[2023] KETAT 291 (KLR)

In re Control Department (Appeal 384 of 2022) [2023] KETAT 291 (KLR) (Civ) (2 June 2023) (Judgment)

Neutral citation: [2023] KETAT 291 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 384 of 2022

RM Mutuma, Chair, D.K Ngala, E.N Njeru, EK Cheluget & RO Oluoch, Members

June 2, 2023

Judgment

1. The Appellant is a private limited company incorporated in Kenya. Its principal activity is sale and construction of commercial, residential units and retail space.

2. The Respondent is a principal Officer appointed under Section 13 of the Kenya Revenue Authority Act Cap 469 laws of Kenya, with the mandate of assessment, receipt and accounting for all Government tax revenue, and the administration and enforcement of all laws set out in the Schedule to the Kenya Revenue Authority Act.

3. The Respondent conducted a desk audit of the Appellant’s imports of solar water heaters for the period January 2017 to 2022 whereupon it issued a demand notice of Kshs 877,286. 79 vide a letter dated 15th February 2022 re-classifying the Appellant’s product from HS Code 8419. 19. 00 to HS Code 8516. 10. 00 which attracts import duty at the rate of 25%.

4. The Appellant wrote to the Respondent on 10th February 2022 objecting to the re-classification of its solar product under HS Code 8516. 10. 00 and further requested the Respondent to review its decision dated 31st January 2022.

5. The Respondent considered the objection and issued its review decision through its letter dated 15th February, 2022 confirming the tax demand for Kshs 877,286. 79.

6. On 23rd February 2022, the Appellant raised another objection to the demand notice dated 15th February 2022 and the Respondent responded thereto on 28th February 2022 rejecting the Second Objection.

7. Aggrieved by the review decision, the Appellant filed its Notice of Appeal dated 11th April 2022.

Appelant’s Case 8. The Appellant filed its Memorandum of Appeal on 14th April 2022 wherein it itemized and structured the said Memorandum of Appeal akin to a Statement of Facts. It also relied on a summary ‘brief analysis’ filed on 14th of November 2022 and its Written Submissions filed on 8th February 2023 to urge this Appeal.

9. It was the Appellant’s case that the Respondent had opened its container at the port where it physically verified the imported solar heaters and confirmed that the solar heaters were non-electric whereupon it correctly classified them under HS Code 8419. 19. 00.

10. The Appellant argued that having cleared these products under HS Code 8419. 19. 00, the burden of proof shifted to the Respondent to show that the importation documents were not genuine, and to also show that the Officers made a mistake in classifying this product at the point of entry under HS Code 8419. 19. 00.

11. The Appellant averred that its goods were physically verified at the port and it incurred extra demurrage costs of Kshs 108,444. 54 to enable the Respondent verify the products whereupon it confirmed that these were solar products falling under HS Code 8419. 19. 00.

12. The Appellant stated that its product is a solar heater that does not have an electric back up. In its view, the Respondent’s re-classification was misguided. It relied on the case of Judicial Review Application No. 599 of 2017 Republic Vs Kenya Revenue Authority (M-Kopa Kenya Limited. Ex-parte) to buttress this point.

13. Flowing from the above, the Appellant stated that Import Duty and VAT is not applicable to its solar imports because its correct classification is under HS Code 8419. 19. 00.

The Respondent’s Case 14. The Respondent filed the following documents to oppose this Appeal:a.Statement of Facts on 13th May 2022. b.Witness Statement by Bernard Oyucho dated and filed on 22nd November 2022 that was admitted in evidence on oath on the 25th January, 2023c.Written Submissions on 1st March 2023.

15. The Respondent stated that it reclassified the Appellant’s products from HS Code 8419. 19. 00 to 8516. 10. 00 because its audit revealed that solar heating systems imported by the Appellant had an electric component and were therefore dual water heating systems classifiable under tariff code 8516. 10. 00 and not 8419. 19. 00 as declared.

16. It was its argument, that it could not classify the Appellant’s products under HS Code 8419. 10. 00 because the heading excludes electrically heated appliances. In its view, the dual nature of the Solar Water Heater is more suitably classified under tariff code 8516. 10. 00.

17. The Respondent stated that:a.According to the General Rules of Interpretation, Rule 1 provides that classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes, provided that such headings or Notes do not otherwise require, provisions of Rules 2 to 6. b.Explanatory notes to the Headings 8419 provide that machinery covered under this heading may be heated by any system (coal, oil, gas, steam, electricity, etc.) except in the case of instantaneous or storage water heaters which are classified in heading 8516 when heated electrically.c.Note 5 to Heading 8516 also indicates that assemblies consisting of immersion heaters permanently incorporated in a tank, vat or other vessels are classified in heading 84. 19 unless they are designed for water heating only or for domestic use, in which they remain in heading 8516. d.By the application of GIR 1, the EAC CET and Explanatory Notes stated in the foregoing paragraph, the dual system solar water heating system imported by the Appellant is covered by the terms of Heading 84. 19 as expressly excluded.

18. Flowing from the above arguments, the Appellant averred that the Appellant’s dual water heating systems should be classified under tariff code 8516. 10. 00. It stated that this classification is guided by the General Interpretation Rule 1 (GIR 1) which clearly outlines the fundamentals of tariff classification decisions namely:“For legal purposes, classification shall be determined according to the terms of the headings and any relative section or Chapter Notes and, provided such headings or Notes do not otherwise require.”

19. It was also its position that the burden of proof in this Appeal lay with the Appellant who had failed to discharge this burden.

20. The Respondent submitted that it sought an advisory from the World Customs Organization (WCO) Secretariat requesting for a classification advise in relation to the dual solar water heaters and the WCO Secretariat affirmed its classification as correct.

21. Based on the above arguments, the Respondent submitted that it correctly classified the water heaters after correctly applying the GIR and the advisory from the WCO Secretariat. It therefore, prayed that the Appellant’s Appeal be dismissed as it was devoid of merit.

Issues For Determination 22. The Tribunal having carefully reviewed the pleadings filed by the parties, the supporting documentation and the submissions made, is of the considered view that the Appeal herein crystalizes into two issues for determination, namely: -a.Whether the Respondent erred in the interpretation of the EAC/CET GIRs and wrongly classified the Appellant’s imported solar water system under HS code 8516:10:00. b.Whether the Respondent’s decision to assess the Appellant for short levied duties in the sum of Kshs 882,306. 36 was justified.

Analysis And Determination a) Whether the Respondent erred in the interpretation of the EAC/CET GIRs and wrongly classified the Appellant’s imported solar water system under HS code 8516:10:00. 23. The Appellant is aggrieved by the Respondent’s decision to classify its imported water heating solar systems under HS code 8516:10:00. The Appellant contended that the applicable heading for classification of solar water heaters is under Heading 8419:19:00. The Appellant also contended that HS code 8516:10:00 is not applicable to solar water heaters as the same covers instantaneous water heaters.

24. The pertinent point of disparity between the parties is that the Respondent contend that the Appellant’s product is dual i.e. both solar and electric, thus classifiable under the tariff for dual systems, while the Appellant asserts that its product is a solar heater, with an electric back up, thus not dual system to fit such tariff classification.

25. The parties have submitted extensively hereinabove on the two contentions, and the Tribunal does not therefore intend to rehash the aforesaid submissions hereon.

26. The fundamental submission made by the Appellant on the HS code 8516. 10. 00 which it contends is not applicable to its solar water heating system is that:i.it was not importing a dual system heater but rather it imported a solar water heating system.ii.It was inspected by the Respondent at its yard in Kisumu and its product was found to be a solar system.iii.The solar it imported does not meet the requirements of heading 85. 16 because its products only rely on sunrays to heat the water.iv.Its solar system is not heated electronically or by connection to a fuel heated system.

27. The Appellant therefore submitted that the true application of the GIR 2[b] clearly shows that the solar water heaters in question should be classified based on the component that gives them their main character.

28. On the other hand, the Respondent contended that the Appellant’s water heating system has an electric heating component, thus dual in nature, in the sense that they operate under both solar power, and electricity, thus classifiable under the tariff for dual systems which is 8516:10:00.

29. The Respondent further contended that without the electrical element, the system would not be effective in heating water when the solar energy is inadequate but it would work perfectly without the solar component. It thus opined that it was dual in nature.

30. The Respondent submitted that Heading 8419 covers non-electrical instantaneous or water heating systems only, and electric heating systems are excluded from this heading, therefore submitting that, the Appellant’s product has an electric heating system and is therefore excluded from the heading.

31. The Respondent further submitted that the Appellant’s solar water heating system is specifically covered under sub-heading 8516; 10:00, which covers;“Electric instantaneous or storage water heaters and immersion heaters”.

32. The Heading 8419:19:00 covers non-electric water heaters, as it provides:“Instantaneous or storage water heaters, non-electric “

33. The Respondent also asserted that the WCO had also given it an advisory opinion confirming that the products in question are classifiable under Tarif 8516. 10. 00.

34. Paragraph A (3) of the Explanatory Note to Heading 85. 16 has defined dual systems to be:“those in which the water is heated either electrically or by connection to a fuel-heated hot water system; they are often equipped with a thermostatic control to operate them electrically only when the alternative is insufficient”.

35. From the above description, it is clear that the heater that qualifies as a dual system under this definition is required to heat its water through electricity or by connection to a fuel heated hot water system. This means that the duality of the solar is obtained when the said solar system is heated by either electricity or fuel heated hot water system.

36. The solar systems that are the subject matter of the dispute rely on the electricity to obtain their energy. They do not rely on a connection to a fuel heated hot water system to obtain their energy. The fact that they are not heated by fuel heated hot water system means that they cannot fall within the definition of duality that is envisaged under Paragraph A (3) of the Explanatory Note to Heading 85. 16.

37. This product has failed the classification test under GIR 1 because the product does not fall for classification according to the terms of the headings and any relative section or notes. The Tribunal shall now move to consider if it is classifiable under GIR 2.

17. Rule 2 (a) deals with articles that are incomplete or unfinished. The appropriate Rule would thus be Rule 2( b) which provides that:“Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substances. Any reference to goods of a given material or substance shall be taken to include a reference to goods consisting wholly or partly of such material or substance.The classification of goods consisting of more than one material or substance shall be according to the principles of Rule 3”.

38. Rule 3 which has been referred to above provides guidance on which of the two HS codes is more applicable to the product in question and it states follows;-“3. When by application of Rule 2 (b) or for any other reason, goods are prima facie classifiable under two or more headings, classification shall be effected as follows;a.The heading which provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings refer only to part only of the materials or substances contained in a mixed or composite goods or to part only of the items in a set 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 under 3a, shall be classified as if they consisted of the material or component which gives them their essential character, as far as this criterion is applicable.”

39. Rule 3 dictates that classification ought to be done on the basis of the the essential character of the product in question. In this Appeal, the Appellant stated that it bought a solar water heater and that is what was sold to it by the suppliers. The Tribunal also takes judicial notice that the said solar water heaters are inevitably placed on the roofs of houses to tap onto the sunlight for its operation. If it did not require the sun then it could have been placed on any high point within the compound to achieve the effect of gravity in its operation without any need for the sun.

40. The Tribunal has also taken judicial notice of the fact that the insertion of the electric component into the solar water heaters emanated from a directive by the Government requiring all imported solar water heaters to have an electric component. The purchasers of solar water heaters are therefore merely complying with the Government directive but their main target of purchase remains a solar system that is powered by the sun. Put another way, the purchasers do not have need for this electric component in the solar, and if this directive is rescinded then itwould continue with importation of solar water heaters in their original format.

41. The imported gadget also has solar panels that are typically fitted on any solar water heater. Whereas it has an electric component, it is clear that the intention of the Appellant was not the purchase of a water heater which could be augmented with a solar water heater.

42. Based on the above analysis, and being guided by the GIR 3(b) on the need to determine the essential character of the product under review, the Tribunal hereby arrives at the conclusion that the essential character of the Appellant’s imported product was solar water heater. It therefore, aptly falls under Heading 8419. 19. 00.

43. In light of the foregoing, The Tribunal finds and holds that the Appellant’s imported solar water heaters is classifiable under the EAC/CET HS code 8419:19:00, and not HS code 8516:10:00 that is preferred by the Respondent.

44. In light of foregoing, the Tribunal holds that the Respondent erred in interpreting the EAC/CET GIRs and wrongly classified the Appellant’s imported solar water heaters under tariff HS code 8516:10:00 instead of HS code 8419:19:00.

b) Whether the Respondent’s decision to assess the Appellant for short levied duties in the sum of Kshs 877,286. 79 was justified. 45. Having made a finding that the correct classification for the Appellant’s products is HS code 8419:19:00 and not Hs Code 8516. 10. It follows that the issue of determining whether the Respondent’s decision to assess the Appellant for short levied duties in the sum of Kshs 877,286. 79 has become moot.

Final Decision 46. The upshot of the foregoing is that the Appellant’s Appeal succeeds and the Tribunal accordingly proceeds to make the following orders: -a.The Appeal be and is hereby allowed.b.The Respondent’s review decision dated 31st January 2022 confirming the assessment and demand for Kshs 877,286. 79 be and is hereby set aside.c.Each party to bear its own costs.

47. It is so ordered.

Dated And Delivered At Nairobi This 02th Day Of June, 2023. ROBERT M. MUTUMACHAIRPERSONDELILAH K. NGALAMEMBERELISHAH N. NJERUMEMBEREDWIN K. CHELUGETMEMBERRODNEY O. OLUOCHMEMBER