[2023] KETAT 523 (KLR)

Powermax Solar Solutions v Commissioner of Customs and Border Control (Tax Appeal 681 of 2022) [2023] KETAT 523 (KLR) (1 September 2023) (Judgment)

Neutral citation: [2023] KETAT 523 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 681 of 2022

RM Mutuma, Chair, BK Terer, M Makau, EN Njeru & W Ongeti, Members

September 1, 2023

Between

Powermax Solar Solutions

Appellant

and

Commissioner of Customs and Border Control

Respondent

Judgment

Background 1. The Appellant is a private limited liability Company duly incorporated in Kenya. Its main form of business is in the provision of energy solutions through the supply of products and services among them solar energy products, electrical fittings, and emergency lights.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, the 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 Respondent analysed the Appellant‟s imports of solar water heaters for the year 2016 and found that the Appellant had classified its importation of solar water heaters under H.S Code 8419. 19. 00 instead of HS Code 8516. 10. 00 on the basis that the solar water heating systems imported by the Appellant have an electric component and are therefore dual water heating systems classifiable under tariff code 8516. 10. 00.

4. The Respondent applied the tariff for the solar water heaters as 85. 16. 19. 00 which attracts an import duty of 25% together with VAT.

5. Consequently, on 3rd December 2021, the Respondent issued a demand notice to the Appellant for Kshs. 3,031,162. 5 and sent a notice of enforcement dated 4th April 2022 for the tax demanded.

6. The Appellant applied for a review vide a letter dated 5th April 2022 which resulted in the Respondent upholding its position on the reclassification of the tariff vide a review decision dated 25th May 2022.

7. Being dissatisfied with the objection decision, the Appellant lodged a Notice of Appeal dated 22nd June 2022 and filed on 28th June 2022.

The Appeal 8. The Appeal is premised on the following grounds as listed in the Memorandum of Appeal dated 22nd June 2022 and filed on 28th June 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 Heading 84:19 which caters for “machinery, plant or laboratory equipment whether or not electrically heated for treatment of materials by a process involving a change of temperature such as heating, cooking…”b.The Respondent erred in law and fact by failing to appreciate that in the event that 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 W.C.O General Rules for Interpretation of the Harmonized 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 World Customs Organization 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 the W.C.O Secretariat on the correct classification of the solar water heaters. The Secretariat of the W.C.O has no mandate to issue opinions that 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 W.C.O 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 and in fact by purporting to retrospectively apply the opinion of the World Customs Organization dated 3rd November 2021 to imports that took place many years before the same opinion was delivered.g.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 84:19. Having classified the solar water heaters under tariff code 84:19 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.h.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 2014. i.Section 4 (3) of the Fair Administrative Actions Act requires that where an Administrative Action is likely to adversely affect the right and fundamental freedom of any person, the administrator shall give the affected person:a.The statement of reason and the information, materials and;b.The evidence relied upon in making the decision or the administrative action.j.By failing 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 Fair Administrative Actions Act, the Respondent has infringed on the Appellant‟s rights.

The Appellant‟s Case 9. The Appellant‟s case was premised on;a.The Appellant‟s Statement of Facts dated 22nd June 2022 and filed on 28th June 2022. b.The Appellant‟s written submissions dated 21st September 2022 and filed on the 28th September 2022.

10. The Appellant stated that the solar water heaters can only be classified under Heading 84:19 and not under any other heading relying on the provisions of Chapter 84 of the HS code, the Explanatory Notes to Heading 84:19, and Rule 3 (b) of the General Rules of Interpretation (GIR).

11. It averred that the solar water heaters consist of 3 components which are: -a.The solar collectors are in the form of solar panel that collects heat from the sun to heat the cold water from the storage tanks. It stated that the solar collectors account for 80% of the solar water heater system‟s value and size and are the central part of the system and without them, the system would not function as intended.b.The storage tank which is thermo-insulated and connected directly above the solar collector and is connected directly to the user‟s plumbing system to provide hot water as needed and can keep the water throughout the night;c.The backup heating element is a minor component inside the storage tank which the user can opt to switch on to provide a small amount of electrically generated heat in addition to the solar heat from the collectors in case sunlight is not sufficient for the water to be fully heated by the solar collector.

12. It contended that according to Rule 3 (b) of the GIR, the solar water heaters are given character by the solar collectors which account for 80% of the functionality of the system, and not the electrical backup element which is not intended to provide the core function of the system.

13. It averred that the electric component is not a significant part of the system and the bulk and weight of the system are the collectors and tank with the backup electrical element playing an incidental role in the functioning of the system.

14. It stated that it is unlikely that someone interested in purchasing an electric component would purchase the solar water heater system as the backup electrical heating system bought as a stand-alone is significantly cheaper than when bought together with the solar water heating system.

15. It further averred that the Respondent did not provide any document to demonstrate its application to the World Customs Organization as well as the Complete ruling opinion of W.C.O. denying the Appellant the benefit of the documents while making an application for review.

16. It reiterated that the authenticity of the W.C.O Secretariat advisory opinion dated 3rd November 2021 is questionable as the same does not have the signing off page and further, the W.C.O Secretariat has no mandate to render rulings or advisory opinions on the interpretation of the Harmonised system as those functions are the preserve of the H.S Committee as per Article 7 (1) (b) of the H.S Convention.

17. It averred that it has imported the product in question over the years under HS Code 84:19. 19. 00 and the Respondent has never raised an issue with the classification of the product thus creating a legitimate expectation that the Respondent would in the future classify the product under the same HS code. It added that the Respondent is therefore estopped from acting contrary to the consistent best practice from which the Appellant‟s legitimate expectation emanated.

18. It asserted that the Respondent did not dispute in its review decision dated 3rd December 2021 that the W.C.O ruling it shared with the Appellant was incomplete and stated that the part shared with the Appellant was sufficient to justify the classification of the dual system water heaters.

19. It maintained that it contacted the W.C.O which declined to comment on the matter indicating that correspondence between itself and its members is confidential thus it could not supply confidential documents in response to a request from a third party.

20. The Appellant identified three issues for determination by the Tribunal, namely;-a.Whether the reclassification of the solar water heaters infringed on the Appellant‟s right to legitimate expectation.b.Whether the solar water heaters are classifiable under heading 84. 19 or 85. 16. c.Whether the Respondent‟s Post Audit Department acted ultra vires.

a. On whether the reclassification of the solar water heaters infringed on the Appellant‟s right to legitimate expectation. 21. The Appellant submitted that it had imported the product in question over the years under HS Code 84:19. 19. 00 and the Respondent has never raised an issue with the classification of the product thus creating a legitimate expectation that the Respondent would in the future classify the product under the same HS code. It added that the Respondent is estopped from acting contrary to the consistent best practice from which the Appellant‟s legitimate expectation emanated.

22. It cited the case of Oindi Zaippeline and 39 Others vs. Karatina University and Another [2015] eKLR where the court cited with approval the case of re Westminster City Council, [1986] A.C. 668 at 692 (Lord Bridge) in which it was 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.”

23. It submitted that the process of clearance of goods is a lengthy one with the Respondent through its agents being involved in the importation process with the Appellant not playing any role in the process of setting the applicable standards.

24. It asserted that the fact that all the importers of the solar water heaters were importing under tariff 8419. 19. 00 for a long period indicates that the Respondent was also of the view that this was the applicable tariff until the Respondent‟s Post Audit Clearance department thought differently thereby acknowledging that it has been applying the wrong taxes and demanding back taxes for the past 5 years.

25. It argued that the Government through the Finance Act, 2014 amended item 45 Part I of the First Schedule to the VAT Act 2013 to exempt “specialized solar equipment and equipment, including solar water heaters and deep cycle-sealed batteries which exclusively use or store solar power” and reintroduced VAT on solar water heaters through the Finance Bill 2020.

26. It contended that the dispute over the importation of solar water heaters was not attributed to the classification of the product but to the Respondent‟s change in the interpretation of the applicable HS Code thus making it unfair to pin the burden of this change on the Appellant.

27. It relied on the case of Kenya Revenue Authority vs. Universal Corporation Ltd [2020] eKLR where the court stated as thus: -“(ii)in an instance where the appellant failed to explain itself for inaction, the trial Judge cannot be faulted for finding its action of moving to recover the short levied taxes at a time when the respondent was not in a position to recover the same unfair, irrational and unreasonable;(iii)the appellant‟s gain in recovering the short levied taxes from the respondent at that point in time was not proportional to the total loss the respondent stood to suffer on account of inability to recover refunds lawfully due to it and which it would have rightfully claimed had it not been for the appellant‟s inaction and default in failing to demand for the same timeously, and which move the learned Judge properly found unfair;(iv)the appellant‟s decision was irrational because no reasonable public authority properly directing its mind to the issue would have failed to realize that its decision to demand for the said short levied taxes at that point in time was not only unfair but also unjust;(v)it was unreasonable because no justification was given for the appellant‟s action of moving at that point in time to penalize the respondent for the appellant‟s mistakes arising from it having in place a system of operations established and managed by itself which led to the late discovery that there were short levied taxes owed to it by the respondent; ”

28. It further relied on the case of Communications Commission of Kenya & 5 Others vs. Royal Media Services Limited & 5 Others, Petition No. 14 of 2014 where it was held that:-“...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 it 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”

29. It cited the case of Krish Commodities Limited vs. Kenya Revenue Authority [2018] eKLR where the Court held as follows: -“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.”

30. It reiterated that the inaction of the Respondent to raise the classification issues leading to the Appellant pricing its solar water heaters without factoring any additional taxes estops the Respondent from reneging on its promise and the conduct of the Respondent of demanding taxes at the end of five years from the date of the importation without explaining the inordinate delay is both unreasonable and disproportional as it passes on an illegal tax burden to the Appellant.

b. On whether the solar water heaters are classifiable under Heading 84. 19 or 85. 16 31. The Appellant cited Rule 9 of the GIR EAC CET 2017 and Heading 8419 submitting that the solar water heaters are classifiable under Heading 8419 as is the practice worldwide. It added that there is no need of considering the explanatory notes since the heading is clear on the treatment of the solar water heaters since the heading takes precedence over the explanatory notes which would only be referred to when in case the heading lacks clarity.

32. It cited Heading 8516. 10. 00 and submitted that the same is not applicable to solar water heaters because it covers instantaneous electric water heaters and does not address solar water heaters incorporating a backup electric heating element.

33. It argued that classifying solar water heaters incorporating solar water heaters with backup electric heaters under Heading 8516. 10. 00 is purporting to enlarge the scope of the heading offending the requirements of Rule 3 (b) of the GIR.

34. It submitted that both embattled headings indicate that the solar water heaters are classifiable under Heading 84. 19.

35. The Respondent quoted explanatory Note A (3) of Heading 85. 16 on the definition of dual system water heaters. It argued that the products in question are solar water heaters but in the definition of dual-system consisting of a fuel- heated hot water system with a thermostatic control to operate when the fuel-heating system is not sufficient. It contended that solar water heaters are not fuel-heated water systems that utilize fuel as the primary heating system and solar is not defined as a form of fuel.

36. In submitting that laws should be read in plain language without room for intendment, the Appellant relied on the case of Commissioner of Domestic Taxes vs. Unga Limited [2021] eKLR where the court observed:-“Our courts have reiterated the principle that tax laws should be interpreted strictly and leave no room for intendment”

37. It cited the last paragraph of the explanatory notes to Heading 85. 16 which excludes solar water heaters. It further relied on Rule 1 of the explanatory notes to Heading 84. 19 positing that there is no clear provision in the heading and explanatory notes excluding solar water heaters from the heading.

38. It observed that the 2022 nomenclature has under heading 8419. 12. 00 created a new tariff for solar water heaters thus indicating that solar water heaters have always been classified under Heading 84. 19 which the World Customs Organization is using in respect of solar water heaters manufactured and sold together with a backup electric heating element. It relied on the case of United States of America Customs and Border Protection in Tariff Ruling NY N030231 (CLA-2-84: RR: NC:106).

39. It reiterated that Rule 3 (b) of the GIR shows that solar water heaters should be classified based on the components that give them character. The solar collectors account for 80% of the functionality of the system and the electric component is not a significant part of the system.

40. It cited the case of Republic vs. Commissioner of Domestic Taxes Large Taxpayers Office Ex-Parte Barclays Bank of Kenya Ltd [2012] eKLR where the court approvingly cited the case of Russell v Scott [1948] 2 ALL ER 5 where it was held,“My Lords, there is a maxim of income tax law which, though it may sometimes be overstressed yet ought not to be forgotten. It is that the subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax upon him.”

c. On whether the Respondent‟s Post Audit Department acted ultra vires 41. The Appellant quoted Sections 235 (1) and 236 (2) of the EACCMA and submitted that the Respondent is limited in the exercise of its power to inspect for purposes of verification of the entry of the goods as opposed to reclassifying products under HS code and cited the W.C.O Objectives for post clearance audits.

42. It reiterated that the Respondent has allowed the importation of solar water heaters under HS code 8419. 19. 00 and that the post clearance audit was to be limited to confirming if the importer had used the allowable tariff.

43. It cited the case of Republic vs. Cabinet Secretary, Ministry of Agriculture, Livestock, and Fisheries [2019] eKLR in which the court held that:-“A decision is illegal if it: -a.contravenes or exceeds the terms of the power which authorizes 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 authorized by any power;d.contravenes or fails to implement a public duty.”

44. It submitted that Sections 235 and 236 of the EACCMA did not intend for the Respondent to overhaul the meaning or redefine the Application of the HS code.

45. It cited the case of Commissioner of Domestic Taxes vs. Unga Limited [2021] eKLR.“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.”

46. It argued that there is no direct authority for the Respondent to reclassify or change a HS Code and the provisions of Sections 236 and 237 of the EACCMA cannot be read with intendment to clothe the Respondent with such powers.

47. It cited Article 16 of the HS Convention and asserted that the legal mandate to make changes to the HS Code and the procedure for exercising the same is given to the HS committee and the Respondent should have notified the Committee of its intention to change the HS Code for solar water heaters from 8419. 19. 00 to 8516. 10.

48. It argued that the unilateral decision by the Respondent to change the HS Code has not only created an undue tax burden on the Appellant but has also deviated from the acceptable practice by all the member states.

49. It submitted that being a public body, the Respondent was required to comply with the provisions of Article 47 of the Constitution of Kenya and Section 4 (3) of the Fair Administrative Actions Act which it has neglected to do despite the Appellant asking for the same.

50. It reiterated that it was never called upon by the Respondent to air its opinion on the reclassification of the solar water heaters despite being a member of the Kenya Renewable Energy Association further offending various constitutional provisions requiring public/stakeholder‟s participation on matters touching on public finance.

The Appellant‟s prayers. 51. The Appellant consequently prayed that the Tribunal: -a.Annuls the Respondent‟s review decision dated 25th May 2022 with costs to the Appellant.

The Respondent‟s Case 52. The Respondent‟s case is premised on;a.The Respondent‟s Statement of Facts dated and filed on 21st July 2022. b.The Respondent‟s written submission dated 31st May 2023 and filed on the 8th June 2023.

53. It cited Sections 236 and 229 of the East African Community Customs Management Act and stated that it conducted an audit issuing audit finding and a demand for taxes in accordance with the law requesting further information justifying classification under tariff 8419 from the Appellant during the review which was not presented by the Appellant.

54. It reiterated that it is not restricted by law to accept the documents of the Appellant or any taxpayer and that it is allowed to depart from the transactional value method where there is doubt as per Section 122 (1) and (4) of the EACCMA which the Respondent was guided by and which informed the decision that the value of the product as given by the Appellant was erroneous.

55. It relied on Section 229 of the EACCMA and stated that it performed an analysis of the products imported by the Appellant which resulted in the Respondent placing the samples under HS 8516 thus confirming the taxes after the Appellant failed to provide further information as provided for in the law.

56. The Respondent averred that it strictly adhered to the GIR while classifying the goods together with the explanatory notes and the W.C.O tariff advisory which place the solar water heaters under tariff code 8516 and demanded the tax on short-levied import duty and VAT in accordance with the provisions of Section 249 (1) of the EACCMA.

57. It cited Section 248 of the EACCMA and asserted that it issues private rulings and are not binding to them for one year and the classification of tariff rulings is based on the nature of the imports and material information and does not absolve the importer from any liability that may arise at the time of the importation thus private rulings issued do not create a legitimate expectation.

58. The Respondent in its submissions identified two issues for determination for the Tribunal, namely: -a.Whether the Respondent erred in classifying the Appellant‟s imported solar water heating systems under H.S Code 8516. 10. 00. b.Whether the Respondent‟s decision to demand the short-levied taxes was proper in law.

a. On whether the Respondent erred in classifying the Appellant‟s imported solar water heating systems under H.S Code 8516. 10. 00. 59. The Respondent relied on the case of Republic vs. Commissioner General & Another Ex-Parte Awal Ltd [2008] eKLR where the court stated that: -“It is also imperative to note that the rules of interpretation of tariff classification are also provided for in the world customs organization explanatory notes of Harmonized Commodity Description and coding systems (H.S. Code). They are the generalized rules of interpretation of harmonized systems in classification of goods in nomenclature issued by the world customs organization to which Kenya is a signatory. The HS Code assists the customs Department in the interpretation of the tariff classification. I will apply the interpretation provided for under the Customs and Excise Act plus the rules of H.S. Code to determine this dispute.”

60. It further cited the case of Beta Healthcare International Ltd vs. Commissioner of Customs Services [2010] eKLR where the court opined thus:“Kenya is a signatory to the International Convention on the Harmonized Commodity Description and Coding System. Kenya became a contracting party to the convention on 29th January 1988. The entry into force of the convention came into effect in Kenya on 1st January 1989. ”

61. It submitted that the Appellant‟s imported solar water heating systems are classifiable under Chapter 85 of the East African Community Common External Tariff (EAC CET) which is derived from the International Convention on the Harmonized Commodity Description and Coding System to which Kenya is a signatory.

62. It quoted Chapter 85 of the EAC CET and Heading 85. 16 together with sub- heading 8516. 10. 00 and submitted that the Appellant‟s imported solar water heating systems are dual in nature in the sense that they operate under both solar power and electricity.

63. It argued that apart from the solar energy collector which heats the water from solar energy, the system incorporates an auxiliary electric heating element operated by a thermostatic control to enable electrical heating when solar heating is insufficient, and the system can operate solely on electricity or on solar energy.

64. It asserted that without the electric element, the system would not be effective in heating the water when the solar energy is inadequate, but it would work perfectly without the solar component.

65. It quoted Chapter 84 of the EAC CET and Heading 84. 19 together with sub- heading 8419. 19. 00 and submitted that the same provides for non-electric instantaneous or storage water heating systems only and electric heating systems are excluded from the heading.

66. It contended that the explanatory notes to Heading 84. 19 may be heated by any systems (coal, oil, gas, steam, electricity, etc.) except in the case of instantaneous water heaters and storage water heaters which are classified under heading 85. 16 when heated electrically.

67. It maintained that note 1 to heading 84. 19 concludes that the apparatus described is essentially used industrially, but the heading also covers non- electric instantaneous water heaters, including solar water heaters, domestic or not. It added that if electrically heated, such appliances are excluded.

68. It asserted that under Rule 1 of the GIR, the Appellant‟s imported solar water heating systems are classifiable under HS code 85. 16 and that the Appellant‟s solar water heating systems are specifically covered under subheading 8516. 10. 00 which provides for electric instantaneous or storage water heaters as heading 84. 19 provides for non-electric instantaneous or storage water heaters.

69. It argued that even if both the solar and electrical components are equal under Rule 4 of the GIR, the dual system heaters would still be classified under the heading appropriate to the goods which are most akin, which in this case is HS Code 85. 16.

b. On whether the Respondent‟s decision to demand the short-levied taxes was proper in law 70. 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.

71. It further submitted that where the Kenyan tax system is a self-assessment regime in which a taxpayer is required to self-assess and submit the correct applicable taxes, the Respondent acted within its power under Sections 255 (1) and 236 of the EACCMA 2004 which empowers it to conduct a post clearance audit within five (5) years and seek for documentation to verify the correctness of the taxes declared and paid.

72. It cited the case of Pharmaceutical Manufacturing (K) Ltd & 3 Others vs. Commissioner General of Kenya Revenue Authority and 2 Others [2017] eKLR where the Court of Appeal stated that:-“Furthermore section 135 (1) of the East African Community Customs Management Act, 2004 mandated the respondents, where any duty was short levied or erroneously refunded, to demand payment or a refund, as the case may be, from the person who should have paid the amount or to whom a refund was erroneously made. Such a person is required to pay the amount due upon receipt of the demand. The amount due is deemed to be due on the date on which the demand note is served upon him or her. The demand note must be followed by payment within thirty days of the date of such service, failing which a further duty of a sum equal to five percent of the amount demanded would be due and payable by that person by way of a penalty and a subsequent penalty. But no such demand may be made after five years from the date of the short levy or erroneous refund, as the case may be, unless the short levy or erroneous refund had been caused by fraud on the part of the person who should have paid the amount short levied or to whom the refund was erroneously made, as the case may be.”

73. It asserted that the Appellant failed to apply for a review within the stipulated thirty (30) days under Section 229 of the EACCMA applying for the same on dates that were beyond the statutory timelines of thirty (30) days without making an application to allow it lodge the late review application out of time thus the late review application was not admitted.

The Respondent‟s prayers 74. The Respondent prayed for orders for this Tribunal, to: -a.Uphold the transaction value the Respondent applied;b.Find the transactional value (sic) of 8516. 10. 00 as proper in law;c.Dismiss the Appeal herein with costs to the Respondent.

Issues For Determination 75. After perusing the pleadings and documentation produced before it, the Tribunal is of the opinion that the only issue that comments itself for determination is:Whether the Respondent erred in law in classifying the Appellant‟s imports under HS Code 85. 16.

Analysis And Findings 76. The Tribunal wishes to analyze the issue as herein.

Whether the Respondent erred in law in classifying the Appellant‟s imports under HS Code 85. 16 76. In the instant case, the Respondent found that the Appellant had wrongly classified its imports under HS Code 8419. 19. 00 which provide for „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, 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.‟ instead of HS code 8516. 10. 00. which provides for „Electric instantaneous or storage water heaters and immersion heaters.

77. The Appellant argued that the water heater should be classified under HS 8419. 19. 00. However, the Commissioner on the other hand maintains that the goods as dual water heating systems and should be classified under HS 8516. 10. 00, and on this basis, the Commissioner demands additional taxes from the importers.

78. The Tribunal notes that there is no dispute between the parties that solar water heaters which rely solely on solar energy to heat the water are classifiable under HS 8419 and that water heaters that use electricity or electricity and another fuel are classifiable under HS 8516. It is also noted that there is no dispute as to the identity of the subject goods; they are solar water heaters that have been modified to use electricity when solar energy is not available.

79. These solar water heaters can be classified as either active or passive depending on the mode of fluid circulation. Active systems use mechanical pumps and differential controllers to regulate and direct the flow of the heat-transfer fluid or water from the solar collector to the tank. Some pumps run on mains electricity (like electricity), and others operate on electricity generated by a solar photovoltaic panel. On the other hand, passive systems rely on gravity rather than electricity using a thermosiphon configuration that uses gravity and convective heat flows.

80. In the current dispute, the water heating systems are solar water heaters with heat collectors running either on an active or passive system and also fitted with electric immersion heaters, therefore, can function as electric water heaters. The challenge then is how the water heaters are properly classified in the HS.

81. The objective classification of goods under the HS is guided by rules of interpretation commonly known as GIR. In the instant case, the relevant rules of interpretation are as follows:

82. In the first instance, Rule 1 provides that:“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. According to the terms of Heading 8419, solar heaters are ideally non-electric equipment correctly classifiable under Heading 8419. The 2022 version of the EAC CET presents the classification as follows:“-Instantaneous or storage water heaters, non-electric: 8419. 11. 00 -- Instantaneous gas water heaters 8419. 12 00 – Solar water heaters 8419. 19. 00 -- Other “

84. However, the impugned solar water heaters are fitted with an ancillary electric immersion heating element to enable them to use electricity when solar energy is down. Note 1A (2) to Heading 8419 provides that:“…….. 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 85. 16).”

85. Water heaters that use electricity are correctly classifiable under HS 8516. 10 which provides as follows:“8516 10 00- Electric instantaneous or storage water heaters and immersion heaters.”

86. The solar water heating system with an electric immersion heating element cannot be deemed as a dual system because according to the explanatory notes to this heading, the dual-system heaters of this heading are those in which the water is heated either electrically or by connection to a fuel-heated hot water system; they are often equipped with a thermostatic control to operate them electrically only when the alternative means which must be of a fuel source is insufficient. In the instant case, the impugned solar water heaters cannot be considered as a fuel-heated hot water system.

87. However, the explanatory notes to HS 8516 state that: -“the Assemblies consisting of immersion heaters permanently incorporated in a tank, vat or other vessel are classified in heading 84. 19 unless they are designed for water heating only or for domestic use, in which case they remain in this heading. Solar water heaters are also classified in heading 84. 19” (emphasis added)

88. Based on the foregoing, the impugned goods are potentially classifiable under two Headings 8419 and 8516. As presented, the goods can function as a solar heating system and also electric water heaters. They have all the characteristics of a solar water heater and also all the characteristics of an electric water heater. Rule 1 cannot be used to classify the goods because it results in two possible classifications.

89. It is a well-considered view that the heaters are a combination of the two types of heaters and therefore may be classified using rule 2 (b) which provides as follows:“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 substance with other materials 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. ”

90. To choose which of the two possible codes is applicable, guidance is therefore sought from Rule 3 which provides 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 affected 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 each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods.b.Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3 (a), 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.”

91. The heaters cannot be classified according to Rule 3 (a) because neither of the two codes gives a more specific description of the imported goods than the other. Consequently, the goods must be classified according to Rule 3 (b). The question then to be asked is what gives the heaters as imported, their essential character? That is, what are: “the prominent characteristics which serve to distinguish the heaters”.

92. Based on the parties‟ pleadings, the essential characteristics of these heaters that distinguish them are the solar collectors commonly fitted to all solar water heaters. They are offered for sale as solar water heaters and must essentially be fitted in a location where they are able to collect solar heat. They mainly function as solar water heaters and revert to electricity only when there is an outage of solar heat. The immersion heaters which is a characteristic of electric heaters form only a small percentage of the system. Furthermore, the electric component is fitted as a regulatory requirement rather than for engineering expedience.

93. Based on the material presented, the heating system has the appearance and character of a solar heating system. It is a considered view that the systems are not electric water heating systems fitted with solar components, but solar systems fitted with electric accessories to enable them to function as electric heaters.

94. The Tribunal notes that the East Africa Solar Taxation Hand Book at page 38 describes solar heaters as: -“Machinery, plant for conversion of sunlight inti heat for water heating using a solar thermal collector.” The handbook indicates that HS code used for solar heater in the East Africa Countries is 84;19;00. The Tribunal notes the Respondent did not offer satisfactory justification for departure from the code that it has used over the years and that continues to be used by other countries in the East Africa Union.

95. The Tribunal reiterates its decision in similar matter TAT 249 of 2021 – Scandinavia Solar Systems Ltd vs. Commissioner of Customs and Border control and TAT 142 of 2022- Sollatek Electronics (K)Ltd vs. Commissioner of Customs and Border control, where the Tribunal found that solar heaters are classifiable under HS code 8419. 19. 00 during the period under review. The Tribunal has found no reason to depart from its earlier decisions.

Final Decision 96. The upshot to the foregoing is that the Appeal is merited, and the Tribunal consequently makes the following orders; -a.The Appeal be and is hereby allowed;b.The Respondent‟s review decision of dated 25th May 2022 be and is hereby set aside;c.Each party to bear its own costs.

97. Each party to bear its own costs.

DATED AND DELIVERED AT NAIROBI THIS 1ST DAY OF SEPTEMBER, 2023ROBERT MUGAMBI - CHAIRPERSONBONIFACE K. TERER - MEMBERMUTISO MAKAU - MEMBERELISHAH N. NJERU - MEMBERDR. WALTER ONGETI - MEMBER