

In 1980, Brown Boveri & Ce AG (hereinafter referred to as Brown Boveri) concluded a contract with an undertaking established in the United States of America for the delivery of a computer-assisted design system for a total price of US $ 6000000. Separate prices for the computer equipment and software were not agreed.

In February 1982, Brown Boveri took delivery of three consignments of equipment and software recorded on tape, followed in June 1982 by a further consignment of software on tape. In the import declaration, the first consignment was described as computer parts and the second as software. The invoices attached as supporting evidence set out the totals without breaking them down into their individual components, and included no reference to carrier media.

In its declarations on the value of the goods for customs purposes (customs value), Brown Boveri deducted from the total the assembly costs, the cost of transport in the country of importation and the value of the software. The value of the last consignment was therefore estimated at zero.

The Hauptzollamt Mannheim (hereinafter Hauptzollamt) allowed only the deduction for the transport costs in Germany, on the grounds that the invoices produced did not show separately the sums qualifying for deduction.

Brown Boveri lodged an objection to the decisions of the Hauptzollamt and, in the course of the procedure, produced revised invoices for the first three consignments, in which the earlier comprehensive prices were broken down as separate prices for hardware and software. It also presented two telex messages from the manufacturer, quantifying the costs for the software and assembly. The Hauptzollamt dismissed its objections, and accordingly Brown Boveri brought an action before the Finanzgericht (Finance Court). When that application, too, was dismissed Brown Boveri appealed to the Bundesfinanzhof (Federal Finance Court) which, by order of 13 February 1989, referred the following questions to the Court of Justice for a preliminary ruling.

2. Summary of the observations of the Bundesfinanzhof

The Bundesfinanzhof takes the view that, being intangible property, software is not an item of goods and cannot be subject to customs examination. Consequently, customs duties must be charged solely on the carrier media.

It points out that, according to the case-law of the Court, the price actually paid or payable, which serves to define the transaction value within the meaning of Article 3(1) of Council Regulation (EEC) No 1224/80 of 28 May 1980 on the valuation of goods for customs purposes (Official Journal L 134, p. 1; hereinafter referred to as the basic regulation) must be adjusted when it is necessary to do so in order to avoid setting an arbitrary or fictitious value. Such is the case, the Bundesfinanzhof maintains, when an invoice price clearly includes amounts unrelated to the goods to be valued; in such circumstances, the components of the price paid or payable which relate to other items must be deducted for the purpose of determining the transaction value. Inclusion of the value of the software (which is high) in the transaction price of the carrier media increases that price considerably, raising the question whether the customs value would not then be arbitrary. The Bundesfinanzhof concludes that in this case the price of the software should be deducted and only the value of the carrier media should be taken into account.

Since a similar line of reasoning may underlie the rule set out in Article 8a of the basic regulation, which was inserted by Council Regulation (EEC) No 1055/85 of 23 April 1985 (Official Journal L 112, p. 50), the Bundesfinanzhof is inclined to the view that Article 8a merely records in declaratory form a rule already in force. That provision, which did not come into force until 1 May 1985, stipulates that the value of software is not to be taken into account for determining the customs value if its value is distinguished from the value of the carrier medium.

Turning to the interpretation of distinguish, the Bundesfinanzhof tends to the view that separate evidence showing the value of the software or the assembly costs may be presented after the material time for the determination of the customs value, and until such time as the relevant customs decision on the duties has become legally unassailable.

3. Procedure before the Court

The order for reference was lodged at the Court Registry on 13 March 1989.

In accordance with Article 20 of the Protocol on the Statute of the Court of Justice of the EEC, written observations were submitted on 9 June 1989 by Brown Boveri, represented by Hinrich Glashoff, a tax adviser, on 15 June 1989 by the Government of the Federal Republic of Germany, represented by Martin Seidel and Klaus Peter Müller-Eiselt, acting as Agents, and on 16 June 1989 by the Commission of the European Communities, represented by Jörn Sack, Legal Adviser, assisted by Renate Kubicki, an official of the Ministry of Justice of the Federal Republic of Germany seconded to the Legal Department of the Commission as part of an exchange programme for national officials, acting as Agents.

Upon hearing the report of the Judge-Rapporteur and the views of the Advocate General, the Court decided to open the oral procedure without any preparatory inquiry. By decision of 21 February 1990, it decided to assign the case to the First Chamber.

II — Summary of the written observations submitted to the Court

1. First question

Whether the value of the software should he included in the customs value

Brown Boveri subscribes to the legal view of the Bundesfinanzhof. It maintains that only goods — that is, movable property — are subject to customs duty. Payments attributable to the software, as intangible property, must therefore be excluded from the customs value.

The aims of the new system of customs valuation introduced by the basic regulation and by the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (Official Journal 1980 L 71, p. 107; hereinafter: the GATT Agreement) are to facilitate international trade, establish fair and straightforward valuation rules and set up a fair and neutral procedure. There is nothing in the system which subjects non-goods to customs duty. Consequently, inclusion of the carrier media in the transaction value would lead to a fictitious value, which is indeed expressly prohibited under Article 2(4) of the basic regulation. Furthermore, as Mr Advocate General Mancini emphasized in his Opinion in Case 7/83 Ospig v Hattptzollamt Bremen-Ost [1984] ECR 609, at p. 621, inclusion in the customs value of elements extraneous to the price would increase protectionism and run counter to a uniform and neutral system of customs valuation.

Brown Boveri claims that the insertion by Regulation No 1055/85 of Article 8a into the basic regulation is merely declaratory in nature. Although the preamble to Regulation No 1055/85 recites that the implementation of the GATT Agreement brought about certain changes in the customs handling of carrier media containing software, it does not follow that those changes were either essential or justified. In any case, the preamble refers to a decision adopted by the Committee on Customs Valuation, established by Article 18(1) of the GATT Agreement. Clearly, however, that committee is not entitled to amend the Agreement itself. The only new element introduced by Article 8a is the concession whereby the value of the software need only be shown separately to make the amount involved deductible from the customs value. None the less, that does not mean that other methods of valuation would not have achieved the same result.

Brown Boveri therefore proposes the following answer to the first part of Question 1 :

The Commission stresses at the outset that, by assessing the transaction value of the carrier media on the basis of the comprehensive price shown in the invoice, without deduction of the costs attributable to the software, the Hauptzollamt was acting in accordance with the provisions of Community law in force at the time and with the prevailing practice of the Member States' customs authorities. That legal situation was not changed until Regulation No 1055/85 inserted Article 8a into the basic regulation.

During discussions within the Council regarding Regulation No 1055/85, only the German representative advocated that it should have retroactive effect. The Commission and the other Member States were opposed to this, because the legal situation up to that point had accorded fully with the GATT Agreement. That was borne out by the decision of the GATT Committee on Customs Valuation of 24 September 1984, concerning the valuation of carrier media bearing software. The decision reiterates that the use of the transaction value as the basis for the valuation of software recorded on carrier media is fully compatible with the GATT Agreement, but states that it would be equally compatible with the GATT Agreement to take account only of the value of the carrier medium as such, provided that it was distinguished from the value of the software.

That option was created because the customs charges for carrier media increased considerably after the transaction value had replaced the normal competitive price as the basis for calculating the customs value. For the purposes of the normal price, the customs value of carrier media was estimated as being the value of the physical medium, increased by 100%, whereas for the purposes of the transaction value it was the full invoice price which was taken as the customs value. This ran counter to the aim of the GATT Agreement, namely to facilitate international trade.

Regulation No 1055/85 made it possible to apply a more liberal set of provisions, in the light of the fact that information can equally well be transmitted by cable or by satellite without incurring any customs charges.

Disagreeing with the Bundesfinanzhof, the Commission stresses that neither the GATT Agreement nor the basic regulation required the value of the software to be deducted. On the contrary: when the software is recorded on a carrier medium it forms part of the goods, and the whole entity is subject to customs legislation.

That conclusion is borne out by the judgments of the Court on the inclusion of license fees in the value for customs purposes (judgments in Cases 1/77 and 135/77 Bosch v Hauptzollamt Hildesheim [1977] ECR 1473 and [1978] ECR 855 respectively). The Court ruled that licence fees were to be included in the customs value where the carrying-out of the patented process constituted the only economically viable use of the goods and where, in turn, the process could only be put into effect by the use of those goods. The Commission maintains that this is exactly the case with carrier media containing software, irrespective of whether the information is embodied permanently and ineradicably, as on a gramophone record, or whether it is capable of subsequent modification or even total separation from the carrier media. The time of importation is the only relevant factor in determining whether the software, together with the carrier medium, qualifies as a single item of goods. Viewed in that light, the combination of alterable software and carrier medium is comparable to a musical performance recorded on a tape cassette. In the Commission's opinion, magnetic tapes containing unduplicated information must be taxed in the same way as mass-produced goods (such as music cassettes).

Accordingly, the Commission suggests that the Court should give the following answer to the first question:

Material time for separating the price of the carrier media from that of the software

Brown Boveri does not accept that the separate statement of prices may only be given at the time of importation, in the declaration of particulars relating to customs value (Form D. V.l.), and that there is no possibility of correcting after the event the information given. If that were so, then the customs value would be determined solely by reference to the — possibly spurious — facts set out in the declaration of intent. In any case, the principle of legal certainty may not be pleaded so as to restrain the correction or amplification of a statement of facts.

Brown Boveri observes that it refrained initially from declaring the value of software, which dispensed it from the need to give that value separately from the stated total price; at the same time, it informed the Hauptzollamt that the full invoice amount included items which were not part of the customs value. Brown Boveri proposes that the second part of Question 1 should be answered in the following terms:

Since the Commission maintains that the transaction value of the carrier medium should have included the price paid for the software incorporated in it, it considers the second part of Question 1 to be redundant. It argues, however, that even if a rule comparable to the rule under Article 8a of Regulation No 1224/80 were applied, the obligation to state the price of the software separatelv would not have been met.

The Commission submits that the evidence in support of the deductions claimed must be supplied before the material time for the customs valuation. It is not possible to produce evidence after the event, except in the cases set out in Commission Directive 82/57/EEC of 17 December 1981 laying down certain provisions for implementing Council Directive 79/695/EEC on the harmonization of procedures for the release of goods for free circulation (Official Journal 1982 L 28, p. 38). Even then, evidence cannot be taken into account unless it relates to circumstances antedating the presentation of the customs declaration, not to circumstances arising afterwards. That point is clear from Anieles 7 and 3 of Council Directive 79/623/EEC of 25 June 1979, on the harmonization of provisions laid down by law, regulation or administrative action relating to customs debt (Official Journal L 179, p. 31); those provisions were incorporated in Council Regulation (EEC) No 2144/87 of 13 July 1987 on customs debt (Official Journal L 201, p. 15). Under those provisions, the amount of the customs debt on the importation of goods is determined on the basis of the rules of assessment applicable at the time when the customs debt is incurred — that is, at the time when the customs declaration is accepted. The calculation of the customs debt cannot therefore take account of factors which did not exist at the time.

It follows, in the Commission's opinion, that the evidence produced by Brown Boveri after the material time for the determination of the customs value could not have been taken into consideration in calculating that value unless it related to an agreement on the price of the software reached prior to the customs clearance of the goods, and that was not the case.

2. Question 2

Brown Boveri argues that the assembly costs were not included in the invoiced price or the declared customs value and did not relate to the imported goods but to a product which materialized, by virtue of being assembled, only after importation.

It proposes the following answer to Question 2:

The Government of the Federal Republic of Germany, whose observations address only the second question, takes the view that the assembly costs can only be regarded as separate if the customs authorities are in possession of the declaration at the material time for valuation for customs purposes within the meaning of Article 1(1)(g) of the basic regulation, unless final determination of the customs value is delayed in accordance with Article 11. However, in order to avail himself of that option the declarant must, prior to the material time for valuation for customs purposes, have expressed his intention to show the costs separately.

That rule, which according to the German Government is apparent from the spirit and aims of the basic regulation, is confirmed by Commission Regulation (EEC) No 1496/80 of 11 June 1980 on the declaration of particulars relating to customs value and on documents to be furnished (Official Journal L 154, p. 16). Under Article 1 of Regulation No 1496/80 the declaration as to customs value must be set out on Form D. V.l. as shown in the annex thereto, box 20 of which provides for a separate declaration with regard to assembly costs. Form D. V.l. must, pursuant to Article 2 of Council Directive 79/695/EEC of 24 July 1979 on the harmonization of procedures for the release of goods for free circulation (Official Journal L 205, p. 19), be lodged with the customs authorities at the time of the release of goods for free circulation, which means the material time within the meaning of Article l(l)(g) of the basic regulation. If by that stage the declarant has made no entry in box 20, and if he also fails to state that the declaration is incomplete for the purposes of Articles 6 to 8 of Directive 79/695, then no separate statement can be accepted thereafter. Nor can there be any repayment under Article 2(1) of Council Regulation (EEC) No 1430/79 of 2 July 1979 on the repayment or remission of import or export duties (Official Journal L 175, p. 1), because the amount of the duties, determined by reference to the declaration as to customs value, represents the amount lawfully due under the relevant provisions.

The German Government disagrees with the view endorsed by the Bundesfinanzhof, because the time limits for bringing proceedings (and hence the period allowed for the submission of a separate statement) are laid down by national law and because it involves serious legal uncertainty. Such an approach would also be contrary to the aim of the basic regulation, which is to create a fair, uniform and neutral system of customs valuation, based on simple and convenient rules which are conducive to legal certainty.

Accordingly, the Government of the Federal Republic of Germany proposes that Question 2 should be answered in the following terms:

The Commission, referring to its observations regarding evidence of the price paid for the software, suggests the following answer to Question 2:

1 Language of the case: German.