[2023] KETAT 255 (KLR)

ORB Energy Private Limited v Commissioner of Domestic Taxes (Appeal 101 of 2022) [2023] KETAT 255 (KLR) (Commercial and Tax) (12 May 2023) (Judgment)

Neutral citation: [2023] KETAT 255 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Appeal 101 of 2022

RM Mutuma, Chair, EN Njeru & RO Oluoch, Members

May 12, 2023

Between

ORB Energy Private Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and is in the business of provision of designing, supplying, installing, servicing, among other solar energy solutions.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, the Kenya Revenue Authority is charged with the mandate of assessment, collection, receipt, and accounting of the tax revenue, as well as the administration and enforcement of the laws set out in the First Schedule to the said Act.

3. The Appellant on the 25th November 2021, received a demand letter from the Respondent which indicated that a desk audit review on imports of solar water heaters for the period 2016 to 2021 had been conducted.

4. The notice indicated that the desk audit review had revealed that the solar water heaters imported by the Appellant had been wrongly classified under tariff code 8419:19:00 instead of tariff code 8516:10:00 since the solar water heaters contained a backup electrical heating element. That consequently, the Respondent demanded a total of Kshs 5,181,701. 00 being short levied duty.

5. The Appellant applied for review on 7th December 2021 grounded on four issues as hereunder;-i.Breach of the right to fair administrative action.ii.Misinterpretation of the EAC Common External Tariff, 2017. iii.Product function.iv.Misapplication of the World Customs Organization Explanatory Notes.

6. The Appellant further averred that the Respondent did not provide any document to demonstrate its application to the World Customs Organization as well as the complete WCO ruling /opinion, and the Appellant lacked the benefit of these documents while making the application for review.

7. Following the Appellant‘s request for a review decision the Respondent vide its letter dated 5th January 2022 issued the review decision confirming the demand notice of Kshs 5,181,701 on the basis that the Appellant’s imported solar water heaters are dual in nature thus classified under HS code 8516:10;00.

8. Being dissatisfied with the Respondent’s review decision the Appellant instituted the Appeal herein through filing of a Notice of Appeal dated and filed on 1st February 2022.

The Appeal 9. The Appellant lodged its Memorandum of Appeal with the Tribunal dated and filed on 1st February 2022 and which Appeal is grounded on the following grounds;i.The Appellant has a statutory right to fair administrative action pursuant to Article 47 of the Constitution of Kenya, 2010, and the Fair Administrative Actions Act, No 4 of 2015. ii.Section 4[3] of the Fair Administrative Actions Act requires that where an administrative action is likely to adversely affect the right and fundamental freedoms 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.iii.By declining to provide the information, statement of reasons and evidence relied on in reaching its decision as per the mandatory terms of Section 4[3] of the FAAAct, the Respondent has infringed on the Appellant’s statutory rights.iv.The Respondent erred in law and fact by purporting to authoritatively rely on the opinion of the World Customs Organization dated 3rd November 2021, without disclosing how the said opinion was arrived at. Specifically, the Respondent has failed to provide a complete and certified copy of the said Advisory Opinion as well as its application to the Secretariat of the WCO seeking the said opinion.v.The Respondent erred in law and fact by purporting to misrepresent that the advisory opinion dated 3rd November 2021 is a ruling as opposed to an advisory opinion. To the best of the Appellant’s knowledge and information, the Harmonized Systems Committee had in its 67th Session in April 2021, and made specific amendments to the classification of various goods, this being the last meeting of the Committee, it is unclear why the Respondent intend to suggest that the advisory opinion delivered on 3rd November 2021 is a ruling.vi.The Respondent erred in law and in fact by misrepresenting to the secretariat of the WCO that the dispute at issue concerned a “dual system” water heaters as opposed to a composite good containing a primary solar water heating component and an electric back up, thereby posing a question that was alien to the language of EAC/CET since there is no use of the word “dual system” in EAC/CET.vii.The Respondent erred in law and fact by presenting to the secretariat of the WCO a solar water heater whose electric backup had been removed leading to 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.viii.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 said opinion was delivered.ix.The Respondent erred in law and in fact by not taking into account the fact that the Appellant’s solar water heating systems do not fall within the classification of the heading under HS code 85;16 but rather HS code 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…”x.The Respondent erred in law and in fact by failing to appreciate that in the event of the solar water heater with an electric back up could not be classified under both HS code 85;16 and HS code 84:19, the same could only be classified under Rule 3 [b] of the WCO General Rules for Interpretation of the Harmonized System.

10. By virtue of the foregoing grounds of appeal and the supporting evidence, the Appellant prayed the Tribunal to allow its Appeal.

The Appellant’s Case 11. The Appellant has relied in support of its Appeal on the Statement of Facts dated and filed on 1st February 2022, and the Written Submissions dated 19th September, 2022 and filed on 28th September 2022.

12. The Appellant had in the first instance filed before this Tribunal an interlocutory application on 23rd March 2022 under a Notice of Motion, grounded on Articles 35, 47, and 159[d] of the Constitution of Kenya [2010], and Section 15[2] of the Tax Appeals Tribunal Act, seeking for the following orders;1. That the Tribunal orders the Respondent to release the following documents to the Appellant;-i.The application for advisory opinion addressed to WCO by the Respondent dated 30th August 2021,ii.A certified copy of the full advisory opinion delivered by WCO dated 3rd November 2021,iii.A certified copy of the ruling delivered by the Respondent dated 22nd November 2021 addressed to the Kenya Renewable Energy Association.2. The Respondent’s reliance on the WCO advisory hindered the Appellant’s rights under the Fair Administrative Actions Act, which requires public bodies to disclose material documents and information relied upon in reaching at a decision that adversely affects an individual.

13. The Notice of Motion application was opposed by the Respondent through its Supporting Affidavit and written Submissions filed, grounded on the averment that the Appellant was supplied with the information sought in the WCO advisory letter dated 3rd November 2021, vide the demand letter dated 25th November 2021, and that the Appellant was misrepresenting facts before the Tribunal as the relevant information contained in the WCO advisory letter was already within its custody even before the filing of the Appeal herein.

14. When the matter came up for hearing of the Appeal on 18th October 2022, the Appellant sought to have the hearing of the Appeal stayed pending the Ruling on its application. However, the Tribunal overruled the application for stay of proceedings based on the High Court decision that the Tribunal cannot stay its own proceedings, and reserved the Ruling on the Notice of Motion for 21st October 2022, and the hearing of the Appeal was rescheduled to 9th October 2022, with the parties directed to file their submissions. Subsequently, the Tribunal delivered the Ruling on the Appellant’s Notice of Motion Application and dismissed the same.

15. As is apparent the Appellant in its Statement of Facts and written Submissions, have extensively dwelt more on the issues of the right to fair administrative action, and the legitimate expectation arising thereon, as contrasted with the substantive issue of the correct classification of its solar system, perhaps bearing more weight on the importance of substantively considering these issues.

i. On the issue of legitimate expectation and fair administrative action. 16. The Appellant stated that it had over a period of more than five 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, nor raised any additional demand. The Appellant contended therefore that this practice of importing the product over a long period of time and the involvement and approval of the Respondent, created a legitimate expectation that solar water heaters shall in future be imported under tariff HS code 8419:19:00 and not any other tariff.The Appellant cited the case of Oindi Zaippelline & 39 others v Karatina University & another [2015] eKLR, where 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 fulfill a promise”.

17. The Appellant further cited the case of Kenya Revenue Authority v Universal Corporation Ltd [2020] eKLR, where the court created guidelines in establishing a legitimate expectation;“Legitimate expectation arises where there is demonstration that:- A decision maker led a party affected by the decision to believe that he would receive or retain a benefit or advantage including a benefit that he/she/ it 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 confines of the law,

The public body whether by practice or promise committed itself to the legitimate expectation,

The representation was clear and unambiguous,

The claim fell within the class of persons who were entitled to rely upon the representations made by the public body,

The representation was reasonable and that the claimant relied upon it to its detriment,

There was no overriding interest arising from the decision maker ‘s actions 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 to either a past or a 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.”

18. The Appellant further submitted that the same principles were summarized in the Supreme Court case of Communications Authority of Kenya & 5 others v Royal Media Services Ltd & 5 others, SC Pet. No 14 of 2014, as follows;“There must be an express, clear, 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.”

19. The Appellant submitted that the Respondent through its servants or agents having been involved in declaring the applicable tariff, having verified the applicable rate is correct and having permitted the import of solar water heaters under tariff 8419;19;00 is estopped from turning back.

20. The Appellant further submitted that from the authorities cited above i.e. KRA v Universal Corporation, the court pronounced itself on the principle of proportionality, which goes hand in hand with the doctrine of legitimate expectation. The Appellant submitted that the decision to reclassify solar water heaters that took place in 2016, based on a ruling arrived at in 2021 is unfair and unreasonable, especially considering that these taxes were not passed on to the ultimate consumers. The retrospective application of the law though not illegal must be done in a reasonable manner so as not to occasion any unnecessary tax burden on the taxpayer, noting that the Respondent did not even bother to explain the cause of its action and why despite having many opportunities to raise the issue of tariff classification it had failed to act as mandated by law.

21. The Appellant stated that it is 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 to the final consumers of the goods. The taxes being demanded by the Respondent can therefore only be recovered out of its profits, which will occasion undue hardship considering that further taxes have been paid on these profits.

22. The Appellant thus submitted that no public authority would act in the manner that the Respondent has acted and that same is unreasonable and disproportional.

23. The Appellant submitted that the conduct of the Respondent of approving importation of solar water heaters under tariff 8419:19;00 and the Appellant repeatedly relying on such representation created a legitimate expectation in favour of the Appellant.

24. Further, that the inaction of the Respondent to raise the classification issues leading to the Appellant pricing its solar water heaters without factoring in any additional taxes estops the Respondent from reneging on its promise.

25. That in addition, the conduct of the Respondent to demand for taxes at the end of the five years from the date of importation without explaining the inordinate delay is both unreasonable and disproportional as it passes on an illegal tax burden on the appellant, and therefore in breach of its legitimate expectation and the right to fair administrative action.

ii. On the interpretation of EAC/CET HS code and GIR – On whether the water solar water heaters were classifiable under heading 84;19 or 85;16 26. The Appellant submitted that the first General Interpretation Rules [GIR 1] provided under the EAC/ CET, 2017, provides that classification shall be determined according to the terms of the headings and any relative section or chapter notes.

27. It was the Appellant’s submission that the solar heaters in question are correctly classifiable under heading 8419 as is the practice worldwide. This heading applies to; “ 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 the change of temperature such as heating, cooking, roasting, distilling, rectifying, sterilizing, pasteurizing, steaming, drying,- evaporating, vaporizing, condensing, or cooling, other than machinery or plant of a kind used for domestic purposes; instantaneous or storage water heaters, non-electric.”

28. The Appellant contended that since this is the applicable heading for solar water heaters, it was right in classifying the solar water heaters under tariff 8419:19 and other items classifiable under this heading.

29. The Appellant submitted that since the heading is clear on the treatment of the solar water heaters, there is no need to consider the chapter notes or what other section provides. It contends that this is because the heading takes priority and reference to chapter notes or the relative section should only be made when the heading lacks clarity on the classification of the item in question.

30. The Appellant also submitted that the EAC/CET HS code 8516:10:00 is not applicable to solar water heaters as the same cover instantaneous water heaters. That the heading provides as follows;“Electric instantaneous or storage water heaters and immersion heaters; electric space heating apparatus and soil heating apparatus; electro – thermic hair-dressing apparatus [e.g. 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. ”

31. The Appellant submitted that this heading does not in any way address solar water heaters incorporating a backup heating element. That by purporting to classify solar water heaters with an electric back up element under this heading, the Respondent is purporting to enlarge the scope of HS code 8516:10:00 which offends the requirements of rule 3[b] of the GIR which offers clarity where a heading does not provide clarity regarding the classification of a product.

32. It was the Appellant’s further submission that reference to chapter notes of both heading 8419 and heading 8416, also indicates that the solar water heaters can only be classified under heading 84:19. The Appellant further submitted that the heading does not in any way address the solar water heater incorporating a backup heating element.

33. The Appellant asserted that the products in dispute are basically solar water heaters, and in the definition of a dual system, the duality comprises of a fuel heated hot water system with a thermostatic control to operate when fuel heating system is not sufficient.

34. The Appellant further submitted that other members of the world Customs Organization are using heading 84:19 in respect of solar water heaters which are manufactured and sold together with a backup electric heating element.

35. On product functionality the Appellant stated that the product consists of the three components; solar collectors, storage tank, and back up heating element. In the solar water heater the electric back up element is designed to function under very low sunlight and consequently the use of the backup is very rare. The Appellant therefore submitted that the 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 character.

36. The Appellant also stated that the Respondent’s post clearance authority is limited to inspection for purposes of verification of the entry as opposed to reclassifying the products under the HS code as the Respondent has attempted to do in this case and submitted that the Respondent acted ultra vires.

37. By reason of the foregoing submissions, the Appellant prayed that the Tribunal allows the Appeal and sets aside the Respondent’s review decision dated 5th January 2022, with costs to the Appellant.

The Respondent’s Case 38. The Respondent in response to the Appellant’s case has relied on the Statement of Facts dated and filed on 25th February 2022, and the written submissions dated and filed on 17th October 2022.

39. The Respondent responded to the Appellant’s case under three issues separately addressed as hereinafter.

i. On whether the Respondent’s decision to reclassify and demand for the short-levied taxes from the Appellant was wrong, retrospective and in breach of their legitimate expectation 40. The Respondent submitted that the Appellant mis-declared the imported solar water heating systems under HS code 8419;19:00 instead of HS code 8516:10:00.

41. The Respondent submitted that the Kenya tax system is on self-assessment regime whereby a taxpayer is required to self-assess and submit the correct and applicable taxes to the Respondent.

42. The Respondent further submitted that it acted within its power under Section 235[1], and 236 of EACCMA, 2004 which empowers the Respondent to conduct a post clearance audit within five years and seek documents to verify the correctness of the taxes declared and paid.

43. The Respondent stated that Section 135 of EACCMA, 2004 empowers the Respondent to demand for short levied taxes. It relied on the case of Pharmaceutical Manufacturing [K] Co. Ltd & 3 others v Commissioner General Kenya Revenue Authority & 2 others [2017] eKLR, where the Court of Appeal reiterated the Commissioner’s mandate under Section 135[1] of EACCMA to demand payment of short levied taxes.

44. The Respondent further stated that it did not apply the applicable HS code retrospectively as the Appellant is required at all times to correctly declare the goods it is importing and subject the same to the applicable HS code for purposes of appropriate taxes.

45. The Respondent therefore submitted that the Appellant cannot then contend that the application of HS code after the audit is retrospective as the EAC/CET clearly outlined the applicable HS code even before the demand notice for the short-levied taxes was issued.

ii. On whether the WCO advisory affected the classification of the Appellant’s imported solar water heating systems 46. The Respondent submitted that the classification of goods in Kenya is governed by the EAC/CET which codified and adopted the world Customs Organization Harmonized Commodity Description Coding System and its principles of General Interpretative Rules [GIRs] of classification of goods.

47. The Respondent further submitted that the WCO Advisory opinion dated 3rd November 2021, is just an opinion and does not in any way alter the EAC/CET which govern the classification of goods in Kenya.

48. It was also contended by the Respondent that the Appellant’s contention that the failure to provide the certified copy of the WCO Advisory infringes on the Appellant’s rights to fair administrative action is a mere misconception of the law governing the classification of goods in Kenya. They further contended 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.

49. The Respondent stated that the WCO Advisory only affirmed the position under the EAC/CET but was not the primary basis for the classification of the Appellant’s imported solar water heating systems under HS code 8516;10:00.

iii. On interpretation of EAC/CET GIR – whether the Respondent erred in classifying the Appellant’s imported solar water heating systems under HS code 8516:10:00 50. The Respondent submitted that the classification of goods in Kenya is governed by the EAC/CET which codified and adopted the WCO HS system and GIRs of classification of goods.

51. The Respondent cited the cases of Republic v Commissioner General & another ex parte Awal Ltd [2008] eKLR and, Beta Healthcare International Ltd v Commissioner of Customs Services [2010] eKLR

52. The Respondent submitted that the EAC/CET is derived from and informed by the international Convention on the Harmonized Commodity Description and coding system to which Kenya and all member states of East African Community are signatories.

53. The Respondent submitted that the Appellant’s imported solar water heating systems are classifiable under chapter 85 of the 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”.Heading 85;16 covers; -“Electrical 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. ”Sub -heading 8516: 10: 00 covers:-“Electric instantaneous or storage water heaters and immersion heaters.”

54. The Respondent further submitted that explanatory [A] to heading 85;16 provides as follows:-“[a]Electric Instantaneous or Storage Water Heaters and Immersion Heaters;This group includes;1. Geysers…2. Storage water heaters…3. 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 electrically only when the alternative means is insufficient.’’

55. The Respondent averred that the Appellant’s imported solar water heating systems have an electric heating component thus dual in nature in the sense that they operate under both solar power and electricity, thus classifiable under HS code 8516:10:00.

56. It was also the Appellant’s submission that apart from the solar panels which heat the water from solar energy, the system incorporates an auxiliary heating element operated by a thermostatic control to enable electrical heating when solar water heating is insufficient, thus the system can operate solely on electricity or on solar energy.

57. The Respondent 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.

58. The Respondent averred that the Appellant’s contention that the solar water heating systems are classifiable under HS code 8419:19:00. Chapter 84 of the EAC/CET provides as follows;-“Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof “.Heading 84:19 covers;“Machinery, plant or laboratory equipment, whether or electrically heated [excluding furnaces, ovens, and other equipment of heading 84:14], for the treatment of materials by a process involving a change of temperature such as heating, cooking, roasting, distilling, rectifying, sterilizing, pasteurizing, steaming, drying, evaporating, vaporizing, condensing or cooling, other than machinery or plant of a kind used for domestic purposes; instantaneous or storage water heaters, non -electric.”Sub-heading 8419: 19;00 covers:“other”

59. The Respondent submitted that heading 8419 covers non-electric instantaneous or storage water heating systems only and electric heating systems are excluded from this heading.

60. The Respondent stated that the Explanatory notes to heading 84:19 further provide that the machinery and plant classified under this heading 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 85:16 when heated electrically.

61. The Respondent averred that Note 1 to heading 84:19 concludes that the apparatus described in the note i.e., heating or cooling plant and machinery, is essentially used industrially, but the heading also covers non-electrical instantaneous water heaters, including solar water heaters, domestic or not. If electrically heated, such appliances are excluded.

62. The Respondent further averred that the Appellant’s imported solar water heating systems are specifically covered under sub-heading 8516:16;10 which covers,“Electric instantaneous or storage water heaters and immersion heaters”

63. The Respondent submitted that heading 84;19 provides for non-electric instantaneous or storage water heaters as it provides as follows;“Instantaneous or storage water heaters, non-electric.”

64. It was the Respondent’s contention that even if it is assumed that both the solar and electrical components are equal under Rule 4 of the 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 would be HS code 85:16. “Goods which cannot be classified in accordance with the above rules shall be classified under the heading appropriate to the goods to which they are most akin.”

65. In the light of the foregoing submissions, the Respondent submitted that the Appellant’s imported solar water heating systems are classifiable under the EAC/CET HS code 8516; 10:00.

66. By reason of the foregoing, the Respondent prays the Honourable Tribunal to uphold its objection decision dated 5th January 2022, find its demand for taxes was proper, and dismiss the Appellant’s Appeal with costs.

Issues for Determination 67. The Tribunal having carefully reviewed the filings made 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: -i.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. ii.Whether the Respondent’s decision to assess the Appellant for short levied duties in the sum of Kshs 5,181,701 was justified.

Analysis & Findings i. 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. 68. The Appellant is aggrieved by the Respondent’s decision to classify its imported water heating 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.

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

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

71. The fundamental submission made by the Appellant on the HS code 8419;19:00 which it contended is applicable to its solar water heating system is that on product functionality, that its products consist of three components, namely; solar collectors, storage tank and back up heating element. The Appellant submitted that the backup electric heater is designed to function under very low sunlight and consequently the use of the backup is very rare. It further submitted that for this reason its product is basically a solar water heater, and does not fit the description, dual, as in a dual system, the duality comprises of a fuel heated hot water heated system with a thermostatic control to operate when the fuel heating system is not sufficient.

72. The Appellant submitted that apart from solar energy which heats the water from solar energy, their system incorporates an auxiliary heating element operated by a thermostatic control to enable electrical heating when solar heating is insufficient. Thus, their solar water heating system can operate solely on solar energy.

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

74. 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.

75. 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, thus dual in nature.

76. The use of the word “dual” to describe the subject product seems to have been stretched to its limits. Looking up the word in the Oxford Advanced Learners Dictionary, “Dual” is simply a common English language word used to express or describe something with two aspects or two parts e.g., dual nationality, dual role as composer and conductor of music, dual carriageway, or a thing that can be used for two different purposes.

77. Therefore, dual, is not a technical word in the tariff classification, and one has to go by the descriptions in the Harmonized commodity description coding system, to find the right place for the subject product.

78. The Appellant’s products, though have been stated to have both a solar heating function and an electrical heating back up function, which can operate at the choice of the user, may therefore not be capable of being described as “dual’’, as it has two independent aspects or two parts in one i.e. solar and electrical, one of which is complementary and not principally independent.

79. 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.

80. 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”.

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

82. The Respondent also submitted that, goods that cannot be classified in accordance with the GIR rules shall be classified under the heading appropriate to the goods to which they are most akin.

83. The Tribunal considers that based on the submissions hereinabove and the GIRs, the disputed solar water heaters are potentially classifiable under the two headings 8419 and 8516 on the basis that on the face of their specifications the same can operate as a solar water heating system and also an electric water heater as they have the characteristics of a solar water heater and the characteristics of an electric water heater. In this regard it would not be viable to classify the heaters under Rule 1 as this would have an outcome of two classifications.

84. The Tribunal takes the considered view that since the heaters are a combination of two types of heaters, they may be classified using Rule 2 (b) which states 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”.

85. Rule 3 then provides guidance on which of the two HS codes is more applicable to the product in question and it states as follows;-“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.”

86. In view of the foregoing, the imported solar water heaters have to be classified in accordance to Rule 3(b) as under Rule 3(a) none of the two codes give a more specific description of the goods than the other. The issue in question would then be what gives the solar water heaters their essential character i.e. the prominent characteristics which serve to distinguish the solar heaters.

87. The submissions herein have set out the essential characteristics of these heaters that distinguish them as the solar panels “solar collectors” commonly fitted on all solar water heaters. As they are offered for sale as solar water heaters, it is essential they be installed in position where they are in a position to collect solar heat with which to heat the water. They therefore function primarily as solar water heaters and only resort to electric heating when there is no solar heat.

88. The electric element which is a characteristic of electric heaters is an auxiliary component of the whole system.

89. Therefore, on the basis of the material availed, the Tribunal is of the considered view that the product in dispute has the appearance and character of a solar water heating system, and that the water heating system is not an electric water heating system fitted with solar components but a solar system fitted with a backup electric component to enable perform the function of a water heater in the absence of solar heat.

90. The Tribunal based on the above review and analysis of the foregoing submissions, and having regard to GIR 3(b), is persuaded that the Appellant’s imported solar water heaters are classifiable under the EAC/CET HS code 8419:19:00, and not HS code 8516:10:00 preferred by the Respondent.

91. 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.

ii. Whether the Respondent’s decision to assess the Appellant for short levied duties in the sum of Kshs 5,181,701 was justified. 92. The Tribunal having made a finding that the correct classification for the Appellant’s products is HS code 8419:19:00 under which the Appellant has been declaring its products and paying the appropriate duties thereunder, the Respondent is not justified in assessing the Appellant for short levied duties in the sum of Kshs 5,181,701. 00.

Final Decision 93. The upshot of the foregoing is that the Appeal is merited and the Tribunal accordingly proceeds to make the following Orders: -i.The Appeal be and is hereby allowed.ii.The Respondent’s review decision dated 5th January 2022 confirming the assessment and demand for Kshs 5,181,701. 00, be and is hereby set aside.iii.Each party to bear its own costs.

94. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF MAY, 2023. ...................ROBERT M. MUTUMACHAIRPERSON………………………….ELISHAH NJERUMEMBER........................RODNEY O. OLUOCHMEMBER