Trends in the Development of Court Practice for Foreign Trade Businesses

Alexander Kosov
Head of the Practice Group for Customs and Foreign Trade Regulation
Pepeliaev Group

Although Russia’s foreign trade turnover contracted by 40 percent in 2009 compared with 2008, the Russian customs authorities still managed to meet the budgeted target for the remittance of customs proceeds, which was reduced by the government by only 20 percent. According to the Federal Customs Service, this became possible owing to the increased efficiency of customs administration for imports.

In the absence of effectively functioning new technologies for customs administration, the customs authorities solve the task of collecting customs payments using a risk-management system. The so-called risk profiles make up the core of the system. Practice shows that this approach creates conditions for dramatic increases in unlawfulness and administrative abuse.

Court disputes with customs authorities aptly illustrate this issue.

According to the Federal Customs Service, the number of judicial appeals against the decisions and actions of the customs authorities has more than doubled. In 2008, fewer than 8,000 appeals were filed, while in 2009, more than 16,000 appeals were filed. The categories of lawsuits considered by courts were distributed as follows:

• about 46 percent were on the adjustment of customs value

• about 30 percent were cases involving administrative offenses

• about 7 percent were on the reclassification of goods

• and on the refund of overpaid customs payments, though most of the decisions resulted from the adjustment of customs value, 8 percent.

Dmitry Evseev
Pepeliaev Group

Statements of claim filed on other customs grounds amounted to 9 percent of the total.

In 2009, the number of customs disputes considered on their merits by state arbitration courts soared by almost 40 percent, reaching 14,000 (in 2008, the number of cases was a little more than 8,000). State arbitration courts upheld more than 70 percent of the claims filed by foreign trade businesses.

Adjustment of Customs Value

In 2009, state arbitration courts considered almost 6,000 disputes relating to the adjustment of customs values. The courts upheld 95 percent of the appeals filed by companies. This result attests to a systemic approach taken by the customs authorities. Despite the growing number of appeals and the percentage of those upheld by the courts, the number of importers who took the authorities to court makes up only a small fraction. The majority of importers, after comparing the onus of court litigation with the amount of additional payments required by the customs on the basis of the risk profiles, opt for the latter, which is less costly.

There is a more alarming sign in this situation: There were court judgments handed down in the second half of 2009, in which the courts dismissed the appeals against the decisions made by the customs authorities for adjusting customs value, for which the only reason was a considerable difference in the declared customs value compared with the transaction prices for similar goods. We would prefer not to see a trend here, because otherwise, the importers will have no hope of protecting their interests, even in court.

When proceeds shrank dramatically in 2009, customs authorities had to deal with certain issues that were complicated in terms of methodology — for example, the assessment of how the relations between the parties affect the transaction price or the inclusion of royalties for use of intellectual property in the customs value of goods. The prevailing court practice on royalties shows that courts no longer confine themselves to considering whether the formal criteria for the inclusion of royalties in the customs value of imported goods are observed. Rather, they also assess the economic nature of relations between the rights holder, the supplier and the buyer of goods.

When speaking of intellectual property from a customs perspective, one cannot but mention resolution No. 10458/08 of the Supreme Arbitration Court dated Feb. 3, 2009, in the case involving Porsche Cayenne. This resolution completely reshaped the practice of holding the importers of genuine goods administratively liable in terms of article 14.10 of the Code of Administrative Offenses for importing these goods into Russia without the consent of the rights holder. According to this resolution, in this case the rights holder was able to protect its interests only through a civil court action. However, the practice is ambiguous in this situation as well. While the courts of the Northwestern Federal Arbitration Circuit uphold the claims of the rights holders, the courts of the Moscow Circuit, on the contrary, dismiss such claims.

Resolutions on Cases on Administrative Offenses

Consideration of appeals against decisions passed by the customs authorities in cases involving administrative offenses made up the second-largest category of judgments passed by state arbitration courts, numbering 4,500 in 2009. This category of cases is the only one in which the number of disputes won by claimants is approximately the same as those won by the customs authorities.

Resolution No. 11875/08 passed by the Presidium of the Supreme Arbitration Court and dated Feb. 3, 2009, is worth noting here. In this resolution, the Supreme Arbitration Court laid down the existing court practice: Failure by the declarant to specify the correct classification code in the customs declaration, if such a failure does not relate to declaring false information as to the quantity, features or characteristics of goods that could affect the classification of the goods under a particular classification for said goods, may not serve as grounds for holding the declarant administratively liable for a false declaration.

The declarant is not exempt, however, from the obligation to pay customs payments in the amount stipulated for the correct code of goods classification. Thus, the court, when ruling on administrative liability, instead of establishing whether the declarant was guilty of declaring the wrong code, excluded the incorrect declaration of the classification code per se from the objective side of this offense.

Return of Overpaid Customs Payments

In 2009, state arbitration courts saw almost 2,000 cases involving the refund of overpaid customs payments. Customs authorities lost more than 90 percent of these cases. It should be mentioned that the disputes classified by the Federal Customs Service under this category are not always cases that directly relate to the refund of overpaid customs payments.

Many payers of customs payments, who have missed the deadline for appealing in court the decision adjusting the customs value, try to claim the refund of the customs payments recovered on the basis of such an adjustment from the customs authority. After that, they challenge the customs authority’s refusal in court.

When considering these cases, courts proceed from the premise that the failure to file a claim with an arbitration court, for invalidation of a decision made by the customs authority adjusting the customs value of imported goods, does not deprive the interested party of the ability to defend its rights infringed by this decision by other means — for example, by filing an application seeking the refund of funds. Thus, a court, when ruling that the refusal was unlawful, decides whether the adjustment by the customs authority of the customs value complied with statutory requirements.

Classification of Goods Under the Russian Commodity Classification for Foreign Trade

State arbitration courts considered more than 800 cases that involved challenging the decisions passed by the customs authorities on the reclassification of goods. The number of upheld appeals exceeded 60 percent of the total number of cases considered.

Other Disputes With Customs Authorities

Cases considered by state arbitration courts that do not fall within the above four main categories amount to less than 10 percent of the total number of cases considered in 2009. This category includes, for example, disputes arising in connection with the application of economic customs regimes, performance of activities by customs brokers, freight forwarders, owners of bonded warehouses and other entities operating in the customs sphere, and determination of the country of origin.

Among these disputes, the cases challenging the decisions, actions of, or failure to act by customs authorities relating to the violation of deadlines stipulated for the release of goods seem to be of greatest interest. In a number of cases, the courts take a formal approach in establishing whether the methods used by the customs authority to retain the goods were lawful.

Some claimants even succeed in recovering the damages inflicted by the Federal Customs Service. For example, in 2009, two orders passed by the Federal Customs Service were deemed unlawful. These orders set restrictions on the number of cargo places that a declarant may declare for certain goods (resolutions of the Supreme Arbitration Court No. 15092/08 dated Jan. 30, 2009, and No. 4671-5327-9013/09 dated Oct. 12, 2009). The court stated that, by introducing these restrictions, the Federal Customs Service failed to observe the criteria for setting them, that is, customs legislation should have been breached on a regular basis when the relevant goods were imported.

The statistics vividly demonstrate what price foreign trade participants need to pay for customs authorities’ aspirations to meet their fiscal targets. Alongside the allocation of customs proceeds to the federal budget, nobody assesses how many payments were subsequently refunded under court judgments, what costs the importers incurred as a result of this “system” and how much the state has to spend on the consideration of obviously unlawful decisions passed by the customs authorities.

The Finance Ministry has planned for an increase in customs proceeds to be allocated in the federal budget in 2010. Consequently, one can expect to see still-increasing administrative pressure exerted by the customs authorities and, as a result, an increase in the number of court cases involving customs disputes.