[2024] KETAT 96 (KLR)

Kadernami v Commissioner of Customs and Border Control (Appeal 887 of 2022) [2024] KETAT 96 (KLR) (2 February 2024) (Judgment)

Neutral citation: [2024] KETAT 96 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 887 of 2022

Grace Mukuha, Chair, G Ogaga, Jephthah Njagi, E Komolo & T Vikiru, Members

February 2, 2024

Between

Sif Abdulla Kadernami

Appellant

and

Commissioner of Customs and Border Control

Respondent

Judgment

1. The Appellant is a Kenyan citizen whose principal business activity is sales, installation and maintenance of solar energy products among other products.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and the Kenya Revenue Authority is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Appellant received an enforcement notice on 4th April 2022 which made reference to a demand notice dated 3rd December 2021.

4. The demand stated that a desk audit had been undertaken by the Respondent and the findings were that solar water heaters imported by the Appellant for the period November 2016 to December 2021 had been wrongly classified under tariff code 8419:19. 00 instead of 8516:10. 00.

5. The Appellant submitted an application for review on 20th June 2022 objecting to the said demand.

6. The Respondent delivered its review decision on 15th July 2022 wherein it upheld its demand amounting to Kshs. 4,062,551. 69.

7. The Appellant being dissatisfied with the review decision filed a Notice of Appeal on 24th August 2022.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Appellant’sMemorandum of Appeal dated 22nd August 2022 and filed on 24th August 2022:a.That the Respondent erred in law and in fact by not taking into account the fact that the solar water heaters imported by the Appellant are not classifiable under Heading 85:16 but rather 84:19 which caters for;“machinery, plant or laboratory equipment whether or not electrically heated for treatment of materials by a process involving change of temperature such as heating, cooking….”b.The Respondent erred in law and in fact by failing to appreciate that in the event the solar water heater with an electric backup could not be classified under both HSC 85:16 and HSC 84:19 the same could only be classified under Rule 3(b) of the WCO General Rules for Interpretation of the Harmonised System.c.The Respondent erred in law and in fact by failing to appreciate that the Appellant has a right of access to information provided under Article 35 of the Constitution of Kenya 2010. By purporting to authoritatively rely on the opinion of the WCO dated 3rd November 2021 without disclosing how the same opinion was arrived at, the Respondent has infringed on this right.d.The Respondent erred in law and in fact by purporting to rely on the opinion of WCO Secretariat on the correct classification of the solar water heaters. The Secretariat of the WCO has no mandate to issue opinions or rulings on the interpretation of the harmonised system since those functions are the preserve of the HS Committee in line with Article 7(1)(b) of the HS Convention.e.The Respondent erred in law and in fact by presenting to the Secretariat of the WCO a solar water heater whose electric backup had been removed leading the Secretariat to apply GIR 2(a) whose purpose is to give character to an unfinished product and classify it together with the finished product which without considering the solar capabilities would be considered electric,f.The Respondent erred in law in failing to appreciate the fact that the demand dated 3rd December 2021 is tainted with illegality. The Respondent had been warned by the WCO against using this advisory opinion to change the HS code or in any way utilize this opinion to change the applicable tariff for solar water heaters. Nonetheless the Respondent attached an incomplete copy of this advisory opinion to the demand dated 3rd December 2021 as the basis for demanding the taxes in question.g.The Respondent erred in law by purporting to retrospectively apply the opinion of the WCO dated 3rd November 2021 to imports that took place many years before the same opinion was delivered.h.The Respondent erred in law and in fact by failing to acknowledge that it had a duty to uphold the Appellant’s legitimate expectation to the effect that the solar water heaters were classifiable under tariff code 8419. Having classified the solar water heaters under tariff code 8419 for years without raising any additional assessment, the Respondent created a legitimate expectation on the part of the Appellant that the solar water heaters would in future be classified under the same code.

Appellant’s Case 9. The Appellant’s case is premised on the following documents:a.The Appellant’s Statement of Facts dated 22nd August 2022 and filed on 24th August, 2022; andb.The Appellant’s Written Submissions dated 6th February, 2023.

10. That the Appellant has a statutory right to fair administrative action pursuant to Article 47 of the Constitution of Kenya and the Fair Administrative Actions Act No. 4 of 2015.

11. That Section 4(3) of the Fair Administrative Actions Act requires that where an administrative action is likely to adversely affect the rights and fundamental freedom of any person, the administrator shall give the affected person:-a.A statement of reasons and the information, materials andb.Evidence to be relied upon in making the decision or the administrative action.

12. That by declining to provide the information, statement of reasons and the evidence relied on in reaching its decision as per the mandatory terms of Section 4(3) of the Fair Administrative Actions Act, the Respondent has infringed on the Appellant’s statutory rights.

13. That on the issue of misinterpretation of the EAC Common External Tariff (CET), 2017, it is the Appellant’s position that the solar water heaters can only be classified under heading 8419 and not under any other Heading. That this is because Heading 8419 covers:-“machinery, plant or laboratory equipment, whether or not electrically heated (excluding furnaces, ovens and other equipments of heading 8514) for the treatment of materials by a process involving a change of temperature such as heating, cooking, roasting, distilling, rectifying, sterilizing, pasteurizing, drying, evaporating, vapourising, condensing or cooling, other than machinery or plant of a kind used for domestic purposes, instantaneous or storage water heaters, non-electric.”

14. That it was the Appellant’s position that the Explanatory Notes (ENs) constitute the official interpretation of the Harmonised System at the international level with each EN providing a commentary on the scope of each heading and therefore indicative of the proper interpretation of these headings.

15. That in this regard, Chapter 84 covers all electric machinery and equipment other than machinery and apparatus of a kind covered by Chapter 84 which remains classified there even electric. That the Appellant therefore holds the position that the solar water heaters are classifiable under heading 8419.

16. That, furthermore, the Explanatory Notes to Heading 8419 states in the relevant part:“the apparatus described above is essentially used industrially, but the heading also covers non-electric instantaneous water heaters and storage water heaters, including solar water heaters, domestic or not, if electrically heated such appliances are excluded (heading 8516).”

17. The Appellant averred that the Respondent’s decision to classify the solar water heaters incorporating a heating element under Heading 8516 was informed by its erroneous interpretation of Explanatory Note A(3) of Heading 8516 on definition of dual system water heater. That this provision defines dual system water heaters as follows:-“Dual system heaters 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 electronically only when the alternative means is insufficient.”

18. It was the Appellant’s position that the products in dispute are basically solar water heaters which incorporate a back-up heating element and not dual system water heaters as the Respondent would want the Tribunal to believe. That it ought to be noted that solar water heaters do not in any way utilize fuel and therefore are not connected to a fuel-heated hot water system. That solar water heaters are not equipped with a thermostatic control and neither are they immersion heaters. That this leads to the inevitable conclusion that solar water heaters do not meet the definition of dual system heaters prescribed under Explanatory Note A(3) of Heading 8516.

19. The Appellant stated that the fact that the solar water heaters cannot be classified under Heading 8516 is further buttressed by the last paragraph of Explanatory Note A(5) of Heading 8516 which provides as follows:- Assemblies consisting of immersion heaters permanently incorporated in a tank, vat or other vessel are classified in Heading 8419 unless they are designed for water heating only for domestic use, in which case they remain in this heading. Solar water heaters are also classified in Heading 8419.

20. The Appellant posited that this clearly indicated that Heading 8516 clearly excludes solar water heaters and provides that they are classifiable under Heading 8419. That it is apparent that the Respondent has been sharing incomplete chapter notes and failing to disclose this provision to the Tribunal and the Appellant. That this provision clearly provides that solar water heaters are classifiable under Heading 8419 and there is no reason why the Respondent would move to reclassify solar water heaters under any other heading.

21. The Appellant submitted that the Respondent has indicated that solar water heaters are excluded from the provision of Heading 8419 by dint of the last paragraph of Heading 8419 which provides as follows:- instantaneous or storage water heaters, non-electric. That it is however the Appellant’s submission that this is an erroneous interpretation of the law since solar water heaters are not instantaneous or storage water heaters. That further, the incorporation of an auxiliary heating element does not change the nature of these products which remains under Heading 8419 as is the practice worldwide. That this has also been the practice in Kenya since 2019 when the Respondent obviously under pressure to meet tax targets decided otherwise.

22. The Appellant explained that a reading of the Chapter Notes to Heading 8419 further suggested that solar water heaters are classified under this Heading. That this Note provides as follows:-“The machinery and plant classified under this heading may or may not incorporate mechanical equipment. They may be heated by any system (coal, oil, gas, steam, electricity, etc) except in the case of instantaneous water heaters and storage water heaters which are classified in heading 8516 when heated electrically.”

23. The Appellant contended that it was therefore apparent that there is no provision either in Heading 8419 or in the Chapter notes to this heading which excludes solar water heaters from this Section. That on the other hand, Explanatory Note A(5) of Chapter 8516 clearly states that solar water heaters are classified under Heading 8419.

24. That the Appellant invited the Tribunal to take note of the fact that the 2022 version of the HS code had created a new tariff 8419. 12. 00 for solar water heaters. That this also indicates that solar water heaters have always been classified under Heading 8419 and continues to be classified under this Heading by dint of the 2022 version of the HS code.

25. The Appellant stated that it brought to the attention of the Respondent the fact that in the event that the solar water heaters in question could not be classified under Heading 8419 their classification must be done in line with the General Interpretation Rules (GIR). That the specific rule applicable is Rule 3(b) which deals with the mixtures and composite goods consisting of different materials which cannot be classified by reference to the headings under the tariff. That Rule 3(b) extracted verbatim provides as follows:-“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 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.”

26. The Appellant averred that in this regard, solar water heaters consist of 3 major components which are described as follows:-a.Solar collectors – these are solar panels (usually installed on the roof top) that are responsible for collecting heat from the sun and using it to heat cold water that is fed through the collectors from a water storage tank. In accordance with the principle of thermos-syphoning, cold water from the tank runs down into the collectors, where it is heated by sunlight. The heated water then rises back up through the collectors and back into the tank and is replaced with more cold water that is again heated with the heat of the sun, and the cycle continues through the day to ensure constant supply of water heated by sunlight. The solar collectors account for 80% of the solar water heater system’s size and value, and they are the most central part of the system such that without them the system would not function as intended. They take different forms and sizes depending on the location where they are installed (the type of roof, the user’s plumbing infrastructure, and the type of water to be heated) and the volume of water to be heated.b.Storage tank – this is a thermal insulated water storage tank connected directly above the solar collector. Cold water from the tank is fed into the solar collector, where the heat is insulated and the hot water stored for use. The tanks connect directly into the user’s plumbing system to provide hot water as needed and the insulation is such that water can be kept hot throughout the night.c.Back-up heating element – this is a small component inside the storage tank. The user can optionally switch it on to provide a small amount of electricity generated heat in addition to the solar heat from the collectors. This is only utilized on the minority of days when the sunlight is not sufficient for the water to be fully heated by the solar collectors.

27. That by design, the solar collector provides the majority of heat on the majority of days so that users rarely have to turn on the electrical back-up element and can thus avoid electricity costs for heating water. Therein lies the value of the solar water heater heating system. It is prudent to note therefore that the solar water heater is designed to function under very low sunlight and consequently the use of the backup heater is very rare.

28. The Appellant contended that a true application of the GIR, specifically Rule 3(b), clearly shows that the solar water heaters in question should be classified based on the component that gives them their essential character. That in the sample above, the solar water heaters are given character by the solar collectors which account for 80% of the functionality of the system. That it is therefore inaccurate to conclude that the solar water heaters are given character by the electrical backup element considering that this element is not intended to provide the core function of the system but rather a backup for the rare occasions when there is insufficiency of sunlight.

29. The Appellant stated further that, on the issue of misapplication of the WCO Explanatory Notes (WCOEN), the Appellant indicated that the WCOEN creates four considerations for any classification to be made on composite goods. That consideration should be given to the following areas:-a.Nature of the material or component.b.Bulk, weight or value.c.The role of a constituent material in relation to its use.d.The valuation of the different components.

30. The Appellant stated that in light of the solar water heaters in question, it is clear that the electric component is not a significant part of the system and further, the bulk and weight of the system is the collectors and the tank. That in consideration of the role, the Appellant has demonstrated above that the backup electrical heating element plays a very incidental role in the functioning of the system.

31. That whereas the solar collector is providing heat 365 days a year, the electrical backup element is only in use about 30 days of the year when the solar heat alone is insufficient. That the system would still function even without the electric component signaling that the Rule I is not primary to the functioning of the system.

32. The Appellant argued that as can be seen in the review decision dated 15th July 2022, the Respondent has asserted that the solar water system can operate solely on electricity. That this position is erroneous as the solar water system cannot function without the solar panel. That the design of vacuum tube system cannot allow this since it is not possible to block all the 30 holes in the tank to operate as electric heater without vacuum tubes. That the tubes are the main heating source with the electric heater playing a backup role in the rare event when solar energy is not sufficient.

33. The Appellant reiterated that on the valuation of the components, the backup electrical heating element bought as a stand-alone is significantly cheaper than when bought together with the solar water heater heating system. That to this end, it is therefore unlikely that someone interested in purchasing an electric component would purchase the solar water heater system. That the valuation cost of the solar components significantly outweighs the valuation of the backup electrical heating component.

34. On breach of the right to fair administrative action, the Appellant contended that Article 47 of the Constitution of Kenya 2010 provides for the right to a fair administrative action. This right is further enshrined under the Fair Administrative Actions Act No. 4 of 2015. Salient amongst its provisions is the requirement under section 4(3) which requires that where an administrative action is likely to adversely affect the rights or fundamental freedoms of any person, the administrator shall give the person affected by the decision;a.A statement of reasons and the information, materials, andb.Evidence to be relied upon in making the decision or taking the administrative action.

35. The Appellant further observed that the Respondent did not provide any document to demonstrate its application to the WCO as well as the complete WCO ruling opinion. That the Appellant therefore lacked the benefit of these documents when making its application for review.

36. The Appellant further stated that the decision by the WCO Secretariat dated 3rd November 2021 attached to the demand was incomplete, that without the signing off page the authenticity of the WCO Secretariat opinion is questionable. That it is worth noting that the WCO Secretariat has no mandate to render rulings or advisory opinions on the interpretation of the Harmonized System since those functions are the preserve of the HS Committee in line with Article 7(1)(b) of the HS Convention.

37. That on the issue of the WCO ruling, the Appellant stated that this is another case in a series of suits touching on this issue. That in most suits before the Tribunal the Counsel on record for the Appellant filed an application for disclosure of the complete WCO advisory opinion as well as the Respondent’s application to WCO. That in some cases the Respondent agreed by consent to provide these documents while in others the Tribunal made a ruling requesting the Respondent to provide these documents. That the Respondent is yet to comply with these orders despite having sought time to do so in most of the appeals.

38. The Appellant further averred that around the 15th August 2021, the Respondent filed an application to review in a number of cases indicating that it had received a protest letter from the WCO barring it from sharing the advisory opinion dated 3rd November 2021 with third parties on confidentiality grounds.

39. The Appellant stated that in Tax Appeal No. 186 of 2022, Kinetics Controls Limited vs. Commissioner of Customs and Border Control, the Respondent shared a copy of this protest dated 14th February 2022 which revealed that the Respondent was correctly informed that it is the role of the HS Committee to provide guidance on the interpretation of the Harmonised System as correctly pointed out by the Appellant in this matter. That this suggests that the Respondent’s action of utilising this advisory opinion to claim the impugned taxes from the Appellant was irregular and illegal.

40. It is the Appellant’s position that it had over the years imported the product in question under HS code 8419. 19. 00 and the Respondent had never raised an issue with the classification of the product or issued an additional demand. That this therefore created a legitimate expectation on the Appellant that the Respondent in future would classify these products under the same HS code. That the Respondent is therefore estopped from acting contrary to the consistent practice from which the Appellant’s legitimate expectation emanated.

41. The Appellant averred that the decision to reclassify products and demand taxes for imports made in 2016 based on a ruling arrived at in 2021 is unfair and unreasonable. That the retrospective application of the law, although not illegal, must be done in a reasonable manner so as not to occasion any tax burden on the taxpayer.

42. That despite the above-stated reasons, the Respondent delivered its review decision on 15th July 2022 where it upheld its demand dated 3rd December 2021 and grossly misdirected itself on the classification of the product.

43. That in the above-stated review decision, the Respondent did not dispute that the WCO ruling shared with the Appellant save for stating that the part shared with the Appellant was sufficient to justify the classification of the “dual system water heaters”.

44. The Appellant further submitted that the goods clearance process is lengthy. That it begins with a bill of lading which is a contract between the seller and the buyer of the goods. That the HS code of the product first appears here. That a Certificate of Conformity (CoC) is then issued by a company based in the country of origin. That these companies are hired by the Respondent and are therefore agents of the Respondent to ensure that the goods being imported conform to Kenyan standards. That the good are accompanied by a Certificate of Origin showing where the goods originated from.

45. That is then followed by a commercial invoice which describes the goods sold and cost of the same. That in most cases the applicable tariff in the exporting country also appears on the invoice. That the importer of the goods then acquires a Customs bond which is a guarantee that they will abide by Regulations. That the goods are also accompanied by an Export Manifest which shows a detailed list of the goods being carried. That once the goods arrive at the designated port, the clearing agent prepares an Import Declaration Form which summaries the import details and indicates the applicable tariff code.

46. That these agents are licensed and regulated by the Respondent and therefore act as its agents. That the goods are then inspected by the Kenya Bureau of Standards (KEBS) as an agent of the Respondent and the KEBS certificate issued.

47. The Appellant averred that it was apparent that from the start, the Respondent was involved in the importation process. That in addition, the Appellant plays no role in setting the applicable standard and this explains why the Respondent has never raised any issue with the Appellant about declaring a wrong tariff.

48. That the fact that all importers of the solar water heaters were importing under tariff code 8419. 19. 00 for a long period indicates that the Respondent was also of the view that this was the applicable tariff for these until the Respondent through its Post Clearance Audit Department took a different interpretation of the HS code. That this therefore begs the question why the Respondent would turn back and indicate that the Appellant had been declaring the wrong tariff and worse still move a step further and demand back taxes for a period of 5 years.

49. The Appellant further averred that the dispute of the solar water heating systems was not attributed to the classification of the product but instead from the change in interpretation of the applicable HS code by the Respondent. That to this end, it is difficult to pin the huge burden of this change on the Appellant. That, if anything, it must be understood that at the point of importation of the solar water heaters, it was clear between the Appellant and the Respondent that the applicable tariff was 8419. 19. 00 and the Appellant relying on the guidance of the Respondent classified all subsequent imports under the said tariff.

50. The Appellant submitted that in respect of the VAT claim, Government through the Finance Act, 2014 amended Item 45 of the Part I of the First Schedule to the VAT Act, 2013 to exempt “specialized solar equipment and accessories, including solar water heaters and deep cycle-sealed batteries which exclusively use or store solar power”. The Government only reintroduced VAT in respect of solar water heaters through the Finance Bill 2020. It is therefore not clear why the Respondent would turn back and demand VAT yet the same had been waived by the Government at the time of importation.

51. The Appellant submitted that the lengthy process described in its submissions as well as the involvement of the Respondent and its approval over the years created a legitimate expectation on the part of the Appellant that the Respondent would in future classify these products under HS code 8419. 19. 00. That the Respondent is therefore estopped from acting contrary to its consistent representation from which the Appellant’s legitimate expectation emanated.

52. That in re Westminster City Council 1986 A.C.668 at 692 as cited in the case of Oindi Zaippeline & 39 Others vs. Karatina University & Another (2015) eKLR, the court stated that:“Legitimate expectation applies the principles of fairness and reasonableness to the situation in which a person has an expectation, or interest in a public body retaining a long-standing practice, or keeping a promise. An instance of legitimate expectation would arise when a body, by representation or by past practice, has aroused an expectation that is within its power to fulfil a promise.”

53. The Appellant pointed out the principles that guide the court when determining whether or not a legitimate expectation exists were highlighted in the case of Kenya Revenue Authority vs. Universal Corporation Ltd (2020) eKLR. That the court in finding that the Appellant had created a legitimate expectation in favour of the Respondent created the following guidelines in establishing a legitimate expectation:“a legitimate expectation arises where there is demonstration that a decision made led a party affected to believe that he would receive or retain a benefit or advantage including a benefit that he/she would be accorded a hearing before the decision was taken; a promise was made to a party by a public body that it would act or not act in a certain manner and which promise was made within the confine of the law; the public authority whether by practice or promise committed itself to the legitimate expectation ; the representation was clear and unambiguous; the claimant fell within the c lass of person(s) who were entitled to rely upon the presentations made by the public authority; the representation was reasonable and that the claimant relied upon it to its detriment; there was no overriding interest arising form the decision maker’s action and representation; the representation was fair in the circumstances of the particular case and that the same arose from actual or ostensible authority of the affected public authority to make the same; the promise related either to a past or future benefit; its main purpose is to challenge the decision maker to demonstrate regularity, predictability and certainty in their dealings with persons likely to be affected by their action in the discharge of their public mandate.”

54. The Appellant averred that the same principles were summarised by the Kenya Supreme Court in Communications Commission of Kenya & 5 Others vs Royal Media Services Limited & 5 Others, Petition No. 14 of 2014 as follows;“There must be an express, clear and unambiguous promise given by a public authority; the expectation itself must be reasonable; the representation must be one which was competent and lawful for the decision-maker to make; and there cannot be a legitimate expectation against clear provisions of the law or the constitution”.

55. The Appellant further relied on the case of Krish Commodities Limited vs. Kenya Revenue Authority [2018] eKLR while addressing a similar factual issue, the Judge made the following remarks:“more so, taking into account that the Respondent’s own officers verified the entries made and even inspected the consignments. The Respondent’s officers were not acting as a conveyor belt performing a perfunctory exercise. The reason they were there was to verify the accuracy of the entries and the duty payable before clearance of the consignments in question. Having verified the entries in issue, rate applied and assessed duty as correct, a legitimate expectation arose in favour of the Appellant that the assessed duty was correct.”

56. The Appellant contended that the Respondent had not bothered to explain the cause of its inaction and why despite having many opportunities to raise the issue of tariff classification it had failed to act as mandated by law.

57. The Appellant argued that if anything, it was the inaction of the Respondent that prompted the Appellant to price its products in the manner it did and consequently the tax claimed by the Respondent was not passed on to the final consumers of the goods. That it is not in dispute that the Appellant is in the business of selling solar water heaters and as such, the taxes being demanded by the Respondent can only be recovered from its profits. That this would create an undue hardship more so considering that further taxes have also been paid on these profits. That it is the hardship of this nature that the Court of Appeal seems to be addressing in the instant case. That no public authority would act in the manner that the Respondent has acted and that the same is unreasonable and unproportional.

58. The Appellant stated that this position was further reiterated in Krish Commodities vs. Kenya Revenue Authority where the court specifically addressing the sweeping powers allowed under Section 135 of the EACCMA held that although Section 135(3) of the EACCMA allows the Respondent to make such demand within 5 years, that is not to say that the Respondent would wait until the tail end of the said period before making such a demand. That there should be sufficient reasons as to why such audit and demand is made at the tail end. That the Respondent cannot simply stand behind the time limit given to justify its conduct of demanding the short-levied duty in question 4 years later.

59. That the conduct of the Respondent to demand taxes at the end of 5 years from the date of importation without explaining the inordinate delay is both unreasonable and unproportional as it passes an illegal tax burden to the Appellant.

60. The Appellant submitted that from the above Sections, the Respondent is granted the authority to call for records and inspect the said records to verify the accuracy of the entry of goods. That this section is the underpinning authority of the Respondent’s Post Clearance Audit. That this Section limits the exercise of this power to inspection for purposes of verification of the entry as opposed to reclassifying products under the HS code as the Respondent has attempted to do in this case. That there is nothing in Section 236 that gives the power to change the authorized HS code especially where the same has been repeatedly approved by the Respondent.

61. The Appellant submitted that the WCO has established the guidelines for the management and performance of post clearance audits. That the Guidelines for Post Clearance Audit (volume 1) updated by the WCO in June 2018, establishes the following objectives for PCA;a.To verify that the value, origin and classification of goods is declared correctly and the amount of revenue legally due has been identified and collected; -b.To ensure goods liable to specific import/export controls are properly declared, including prohibitions and restrictions, licenses, quota, etc.;-c.To ensure conditions relating to specific approvals and authorizations are being observed, e.g. pre-authenticated transit documents, preferential origin/movement certificates, licenses, quota arrangements, Customs and excise warehouses and other simplified procedure arrangements; and –d.To facilitate international trade movements of the compliant traders.”

62. The Appellant submitted that these objectives are similar to those contained in Section 236 of the EACCMA and what is the common bond is that the objectives of the PCA is to verify the entries as opposed to reclassifying the products. That the WCO does not envisage a scenario whereby the PCA can be used to change the tariff of commodities as the presumption is that the PCA should be limited to confirming whether the importer of goods used the allowed tariff when making the entries.

63. As far as the conduct of the Respondent goes, it is clear that the Respondent allowed the importation of solar water heaters under tariff 8419. 19. 00 and therefore the PCA audit ought to have been limited to confirming if the importer had used the allowed tariff. That the unfortunate deviation from the objectives of the PCA was an illegal act done by the Respondent with disregard for the principles of legality and ultra vires.

64. The Appellant submitted that where the law does not expressly provide for the performance of certain authority, the same cannot be inferred by any public body and any such inference is illegal. That in the case of Republic vs. Cabinet Secretary, Ministry of Agricultures, Livestock & Fisheries [ 2019] eKLR, the Court used the following principles to determine if the Authority acted ultra vires. The court observed that a decision is illegal if it: -a.contravenes or exceeds the terms of the power which authorises the making of the decision;b.pursues an objective other than that for which the power to make the decision was conferred;c.is not authorised by any power;d.contravenes or fails to implement a public duty.

65. The Appellant submitted that the Respondent had authorised all imports under HSC 8419. 19. 00. That if the Respondent was to apply Sections 235 and 236 as intended, the verification would have been to establish whether the Appellant had imported the solar water heaters under the tariff allowed during the import period. That there is no legal justification for the Respondent to use Sections 235 and 236 of the EACCMA to rewrite the HSC and require the Appellant to pay backdated taxes. That it is apparent that the manner in which the Respondent has applied Section 236 of EACCMA is an attempt to pursue an objective other than that which the power conferred by Section 236 intended.

66. The Appellant submitted that the Respondent is enjoined by the law to ensure that the Appellant is not subjected to a higher tax burden than what is allowed by the law. That in any case, the law requires that the tax statutes should be interpreted without intendment and where there is no clarity, the benefit should be passed to the taxpayer. The Appellant relied on the case of Commissioner of Domestic Taxes v s. Unga Limited [2021] eKLR where the court observed as follows;“Our courts have reiterated the principle that tax laws should be interpreted strictly and leave no room for intendment. The law regarding the procedure for filing self-assessment, the consequences for late filing and of failure to file are clearly set out in the TPA as I have set out above. There is nothing in those provisions, that allows the Commissioner to circumvent those provisions and none can be implied on reading of the statutes.”

67. The Appellant submitted that where there is no direct authority for the Respondent to reclassify the HS Code, the provisions of Sections 235 and 236 of the EACCMA cannot be read with intendment to clothe the Respondent with such powers.

68. The Appellant submitted that the Harmonized System is a global system that has been ratified and domesticated by the various member States. The International Convention on the Harmonized Commodity Description and Coding System (HS Convention) entered into force on 1st January 1988. That this convention is the basis on which the HS code is managed and under Article 16 the Convention provides for the amendment procedure.

69. The Appellant submitted that the legal mandate to make changes to the HS code is granted only to the HS Committee and the procedure for exercising this mandate is elaborately laid down under Article 16 of the HS Convention. That the clarity of the HS Convention leaves no doubt that no individual member State can make amendments to its HS code without following the procedure under Article 16.

70. The Appellant submitted that the unilateral amendment to the HS code by the Respondent has not only created an undue tax burden on the Appellant but has also deviated from the accepted practice by all member states. That this therefore means that the change of tariff by the Respondent without following the due process complicates the importation of solar water heaters from such countries. That in any event where the Respondent does not agree with the treatment of solar water heaters by other member states, the HS convention has an elaborate procedure under Article 10 where such a dispute may be received by the Committee and a ruling rendered. The Respondent failed to initiate this process which it was legally bound to follow.

71. The Appellant submitted that as an indication of the position of the WCO on the classification of solar water heaters, the HS Committee brought into force the HS Nomenclature 2022 which has augmented Chapter 84 to clarify the treatment of solar water heaters. Under this nomenclature, Chapter 84 has introduced tariff 8419. 12 to specifically provide for solar water heaters. That this is an indication that the WCO and its member States intend that solar water heaters be classified under Chapter 84 thereby reinforcing the Explanatory Notes under Chapter 8516 (5) that solar water heaters should be classified under Chapter 8419.

72. The Appellant submitted that although it is a member of the Kenya Renewable Energy Association, it was not consulted by the Respondent or in any way called upon to air its opinion on the purported reclassification of solar water heaters. That this further offended various constitutional provisions requiring public/stakeholder participation on matters touching on public finance. The Respondent’s actions were therefore illegal, null and void.

Appellant’s Prayers 73. The Appellant prayed for orders that the Tribunal:a.Annuls the Respondent’s review decision dated 15th July 2022. b.Awards costs to the Appellant.

The Respondent’s Case 74. The Respondent’s case is premised on its;a)Statement of Facts dated and filed on 1st August 2022b)Written submissions dated 26th January 2023 and filed on 31st January 2023.

75. The Respondent submitted that classification of goods in Kenya was governed by the East African Community Common External Tariff (EAC CET) which codified and adopted the world Custom Organization Harmonised Commodity Description Coding System and its principles of General Interpretative Rules (GIRs) of classification of goods.

76. The Respondent submitted that the EAC CET is derived from and informed by the International Convention on the Harmonised Commodity Description and Coding System to which Kenya and all member States of the East African Community are signatories.

77. The Respondent stated that the Appellant’s imported dual solar water heating systems have an electric component and are therefore dual water heating systems classifiable under Chapter 85 of EAC CET which provides as follows:-“Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles”.

78. The Respondent quoted Heading 85. 16 which covers: “Electric instantaneous or storage water heaters and immersion heaters; electric space heating apparatus and soil heating apparatus; electro-thermic hair-dressing apparatus (for example, hair dryers, hair curlers, curling tong heaters) and hand dryers; electric smoothing irons; other electro-thermic appliances of a kind used for domestic purposes; electric heating resistors, other than those of heading 85. 45”.

79. The Respondent further quoted Heading 8419 which covers machinery, plant or laboratory equipment, whether or not electrically heated (excluding furnaces, ovens, and other equipment of Heading 85. 14), for the treatment of materials by a process involving a change of temperatures such as heating, cooking, roasting, distilling, rectifying, sterilising, pasteurising, steaming, drying, evaporating, vaporising, condensing or cooling, other than machinery or plant of a kind used for domestic purposes; instantaneous or storage water heaters, non-electric.

80. The Respondent submitted that without the electrical element, the system would not be effective in heating water when the solar energy is inadequate but the system would work perfectly without the solar component.

81. The Respondent stated that the Harmonised Customs Commodity Description and Coding System Explanatory Notes together with the additional notes constitute the official interpretation of the Common External Tariff and provide the scope of each heading under the EAC CET. in accordance with GIR 1 and Explanatory Notes, the items are classified under 8516. 10. 00.

82. The Respondent stated that Rule 1 of the General Interpretative Rules (GIRs) provides as follows;“The titles of sections, Chapters and sub-chapters are provided for ease of reference only 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, according to the following provisions.”

83. The Respondent contended that the Explanatory Notes to the Harmonised Commodity Description and Coding System, Note (A) 3 to Heading 8516 classifies dual system heaters in Heading 8516, in which the water is heated either electrically or by connection to a fuel-heated hot water system. They are often equipped with thermostatic control to operate them electronically only when the alternative means is insufficient.

84. The Respondent added that the Explanatory Notes to the heading 8419 state 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 electronically.

85. The Respondent further averred that Note (I) to Heading 8419 concludes that the apparatus described in the note is essentially used industrially, but the heading also covers non-electric instantaneous water heaters and storage water heaters, including solar water heaters, domestic or not. If electrically heated, such appliances are excluded.

86. The Respondent contended that even if it was to be assumed that both the solar and electrical components are equal under Rule 4 of the General Interpretative Riles (GIRs) of classification of goods, the dual system heaters would still be classified under the heading appropriate to the goods which are most akin and in this case it is HS code 85. 16.

87. The Respondent submitted further that the WCO advisory opinion dated 3rd November, 2021 was an opinion and did not in any way alter the East African Community Common Market Tariff (EAC CET) which governs the classification of goods in Kenya.

88. The Respondent submitted that the Appellant’s contention that the basis of the classification was not availed is false as the Explanatory Notes which form the basis of the classification were availed.

89. The Respondent submitted that contrary to the Appellant’s allegation that it relied on the advisory from the WCO to raise the demand, the Respondent had already classified the goods under HS code 8516 way before writing to the WCO for advice.

90. The Respondent submitted that contrary to the Appellant’s allegation that it infringed on its right to fair administrative action and Constitutional right, it informed the Appellant of the additional assessment and explained its decision to classify the goods under the disputed HS code.

91. The Respondent averred that it acted within its powers under Sections 235(1) and 236 of EACCMA, 2004 which empowers the Respondent to conduct a post clearance audit within 5 years and seek for documents to verify the correctness of the taxes declared and paid.

92. The Respondent stated that Section 135 of EACCMA empowers it to demand for short levied taxes.

93. The Respondent submitted that the Appellant cannot claim legitimate expectation on the face of illegality. That the alleged legitimate expectation only arises if the Respondent issued guidelines which were relied on by the Appellant to its detriment. However in the case at hand the inspection report relied on by the Appellant indicated clearly the Respondent’s findings.

94. To support its position, the Respondent cited the following Authorities:-a.Pharmaceauticles Manufacturing (k) Co Ltd & 3 Others vs Commisiioner General of Kenya Revenue Authority & 2 Others [2017] eKLR the Court of Appeal.b.Republic vs Kenya Revenue Authority Ex-Parte Bata Shoe Company (Kenya) Limited [2014] eKLRc.Communication Commission of Kenya & 5 others vs Royal Media Services limited & 5 others [2014] eKLRd.Republic vs Commissioner General & Another Ex-parte Awal Ltd [2008] eKLRe.Beta Healthcare International vs Commissioner of Customs services [2010] eKLR

95. The Respondent stated that the Appellant’s products have an electric component and are therefore considered dual water heating systems meaning that they can operate under both solar power and electricity hence they fall squarely under Tariff Code 8516. 10. 00 and that the demand notice of Kshs. 4,062,551. 59 is lawful and justified.

Respondents Prayers 96. The Respondent made the following prayers.a.That the Tribunal finds that the demand letter dated 3rd December 2021 and the subsequent review decision dated 15th July 2022 are proper and in conformity with the law.b.That the taxes so demanded of Kshs. 4,062,551. 69 are due and payable in full together with the applicable interest and penalties.

Issue for Determination 97. The Tribunal upon due consideration of the pleadings of the parties and their written submissions was of the considered view that the Appeal raises only one issue for its determination:Whether the Respondent erred in law and in fact in reclassifying the Appellant’s solar water heaters from tariff code 8419. 19. 00 to tariff code 8516. 10. 00

Analysis and Determination 98. The Tribunal having ascertained the issue for determination as set out above proceeded to deal with the same as hereunder.

99. This dispute arose from a re-classification of solar water heaters by the Respondent on the basis of a WCO advisory opinion. The Appellant submitted that it had over the years imported the product in question under HS Code 8419. 19. 00 and the Respondent never raised an issue with the classification of the product. That this consistent practice of importing the product in question for a long time created a legitimate expectation that the solar water heaters shall in future be imported under HS code 8419. 19. 00 and not any other code.

100. The Appellant further submitted that the decision by the Respondent to retrospectively apply the opinion of the WCO dated 3rd November 2021 to imports that took place many years before the same opinion was delivered was unfair.

101. The Appellant averred that the Respondent had been warned by the WCO against using this advisory opinion to change the HS code or in any way utilize this opinion to change the applicable tariff for solar water heaters. That nonetheless the Respondent attached an incomplete copy of this advisory opinion to the demand dated 3rd December 2021 as the basis for demanding the taxes in question.

102. The Appellant stated that on the issue of misinterpretation of the EAC Common External Tariff (CET), 2017, it is the Appellant’s position that the solar water heaters can only be classified under Heading 8419 and not under any other heading. That this is because Heading 8419 covers machinery, plant or laboratory equipment, whether or not electrically heated (excluding furnaces, ovens and other equipments of heading 8514) for the treatment of materials by a process involving a change of temperature such as heating, cooking, roasting, distilling, rectifying, sterilizing, pasteurizing, drying, evaporating, vapourising, condensing or cooling, other than machinery or plant of a kind used for domestic purposes, instantaneous or storage water heaters, non-electric.

103. It was also the Appellant’s position that the Explanatory Notes (ENs) constitute the official interpretation of the Harmonised System at the international level with each EN providing a commentary on the scope of each heading and therefore indicative of the proper interpretation of these headings.

104. The Appellant also averred that Chapter 85 covers all electric machinery and equipment other than machinery and apparatus of a kind covered by Chapter 84 which remain classified there even electric. That the Appellant also emphasised the contents of the Explanatory Notes to Chapter 84 which state in the relevant part: that:- it should be noted that machinery and apparatus of a kind covered by Chapter 84 remains in this chapter even if electric. That the Appellant therefore holds the position that the solar water heaters are classifiable under Heading 8419.

105. The Tribunal has established that the demand by the Respondent was on the basis of an application made by the Respondent to the WCO and an advisory opinion issued by the WCO which documents were not availed to the Appellant.

106. Further, the Tribunal has looked at the arguments advanced by both parties.The Appellant’s position is that nothing has changed to warrant the re-classification of the product. The character of the product has not changed and all that happened was that the Respondent changed the interpretation of the HS code through a Ruling by its Technical Committee on 2nd November 2020.

107. The Tribunal finds that the General Interpretation Rules (GIR 1) under the EAC Common External Tariff 2017 provides that classification shall be determined according to the terms of the headings and any relative section or chapter notes. This Rule provides as follows:“The titles of Sections, Chapters and sub-Chapters are provided for ease of reference only; for legal purposes, classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes.”

108. The Tribunal notes that where the heading is clear on the treatment of the solar water heaters, there is no need to consider the chapter notes or what other sections provide. This is because the heading takes priority and reference to chapter notes or other sections should only be made when the heading lacks clarity on the classification of the item in question.

109. The Tribunal agrees with the Appellant that the electric heating element is not a significant part of the system as the bulk of the water heating system is made of the collectors and heat exchange tank. The Appellant demonstrated that the backup heater plays a very incidental role in the functioning of the system as the solar system still functions without the electric heating element.

110. According to GIR 1, what one sees when they look at the product in dispute is a solar water heater as opposed to a water heater, boiler, geyser or hot water tank. The electric heating element is an accessory to the solar water heater. The HS tariff classification codes are internationally used to facilitate global trade. The WCO in 2022 Nomenclature, introduced tariff 8419. 12. 00 to specifically provide for solar water heaters.

111. The East African Common External Tariff structure that came into force on 1st July 2022 also classified solar water heaters under HS Code 8419. 12. 00. This is an indication that the WCO and its member states intend that solar water heaters to be classified under Chapter 84 thereby reinforcing the Explanatory Notes under Chapter 8516 (5) that solar water heaters should be classified under Chapter 8419.

112. The Tribunal also notes that the East African Solar Taxation Handbook at page 38 describes solar water heaters as:-“Machinery, plant for conversion of sunlight into heat for water heating using a solar thermal collector.” The Handbook indicates that the HS code used for solar water heaters in the East African countries is 8419. 19. 00. The Tribunal notes that the Respondent did not offer a satisfactory justification for departure from the code that it has used over the years and that continues to be used by the other countries in the East African Customs Union.”

113. The Tribunal is further guided by its holding in the following matters amongst others: -a.TAT 922 of 2022 Namah Enterprises Limited v Commissioner of Customs & Border Control.b.TAT 279 of 2022 Sunpower International Limited v Commissioner of Customs & Border Control.c.TAT 135 of 2022 Climacento Green Tech Limited v Commissioner of Customs & Border Control.

114. The Tribunal has not been persuaded to depart from its previous decisions.

115. In view of the above, the Tribunal finds that the Respondent erred in reclassifying the Appellant’s solar water heaters from tariff code 8419. 19. 00 to tariff code 8516. 10. 00.

Final Decision 116. The upshot of the foregoing is that the Tribunal finds that the Appeal as filed is merited and it accordingly proceeds to make the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 15th July 2022 be and is hereby set aside.c.Each party to bear its own costs.

117. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF FEBRUARY, 2024. GRACE MUKUHACHAIRPERSONGLORIA A. OGAGAMEMBERJEPHTHAH NJAGIMEMBERERICK KOMOLOMEMBERTIMOTHY VIKIRUMEMBER