[Editor's note: What follows is a detailed summation of the case that may be of limited interest to non-specialists. The degree of detail is intended to reflect the technical nature of the decision and to help clarify conflicting media reports about its holdings.]
In 1987, the European Community developed a nomenclature of goods (the “Combined Nomenclature”) for the purpose of levying customs tariffs and tracking the flow of goods through its borders. Companies that traffic in goods are required to obtain a Binding Tariff Information (“BTI”) certificate from customs officials; the BTI contains binding information on the customs classification of the relevant goods. In August 2000, Sony applied for a BTI from United Kingdom customs officials to import its PlayStation®2 product. Customs officials classed PlayStation®2 as a game console under Chapter 95 of the Combined Nomenclature, and not as a computer under Chapter 84 as Sony had asked, on the grounds that the device “was not freely programmable.”
Sony requested an unsuccessful departmental review of the BTI and appealed to the VAT and Duties Tribunal in London. In the meantime, the European Nomenclature Committee took the issue under discussion and decided that PlayStation®2 was freely programmable. U.K. customs officials now agreed with Sony that PlayStation®2, because freely programmable, should be classified under Chapter 84 and amended the original BTI decision. On July 10, 2001, the Nomenclature Committee promulgated a new regulation classifying an apparatus very similar to PlayStation®2, and accompanied by a photo of the Sony product, as falling under Chapter 95.
Sony Computer Entertainment Europe Ltd. v. Commission of the European Communities, Case No. T-234/01, Eur. Ct. of First Instance (Sept. 30, 2003)
In the present case, Sony contested the new regulation and requested that its BTI application be admitted. Although individuals generally are not allowed to contest nomenclature regulations, the court upheld Sony’s right to challenge on the grounds that the company was “directly and individually concerned” with the new regulation, which was a direct response to the PlayStation®2 BTI debate. With regard to the Combined Nomenclature classifications, the court
held that PlayStation®2 could be considered as either “an automatic data-processing machine” under Chapter 84 or as among “any products which are intended to be used, exclusively or mainly, for playing video games” under Chapter 95.
Under General Rule 3(b) for the interpretation of the Combined Nomenclature, ” “mixtures, [and] composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale” are to be classified “as if they consisted of the material or component which gives them their essential character in so far as this criterion is applicable.” The court held that the Nomenclature Committee had erred in citing General Rule 3(b), because it had classed PlayStation®2 according to its essential function—use for playing video games—rather than “the material or component” that gave the device its “essential character”—its central processing unit (“CPU”). “The CPU,” the court found, “is the central component of all automatic data-processing machines and, accordingly, cannot justify its being classified under the heading for video games.”
The court found, however, that the Committee could classify PlayStation®2 as a game console under the terms of the Combined Nomenclature, Section XVI, Note 1(p), excepting from Chapter 84 items falling under Chapter 95, without reaching General Rule 3(b). But the Committee had failed to refer to Note 1(p) and its reference to General Rule 1(b), which provides that classification should be based on relevant headings and notes before resort to the general rules, was found inadequate to its “obligation to state reasons . . . when it adopts a tariff classification regulation . . . [and] to state clearly the legal basis for the classification, in order to inform the persons concerned of the justification for the measure adopted and to enable the Community Court to exercise its powers of review.” Therefore, the regulation was found invalid.