Ultimately it's the public (and more generally, with the "extreme" sex act, the government's) decision in circumstances like this. Pornography is not considered mass-viewable material by the vast majority of the British public (i say British, if you go to Europe they're a lot more lax about tits on the telly and, not in a perverted way, rightly so). The only reason the IWF removed the censorship is because there was public outcry about it.
I agree strongly with Hex on this one. I, nor he have any right to say what "titilates" - but that also means neither do you. One man's family photo is another man's fap material, as they say(..?). Is the baby's bum on a pampers advert porn? Watch Equilibrium if you want to see this sort of attitude taken to the extreme.
Legally, there are loads of little rules that govern whether something is classed as pornography, and there's a fine line between what's art and what isn't. The rules on child pornography are a lot more strict, naturally, but there are still allowances for family photos. A lot of the laws on child pornography are when the photos were taken without permission of the child, when the child has been deemed to be harmed (physically/psychologically/etc) and so on.
The photo in question, as has been said, was taken by a well known record company, does not appear to abuse the child in question, it was obviously taken with consent (it's not like it was a photo of a baby), and it's even already censored with the "cracked" glass.
Something that i deem to a strong factor in whether something is porn or not is the intention of the artist. It's along the lines of "racism" in the media. Is a joke about Islam worse than a joke about Christianity? Some would say that a "muslim" joke is incredibly offensive, but it's hardly any worse than saying "ooer, Father Dougal plays with the choir boys if you know what i mean". This isn't always the case, of course, but it's generally true. In this case, it's an album cover. It's not porn. Very distasteful, but not porn.