[2023] KETAT 303 (KLR)

Scandinavian Solar Systems Ltd v Commissioner of Customs & Border Control (Appeal 249 of 2021) [2023] KETAT 303 (KLR) (Civ) (12 May 2023) (Judgment)

Neutral citation: [2023] KETAT 303 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 249 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

May 12, 2023

Between

Scandinavian Solar Systems Ltd

Appellant

and

Commissioner of Customs & Border Control

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and carries on the business of selling solar water heaters.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the said Act, the Kenya Revenue Authority (the Authority) is an agency of the Government for the collection and receipt of all revenue.

3. The Respondent indicated that there was a Departmental Technical Committee's Ruling dated 2nd November 2020 that classified solar water heaters in tariff 8516. 10. 00 instead of 8419. 19. 00.

4. As a result of this ruling, the Respondent stated that it carried out an analysis of 17 companies involved in the importation of solar water heating systems during the period January 2016 to December 2020.

5. The Respondent indicated that the analysis revealed that all the solar water heating systems imported by the companies were found to have an electric heating element.

6. The Appellant was one of the 17 importers of the solar water heaters profiled by the Respondent and was therefore issued with a letter of preliminary audit findings on 11th February 2021. The letter asked the Appellant to give an explanation on why extra taxes amounting to Kshs. 10,602,379. 00 should not be demanded.

7. The Appellant responded to the letter of preliminary audit findings on 18th February 2021.

8. On 16th March 2021, the Respondent issued the Appellant with a demand notice for Kshs. 10,602,379. 00.

9. On 29th March 2021 the Appellant through its tax agent, applied for the review of the decision.

10. On 29th April 2021, the Respondent made a review decision on the application dated 29th March 2021 and demanded taxes amounting to Kshs. 11,621,711. 00.

11. Being aggrieved by the review decision, the Appellant filed a Notice of Appeal on 26th May 2021.

The Appeal 12. The appeal is premised on the Memorandum of Appeal dated 20th May 2021 and filed on 26th May 2021 stating the following grounds:-a.That the Appellant has a statutory right to fair administrative action pursuant to The Constitution of Kenya under article 47 and the Fair Administrative Actions Act No.4 of 2015. b.That Section 4(3) of the Fair Administrative Actions Act directs in mandatory terms 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.i.A statement of reasons and the information; materials andii.Evidence to be relied upon in making the decision or taking the administrative action.c.That by refusing to provide 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 the Appellant's statutory right.d.That the Respondent erred in law and in fact by failing to acknowledge the special rules on classification of products that have more than one component as enumerated by the EAC Common External Tariff 2017. e.That the Respondent erred in fact and in law by not taking into account that the Appellant’s solar waters heater do not fall within the classification of the heading under HSC 8516 or HSC 8419 and as such, their classification must be done in line with the World Customs Organization (WCO), General Rules for the Interpretation of The Harmonized System, specifically rule 3(b) which deals with mixtures and composite goods consisting of different materials.f.That the Respondent erred in both fact and in law in arriving at the conclusion that the solar water heaters were classified under Tariff HSC 8516 consequently relying on a component that does not give them their character contrary to rule 3(b) of The World Customs Organization (WCO), General Rules for the Interpretation of the Harmonized System.g.That the Respondent erred in law by disregarding the principles of interpretation set out in the World Customs Organization Explanatory Notes (WCOEN) thus going against accepted international practices and treaties ratified by member states of WTO, Kenya included.

The Appellant’s Case 13. The Appellant’s case is premised on the following documents and proceedings before the Tribunal:-a.The Appellant’s statement of facts dated 20th May 2021 and filed on 26th May 2021 together with the attachments thereof.b.The Appellant’s written submissions dated 12th August 2022 and filed on 16th August 2022 and the authorities attached thereto.c.The Appellant’s witness statement of Ville Paakkari dated 26th July 2022 that was admitted in evidence on oath on the 27th July 2022. d.The hearing before the Tribunal.

14. The Appellant averred that on the 11th day of February 2021, it received preliminary post clearance audit findings from the Respondent detailing that the Appellant had wrongly classified its solar water heaters between January 2016 and December 2020. That the finding was that the solar water heaters imported by the Appellant contained a heating element and were therefore supposed to be classified under HSC 8516. 10. 00 as opposed to HSC 8419. 19. 00.

15. That the Appellant replied on 18th February 2021 acknowledging receipt of the findings and requesting for information as entitled to under Section 4(3) of the Fair Administrative Actions Act No.4 of 2015.

16. That on 16th March 2021, the Respondent issued a demand notice for customs duty amounting to Kshs. 10,602,379. 00 from the Appellant.

17. The Appellant submitted an objection application on the 29th March 2021 to the said assessment and demand as allowed by Section 51 of the Tax Procedures Act, highlighting four issues;a.Breach of the right to Fair Administrative Action.b.Misinterpretation of the EAC Common External Tariff 2017. c.Product function giving the product character.d.Misapplication of the World Customs Organization (WCO) Explanatory Notes.

18. That on the breach of the right to fair administrative action the Appellant contended that the Constitution of Kenya under Article 47 provides for the right to fair administrative action. That this right is further legislated under the Fair Administrative Actions Act No. 4 of 2015. That salient amongst its provisions is the requirement under Section 4(3) of the Act which directs in mandatory terms 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 (among others);(1)a statement of reasons and the information, materials; and(2)evidence to be relied upon in making the decision or taking the administrative action.

19. That the Appellant in its objection application noted that the Respondent in its demand notice dated the 16th of March 2021, did not address any of the concerns raised in the letter dated 18th February 2021 and specifically, did not provide any documents or information on the criteria applied to arrive at the Respondent’s decision.

20. That on the issue of misinterpretation of the EAC Common External Tariff 2017, the Appellant elaborated that whereas the Respondent’s proposition from the annexed schedule of workings illustrated that the Appellant made entries against which the Respondent contended contained solar water heaters with a heating element, the Appellant objected to the conclusion to levy additional taxes on the ground that under the EAC common External Tariff 2017 there are special rules on the classification of products that have more than one component.

21. That the solar water heaters were being reclassified on the grounds that they contain a heating element.

22. That HSC 8419. 19. 00 is applicable for solar water heaters without a heating element and HSC 8516. 16. 00 deals with electric instantaneous water heaters with a heating element. That in consideration of the nature of the solar heaters under contest, it is apparent that they are solar water heaters that have an electric component.

23. That in regard to elaborating the product function, the Appellant referred to the Respondent’s schedule of computations, whereby they had listed entry number 172730 under the description solar water heater pressure 300L (RTPCSS/1800-30) with vacuum tubes. That by referencing this catalogue number, the manufacturers described the product as containing the following components;a.Collectors - these are solar panels (usually installed on the roof top) that are responsible for the collection of sunlight and converting it to heat. They account for 80 % of the solar water heater system and they are the most central part of the system such that without them the system would not function. They take different forms and sizes depending on the weather in which they are installed.b.Heat exchanger and storage tank - this is the unit consisting of pipes that transfer the heated water for eventual storage and use.c.The controller system - this is a system that regulates the temperature of the heat exchanger tank and prevents cold water from being recycled back into the system.d.Back up heater - this is a sma11 component that comes with the system and is only utilized in areas where the weather is too cloudy or the sunlight is not sufficient for the solar water heaters to function. That it is important to note that the solar water heater is designed to function under very low sunlight and consequently the use of the backup heater is rare.

24. That a true application of the World Customs Organization (WCO), General Rules for the Interpretation of The Harmonized System, specifically Rule 3(b) clearly shows that the solar water heaters in question should have been classified based on the component that gives them character. That in the sample above, the solar water heaters are given character by the collectors, which account for 80% of the functionality of the system.

25. That on the issue of Misapplication of the World Customs Organization (WCO), General Rules for the Interpretation of The Harmonized System, the Appellant referred to the rules for 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 component.

26. That in the case of the Appellant’s solar water heaters, 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 heat exchange tank.

27. That the Appellant demonstrated that the backup heater plays a very incidental role in the functioning of the system. That in any event, the system would still function without the electric component signaling that the role is not primary to the functioning of the system.

28. That on the valuation of the components, the Appellant argued that the backup heater bought as a stand-alone is significantly cheaper than when bought together with the solar water heating system.

29. The Appellant further stated that the Respondent disregarded the principles of interpretation set out in the World Customs Organization Explanatory Notes (WCOEN), thus going against accepted international practices and treaties ratified by member states of WTO, Kenya included and consequently the tax demanded is excessive and unfounded in law.

30. The Appellant submitted that the following should be the issues for determination by the Tribunal:-a.Whether by the Respondent allowing the imports of the Solar water heaters over the last 5 years created a legitimate expectation that the correct tariff for importation of solar water heaters was 8419. 19. 00. b.Whether the solar water heaters in question should be classified under tariff 8419. 19. 00 or 8516. 10. 00 and which is the correct application of the general interpretation rules (GIR) and the relevant Explanatory Notes.c.Whether the Respondent exceeded its powers and acted ultra vires by purporting to change the tariff adopted for the importation of solar water heaters into Kenya.d.Whether the Appellant is entitled to costs.a.Whether the reclassification of the solar water heaters infringed on the Appellant’s right to legitimate expectation.

31. 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 or issue any additional demand. That this consistent practice of importing the product in question for a long period of time created legitimate expectation that solar water heaters shall in future be imported under Tariff 8419. 19. 00 and not any other code.

32. The Appellant submitted that the goods clearance process is a lengthy one and involves many parties from the country of origin up to the time they are cleared at the port through Clearing agents licensed and trained by the Respondent.

33. The Appellant submitted that it plays no role in setting the applicable standard and this explains why the Respondent has never raised any issue with it on declaring a wrong tariff.

34. The Appellant submitted that, during cross examination, the Respondent’s witness also indicated that for a long time, they also thought the products in dispute were classifiable under HS Code 8419. 19. 00. That this therefore begs the question why the Respondent would turn back and indicate that the Appellant had been declaring the wrong tariff and worst still move a step further and demand back taxes for a period of 5 years.

35. The Appellant further submitted that the Respondent’s witness confirmed to the Tribunal that the dispute over the importation of the solar water heaters was not attributed to the classification of the product but instead to the change in the interpretation of the applicable HS code by the Respondent.

36. That it is difficult to pin the huge burden of this change in the interpretation of the HS code on the Appellant. That it emerged during cross examination 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.

37. The Appellant submitted that the lengthy process described above, the involvement of the Respondent as well as its approval over the years created a legitimate expectation on the part of the Appellant that the Respondent shall 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.

38. The Appellant relied on the case of 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, 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.”

39. The Appellant submitted that 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. The court in finding that the Appellant had created a legitimate expectation in favor of the Respondent created the following guidelines in establishing a legitimate expectation;“a 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 pubic authority whether by practice or promise committed itself to the legitimate expectation; the representation was clear and unambiguous; the claimant fell within the class of person(s) who were entitled to rely upon the representation(s) 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 from 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.”

40. That the same principles were summarized by the Supreme Court of Kenya in Communications Commission of Kenya & 5 Others vs. Royal Media Services Limited & 5 Others, Petition No. 14 of 2014 where the Court held 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.”

41. The Appellant submitted that the Respondent through its agents having been involved in declaring the applicable tariff, having verified that the applicable rate is correct and having permitted the import of solar water heaters under tariff 8419. 19. 00 is estopped from turning back and indicating that the declared tariff was wrong. That the agents of the Respondent also verified the entries made and the consignments in question before clearance and payment of the duty so assessed. That it is the reliance on this authority of the Respondent that justified the importation of solar water heaters under tariff 8419. 19. 00. The Appellant submitted that it did not have any powers as the approval of the entries was done by the Respondent who retained all the authority to refuse entry or otherwise guide on what it approved as the correct tariff for importation.

42. The Appellant further submitted that the decision to reclassify products and demand taxes for imports that took place in 2016 based on a ruling arrived at by the Respondent’s Technical Committee in November 2020 is unfair and unreasonable, especially considering that these taxes were not passed to the final consumers. 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.

b. Whether the solar water heaters are classifiable under heading 8419 or 8516. 43. The Appellant submitted that the first 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 and, provided such headings or Notes do not otherwise require, according to the following provisions.”

44. The Appellant submitted that the solar water heaters in question were correctly classifiable under heading 84. 19 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 a change of temperature 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”. That since this is the applicable heading for solar water heaters, the Appellant was right in classifying the solar water heaters under tariff 8419. 19. 00 as other items classifiable under this heading.

45. 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 provide. 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.

46. The Appellant Submitted that HS code 8516. 10. 00 is not applicable to solar water heaters as the same cover instantaneous electric water heaters. That this 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 (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.

47. The Appellant submitted that heading 85. 16 does not in any way address solar water heater 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.

48. The Appellant also submitted that the Respondent’s decision to classify the solar water heaters incorporating a heating element under heading 85. 16 was informed by its erroneous interpretation of Explanatory Note A(3) of heading 85. 16 on definition of dual system water heater. 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 electrically only when the alternative means is insufficient.

49. The Appellant submitted that the products in dispute are basically solar water heaters and in the definition of dual–system, the duality comprises of a fuel-heated hot water system with a thermostatic control to operate when the fuel-heating system is not sufficient. That the mischief that the Respondent has relied upon is to attempt equate fuel hot water systems to solar water heaters. The Appellant submitted that solar water heaters are not fuel-heated water systems.

50. The Appellant submitted that during cross examination, the Respondent’s witness confirmed before the Tribunal that solar water heaters do not in any way utilize fuel and are therefore not connected to a fuel-heated hot water system. That this being the chief witness of the Respondent who held himself out as an expert on customs matters, the Tribunal must find that the statement by the witness is binding on the Respondent.

51. The Appellant further submitted that the fact that the solar water heaters cannot be classified under heading 85. 16 is further buttressed by the last paragraph of Explanatory Note A(5) of chapter 85. 16. which provides as follows: - 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.

52. The Appellant submitted that this clearly indicated that chapter 85. 16 excludes solar water heaters and states that they are classifiable under heading 84. 19. 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 with this provision clearly providing that solar water heaters are classifiable under heading 84. 19, there is no reason why the Respondent would move to reclassify solar water heaters under any other heading.

53. The Appellant submitted that there is no provision either in the heading to chapter 84. 19 or 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 85. 16 clearly states that solar water heaters are classified under heading 84. 19 and on the other hand Rule (r) of chapter 8419 allows solar water heaters to remain in this heading even when they are electrically heated.

54. The Appellant also submitted that the 2022 WCO nomenclature has created a new tariff 8419. 12. 00 for solar water heaters. That this indicates that solar water heaters have always been classified under heading 84. 19 and continue to be classified under this heading by dint of the 2022 version of the HS Code.

c. Whether the Respondent’s post clearance audit department acted ultra vires. 55. The Appellant submitted that the exercise of any administrative authority is regulated by Parliament through legislation. Further, the exercise of administrative authority though granted by legislation must meet the minimum Constitutional standards and failure to do so, the authority and its enacting statute are null and void.

56. That in the case of the Respondent, the East Africa Community Customs Management ACT (EACCMA) is the statute that allows the Respondent to undertake post clearance audits.

57. That under Sections 235 and 236 of the EACCMA, the Respondent is granted powers to call for documents within five years from the date of importation as well as undertake inspection of the records to verify the entries.

58. 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.

59. The Appellant submitted that the World Customs Organization 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.

60. 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.

61. 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 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.

62. The Appellant submitted that the decision of the Respondent should be placed on the above scale to evaluate the legality of the PCA report. That with regard to the contravention of the power that authorizes the conduct of post clearance audits, it is apparent that Sections 235 and 236 of EACCMA did not intend for the Respondent to overhaul the meaning or otherwise redefine the application of HS Codes.

63. The Appellant submitted that the Respondent had authorized 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 which the power conferred by Section 236 was intended.

64. 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 vs. 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.”

65. 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.

66. 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.

67. 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.

68. 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 as presented in evidence by the Appellant’s witness, countries such as USA, China, UK, EU, Canada, Australia and members of the East Africa Community are using tariff 8419. 19. 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.

69. 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.

70. 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.

d). Whether the Appellant is entitled to costs? 71. The Appellant submitted that that cost is a discretionary remedy which follows the event. That in the event the Tribunal finds that the current Appeal is merited, Appellant prayed that the same be allowed with costs.

Appellant’s prayers. 72. The Appellant makes the following prayers:-a.That the Tribunal annuls the Respondent’s review decision dated 29th April 2021. b.The costs be awarded to the Appellant.

The Respondent’s Case 73. The Respondent’s case is premised on the hereunder filed documents before the Tribunal:-a.The Respondent’s Statement of Facts dated 16th June 2021 and filed on 18th June 2021 together with the documents attached thereto.b.The witness statement of Mr. Bernard Oyucho dated 22nd July 2022 and admitted in evidence in chief on the 27th July 2022. c.The Respondent’s written submissions dated 19th August 2022 and filed on 23rd August 2022 together with the legal authorities attached therewith.

74. The Respondent averred that its Post Clearance Audit department on 29th December 2020, received intelligence profile from the Business Intelligence Unit. The basis of the profile was misdeclaration of solar water heaters incorporating electrical heating elements in tariff 8419. 19. 00 instead of 8516. 10. 00.

75. The Respondent averred that prior to receiving the intelligence information, there was a Departmental Technical Committee's ruling dated 2nd November 2020 that classified solar water heaters in tariff 8516. 10. 00.

76. That on 11th February 2021, it issued a letter of preliminary audit findings to the Appellant requiring it to give an explanation on why extra taxes of Kshs. 10,602,379. 00 should not be demanded.

77. That on 18th February 2021, the Appellant responded to the letter of preliminary audit findings citing a breach of Section 4(3) of the Fair administrative Actions Act hence could not respond promptly.

78. That on 16th March 2021, the Respondent issued a demand notice to the Appellant since it did not provide enough grounds to refute the findings.

79. That on 29th March 2021, the Appellant through its Tax Agent, opposed the demand notice stating that the Respondent had breached its right to fair administrative action, misinterpreted the EAC Common External Tariff 2017, product function giving the product its character leading to misapplication of the WCO Explanatory Notes.

80. That on 29th April 2021, the Respondent replied to the Appellant’s review application.

81. The Respondent averred that it informed the Appellant the reason for classifying the product under a different HS Code and allowed the Appellant time to state its case and respond to the demand letters.

82. The Respondent averred that its review was based on the Appellant’s import declarations and documents attached for the period under review.

83. The Respondent averred that according to the EAC CET and WCO Explanatory Notes solar water heating systems that rely solely on solar energy are classified under tariff code 8419. 19. 00 whereas dual water heating systems are classified under tariff code 8516. 10. 00. The Appellant’s products have an electric component and are therefore considered dual water heating systems.

84. The Respondent stated that it confirmed the demand notice plus penalties and additional accrued interest through its demand of 29th April 2021 resulting in Kshs. 11,621,711. 00.

85. The Respondent submitted that the only issue of determination in this Appeal is:-

Whether the Respondent erred in classifying the Solar Heating Systems under tariff code 8516. 10. 00 instead of tariff code 8419. 19. 00. 86. The Respondent submitted that it has a statutory duty to carry out post clearance audits on the import declarations made by taxpayers by verifying the accuracy of the entry of goods or documents and determine whether a person has made the correct Customs declarations and paid all the taxes due.

87. The Respondent submitted 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).

88. The Respondent submitted that the solar water heaters imported by the Appellant were misclassified under tariff code 8419. 19. 00. The Respondent averred that the solar water heating systems have an electric component and were correctly classified under tariff code 8516. 10. 00 in accordance with the general Interpretation rules and Explanatory Notes to heading 8516. 10. 00 and 8419. 19. 00

89. The Respondent relied on the case of Republic vs. Commissioner General & Another Ex-Parte Awai Ltd [2008] eKLR, which was quoted in the case of Associated Battery Manufacturers Limited vs. Commissioner of Customs Services [2020] eKLR where the Court held that when faced with a dispute on product classification:-“In the end I must conclude that looking at the material placed before me and the submissions tendered by learned counsels, ... the Respondents had the statutory duty to impose duty according to the tariff classification provided by law under the Customs and Excise Act and under the Harmonized Commodity Description and Coding System provided by the World Custom Organization Explanatory Notes in which Kenya is a signatory."

90. The Respondent submitted that products classifiable under tariff code 8516. 10. 00 attract import duty at an ad valorem rate of 25% and import VAT as provided under the VAT Act 2013. That the Respondent demanded extra taxes of Kshs. 11,621,711. 00 in accordance with Section 135 of EACCMA 2004 which states that:-“Where any duty has been short levied or erroneously refunded, then the person who should have paid the amount short levied or to whom the refund has erroneously been made shall, on demand by the proper officer, pay the amount short levied or repay the amount erroneously refunded, as the case may be; and any such amount may be recovered as if it were duty to which the goods in relation to which the amount was short levied or erroneously refunded, as the case may be, were liable"

91. The Respondent submitted that the item in question is a solar heater used to heat domestic water that is mounted on a roof or grid. Its main energy source is solar energy. That however, electricity is secondary and supplies power when the solar function has failed. The solar heater switches to electricity when the water temperature drops to below 55 degrees Celsius; thus it qualifies as a dual powered system.

92. The Respondent submitted that Appellant’s witness during cross examination did not dispute the fact that the solar water heater has a dual element comprising of a solar heating element and an electric heating element.

93. The Respondent submitted that the product specification of the dual system for domestic use is one that has a provision for use of both solar water heater and electric water heater on one product as the one in this dispute.

94. The Respondent submitted that Rule 1 GIR (General Interpretation Rules), provides that classification shall be determined according to the terms of the heading and any relative section or chapter notes, provided such headings or notes do not otherwise require the provisions of rules 2 to 6. Note (A) 3 to heading 8516 classifies dual system water heaters in heading 8516, in which water is heated either electrically or by connection to a fuel heated hot water system. The systems are equipped with a thermostatic control to operate them electrically only when the alternative means is insufficient-

95. The Respondent urged the Tribunal to be guided by the case of Adamson v. Attorney General (supra), T. M. Bell v. Commissioner of Income Tax [1960] EA 224, Cape Brandy Syndicate v. Inland Revenue Commissioners [1920) 1 KB 64 where it wa stated that:-“...in a taxing Act, one has to look merely at what is clearly said. There is no room for intendment as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used...If a person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be."

96. The Respondent submitted that goods are to be classified at the time of entry and what matters is the nature of the goods at the time of entry. At the time of entry, the solar water heaters had both a solar and an electric element.

97. The Respondent submitted that the Explanatory Notes to tariff code 84. 19 expressly exclude appliances that can be electrically heated and refers them to heading 8516.

Respondent’s prayers. 98. The Respondent makes the following prayers:-a.That HS code 8516. 10. 00 as issued by the Respondent be deemed correct and the demand notice of Kshs. 11,621,711. 00 issued on 29th April 2021 is valid and the same be upheld.b.That this Appeal be dismissed with costs to the Respondent as the same is without merit.

Issue for Determination 99. The Tribunal having carefully reviewed the pleadings filed by the parties, the evidence adduced and the submissions made, is the of the respective view that the only issue for its determination in this Appeal is as follows:-Whether the Respondent erred in law and in fact in reclassifying the Appellant’s water heaters from tariff code 8419. 19. 00 to tariff code 85. 16. 10. 00

Analysis and Findings 100. Having identified the issue falling for its determination, the Tribunal wishes to analyze it as hereunder.

101. 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.

102. The Appellant submitted that the decision to reclassify products and demand taxes for imports that took place in 2016 based on a ruling arrived at in November 2020 by the technical department of the Respondent is unfair and unreasonable because those taxes cannot be passed on to the final consumers.

103. The Tribunal notes that although the first three grounds of appeal raised the issue of statutory right to fair administrative action pursuant to the Constitution of Kenya, 2010 and the Fair Administrative Actions Act No 4 of 2015, the Respondent chose not to address itself to those issues either in the Statement of Facts or in the submissions.

104. The Tribunal notes that the Respondent in its pleadings indicated that there was a departmental Technical Committee’s Ruling dated 2nd November 2020 that classified solar water heaters in tariff 8516. 10. 00. It seems that no consultations were made with the industry stakeholders in arriving at this decision.

105. It is this Technical Committee’s ruling that initiated the process of the re-classification of solar water heaters from HS code 8419. 19. 00 to HS code 8516. 10. 00. The Tribunal notes that nothing in terms of the character of the product changed and all that happened was that the Technical Department of the Respondent decided to re-classify the HS tariff code without assigning reasons for doing so.

106. The Appellant submitted that the Respondent through its officers or agents having been involved in declaring the correct tariff and having permitted the importation and clearance of the solar water heaters under tariff 8419:19:00 for a period of over five years, then they are estopped from turning back, as this conduct created a legitimate expectation.

107. The Tribunal relies on the case of Krishi Commodities Ltd vs. Kenya Revenue Authority [2018] eKLR, where the judge stated that:-“…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 duty assessed as correct, a legitimate expectation arose in favour of the Appellant that the assessed duty was correct “.

108. The holding in the above case aptly applies to this instant Appeal in the sense that, in all the consignments the Appellant imported, over the period of more than five years as averred by the Appellant, the Respondent’s officers always verified the accuracy of the entries and the rate applied, the duty payable, and even inspected the physical consignments, before clearance and release of the consignments to the Appellant. That therefore, having verified the entries in issue, rate applied, assessed duty payable, approved the entry as correct, collected the duty and released the Appellant’s consignments, the Tribunal finds that there was a legitimate expectation in favour of the Appellant that the HS Tariff code used over the years was the correct one.

109. The Tribunal agrees with the Appellant that the failure by the Respondent to raise classification issues led to the Appellant pricing its solar water heaters without factoring any additional taxes and this estops the Respondent from reneging on its promise. The Tribunal further agrees with the Appellant that while the Respondent has the powers to carry out its mandate, this should not be applied retrospectively. The Ruling of the Technical Committee to classify solar water heaters from tariff code 8419. 19. 00 to 8516. 10. 00 should not have been applied retrospectively and should only have applied to solar water heaters imported into Kenya after the date of the ruling.

110. After analyzing the facts and the case laws in this matter, the Tribunal finds that the reclassification of solar water heaters by the Respondent infringed on the Appellant’s right to legitimate expectation.

111. The Appellant submitted that HS code 8516. 10. 00 is not applicable to solar water heaters as the same covers instantaneous electric water heaters.

112. The Appellant also submitted that heading 85. 16 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.

113. The Appellant further submitted that the fact that the solar water heaters cannot be classified under heading 85. 16 is further buttressed by the last paragraph of Explanatory Note A (5) of chapter 85. 16. which provides as follows: - 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.

114. The Appellant asked the Tribunal to take note of the fact that the Respondent had filed an opinion on Tariff Ruling dated 3rd November and allegedly issued by WCO. That the Appellant had requested that the letter from the Respondent requesting for the Ruling be filed with the Tribunal as itbelieved that the Ruling was made as a result of misrepresentation of facts on the character of the product. The Appellant submitted that the fact that the Respondent refused to produce the letter requesting for the opinion of WCO even after being ordered to do so by the Tribunal is a clear indication that there was mischief on part of the Respondent in this matter. The Appellant submitted that the Tribunal ruled that this matter would proceed without reference to the alleged Ruling by WCO dated 3rd November 2021.

115. On the other hand, the Respondent submitted that the item in question is a solar water heater used to heat domestic water that is mounted on a roof or grid. Its main energy source is solar energy. However, electricity is secondary and supplies power when the solar function has failed.

116. The Respondent submitted that Appellant’s witness during cross examination did not dispute the fact that the solar water heater has a dual element comprising of a solar heating element and an electric heating element.

117. The Respondent submitted that the product specification of the dual system for domestic use is one that has a provision for use of both solar water heater and electric water heater on one product as the one in this dispute.

118. The Respondent submitted that Rule 1 of GIR (General Interpretation Rules), provides that classification shall be determined according to the terms of the heading and any relative section or chapter notes, provided such headings or notes do not otherwise require the provisions of Rules 2 to 6.

119. 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 code through a Ruling by its Technical Committee on 2nd November 2020.

120. 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.”

121. The Tribunal notes 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 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.

122. 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.

123. According to Rule 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. 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 be classified under chapter 84 thereby reinforcing the Explanatory Notes under chapter 8516 (5) that solar water heaters should be classified under chapter 8419.

124. 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.

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

Final Decision 126. The upshot of the foregoing is that the Appeal is merited and the Tribunal accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby allowed.b.The Respondent’s objection review dated 29th April 2021 be and is hereby set aside.c.The correct tariff code for solar water heaters with or without an electric heating element for the period January 2016 to December 2020 was HS Code 8419. 19. 00. d.Each party to bear its own costs.

127. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF MAY, 2023. ERIC N. WAFULACHAIRMAN.........................CYNTHIA B. MAYAKAMEMBER..........................GRACE MUKUHAMEMBER.........................JEPHTHAH NJAGIMEMBER.............................ABRAHAM K. KIPROTICHMEMBER