Tax & Trade Blog
Tariff Classification of Combination Goods: The Kraft Case
In Kraft Canada Inc. v. CBSA (appeal No. AP-2013-055), the Canadian International Trade Tribunal (CITT) reviewed the complicated rules for classifying goods for Canadian customs tariff classification purposes, where the goods are really a combination of two different goods. In doing so, the CITT outlined how the “retail sets” rules for tariff classification purposes interact with the “essential character” rule, and the case stands as an excellent example of the intricacies of tariff classification when anything other than simple goods are imported.
On the facts of the case, the goods were Kraft “Cheese & Breadcrumb Mix”, which consisted of two components, namely cheese and breadcrumbs, separated in a plastic bag (and used, when mixed, to coat baked meat). The cheese portion represented over 60%, by weight, of the good. The goods were marketed and sold in the United States as a meat and poultry coating, primarily competing with breadcrumbs, marinades, barbeque sauces, and other dressings.
At the importer’s request, the Canadian Border Services Agency (CBSA) issued an advance ruling classifying the goods as “grated or powdered cheese of all kinds” (tariff items 0406.20.91 or 0406.20.92), and subject to tariff rate quotas under Canada’s rules for imported cheeses.
On appeal to the CITT, Kraft argued that the goods ought to have been classified under tariff item 2103.90.20 (“mixed condiments and mixed seasonings”) based on factors including as follows: the goods were marketed as meat coatings rather than cheese; the breadcrumbs played the primary role in the adherence of the coating to the meat, and in the crunchiness of the coating; and the goods could not function as meat-coating without the breadcrumbs.
CBSA’s supported its original decision by arguing that since half the weight of the product was cheese, and the cheese being the more expensive component of the two, and providing a distinctive flavour (with a unique character), the cheese was the essential character of the product.
The CITT began its analysis with a systematic overview of the legal framework for tariff classification of such “combination” goods: Goods are to be classified according to Rule 3 of the General Rules for the Interpretation of the Harmonized System (“General Rules”); under this rule, where goods are classifiable under two or more headings (i.e. heading No. 04.06, if considered cheese products, and heading No. 21.03, if mixed condiments and mixed seasonings), the applicable required steps are as follows:
3. When… goods are, prima facie, classifiable under two or more headings, classification shall be effected as follows:
(a) … when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods.
(b) Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to Rule 3 (a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable.
These rules, colloquially referred to as the “retail sets rule”, require an “essential character” test.
In the applicable rules, the CITT first agreed that the goods were “put up in sets for retail sale”, as they met the three applicable criteria set out in the Explanatory Notes to Rule 3 – namely, they (1) consisted of at least two different articles (cheese and breadcrumbs) which were classifiable in different headings, (2) consisted of products or articles put up together to meet a particular need or carry out a specific activity (producing a baked coating), and (3) were put up in a manner suitable for sale directly to users without repacking.
The CITT next turned to the required “essential character” test (required under paragraph 3(b) above, to determine which component of the good (i.e., the cheese or the breadcrumbs) gave the goods their essential character. In doing so, the CITT first noted Explanatory Note VIII to Rule 3, which indicates that “[t]he factor which determines essential character will vary as between different kinds of goods [and] … may, for example, be determined by the nature of the material or component, its bulk, quantity, weight or value, or by the role of a constituent material in relation to the use of the goods.” The CITT then noted thatfactors like bulk, quantity, weight and value are not, in and of themselves, necessarily dispositive of the essential character test, noting the Federal Court of Appeal’s decision in Mon-Tex Mills Ltd. v. Canada (2004 FCA 346), for the proposition that the “essential character” analysis “is not merely to weigh the various elements of Explanatory Note VIII against one another, but rather to determine the essence or fundamental nature of the goods” and that “to be essential, a characteristic must pertain to the essence of something … [and] … be fundamental.”
Taking this framework in hand, the CITT observed that the evidence established that the essence or fundamental nature of the goods was that of a “seasoned meat-coating product”, and focussed on which component was the essential component to that character, the key to the conclusion being the role of the particular component in relation to the use of the goods.
The CITT accepted Kraft’s expert evidence that the seasoned breadcrumbs played the crucial role in the adherence of the goods to the meat and were therefore the fundamental component required for its use. The CITT also observed that the dominant factor that distinguished between the different flavours of the product (e.g., “Rosemary & Roasted Garlic”, “Italian Parmesan”) was also not the “cheese” but the breadcrumbs. Finally, the CITT observed that the goods were not in direct competition with other dairy or cheese products.
Ultimately, the CITT concluded that the essential character of the goods was conferred by the seasoned breadcrumbs, and therefore classified the goods under tariff item 2103.90.20 (“mixed condiments and mixed seasonings”) and not subject to Canada’s quota rules on imported cheeses.
By way of commentary, the Kraft decision is a well-reasoned example of the “retail sets” / “essential character” rules in play, and serves as a reminder that the more “objective” factors in Explanatory Note VIII are not necessarily determinative of the essential character of combination goods. As the CITT emphasized, the focal point of the essential character test is effectively ‘which component most contributes to the intended use of the goods’.
Although this analysis may be more “subjective” and contribute to slightly more practical difficulty in classifying imported goods made up of two or more components, it should lend itself to practical results. By classifying “combination” goods sold in retail sets based on the use of the components relative to the goods, tariff rates are more likely to apply equally and fairly to goods that are in direct competition with each other in the Canadian market-place.
Ultimately, we think that the CITT’s approach in this case better aligns with the purposes of customs policy, and promotes market fairness, as compared to the approach taken by CBSA.