[2024] KETAT 1345 (KLR)

Solargen Technologies Limited v Commissioner of Customs and Border Control (Tax Appeal E174 of 2024) [2024] KETAT 1345 (KLR) (20 September 2024) (Judgment)

Neutral citation: [2024] KETAT 1345 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E174 of 2024

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

September 20, 2024

Between

Solargen Technologies Limited

Appellant

and

Commissioner Of Customs And Border Control

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act, CAP 486 of the Laws of Kenya and is a leading Energy, Water and Irrigation solution and service provider in the region.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. A demand for additional taxes that had been assessed on alleged incorrect tariff classification of Solar Water Heaters incorporating electrical heating elements in tariff code number 8419. 19. 00 instead of 8516. 10. 00 was issued. The latter tariff code attracts both import duty at a rate of 25% and VAT while the former tariff code attracts only VAT.

4. The Respondent issued a demand notice dated 25th November 2021 of Kshs. 8,178,712. 70 to the Appellant after conducting a desk audit of the Appellant’s imports for payment of taxes. The Appellant did not respond within 30 days as required under section 229 of the East African Community Customs Management Act (EACCMA), 2004, hence the matter was forwarded to the Debt Management Unit for enforcement.

5. On 4th December 2023, upon receipt of the enforcement notice, the Appellant through its tax agent Knight Castle & King LLC, applied for a review pursuant to Section 229(3) of EACCMA. The Respondent accepted the late application on 3rd January 2024 and upon review, issued its decision upholding the demanded amount in its entirety.

6. Aggrieved by the Respondent’s decision, the Appellant lodged this Appeal vide notice of appeal dated 12th February 2024.

The Appeal 7. The Appellant filed a Memorandum of Appeal dated 12th February 2024 and filed on 13th February, 2024 wherein it raised the following grounds of appeal:i.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 were 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 change of temperature such as heating, cooking.ii.The Respondent erred in law and in fact by failing to consider 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. Solar water heaters are also classified in heading 84. 19. ”iii.The Respondent erred in law and in fact by failing to appreciate that in the event the solar water heater with an electric backup could not be classified under both HSC 85:16 and HSC 84:19, the same could only be classified under rule 3(b) of the World Customs Organization (hereinafter “WCO”) General Rules for Interpretation of the Harmonized System.iv.The Respondent erred in law and in fact by failing to appreciate that the Appellant has a right of access to information provided under article 35 of the Constitution of Kenya, 2010. By purporting to authoritatively rely on the opinion of the WCO dated 3rd November 2021 without disclosing how the same opinion was arrived at, the Respondent has infringed on this right.v.The Respondent erred in law and in fact by purporting to rely on the opinion of the WCO Secretariat on the correct classification of the solar water heaters. The secretariat of the WCO has no mandate to issue opinions or rulings on the interpretation of the harmonized system since those functions are the preserve of the HS Committee in line with article 7(1) (b) of the HS Convention.vi.The Respondent erred in law and in fact by presenting to the Secretariat of the WCO a solar water heater whose electric backup had been removed leading the Secretariat to apply GIR 2(a) whose purpose is to give character to an unfinished product and classify it together with the finished product which without considering the solar capabilities would be considered electric.vii.The Respondent erred in law by purporting to retrospectively apply the opinion of the WCO dated 3rd November 2021 to imports that took place many years before the same opinion was delivered.viii.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 a period of over 10 years without raising any additional assessment, the Respondent created a legitimate expectation on the part of the Appellant that the solar water heaters would in future be classified under the same code.

Appellant’s Case 8. The Appellant filed its Statement of Facts dated 12th February 2024 on 13th February 2024 in which the Appellant stated that on the 25th November 2021, it received a demand dated the same day demanding short levied customs totalling to Kshs 8,178,712. 70.

9. The demand notice indicated that the desk audit of the Appellant’s imports of solar water heaters for the period November, 2016 to date had been conducted. The said desk audit had revealed that the solar water heaters imported by the Appellant had been wrongly classified under tariff code 8419:19. 00 instead of 8516:10. 00. This was based on the understanding that the solar heaters contained a backup electrical heating element.

10. On 4th December 2023, The Appellant submitted an application for review alongside an application for extension of time under the provisions of section 229 (1) read together with section 229 (3) of the EACCMA, seeking a review of the said demand on 5 grounds namely breach of the right to a fair administrative action, misinterpretation of the EAC Common External Tariff 2017 (hereinafter “EACCET”), misapplication of WCO explanatory notes, the right of legitimate expectation and the retrospective application of the law.

11. On the issue of misinterpretation of the EACCET, it was the Appellant’s position that the solar water heaters can only be classified under heading 84:19 and not under any other heading. This is because heading 84:19 covers machinery, plant or laboratory equipment, whether or not electrically heated (excluding furnaces, ovens and other equipment’s of heading 85:14), for the treatment of materials by a process involving a change of temperature such as heating, cooking, roasting, distilling, rectifying, sterilizing, pasteurizing, drying , evaporating, vapourising, condensing or cooling, other than machinery or plant of a kind used for domestic purposes; instantaneous or storage water heaters, non - electric.

12. It was the Appellant’s position that the explanatory notes (“ENs”) constitute the official interpretation of the harmonized system at the international level with each EN providing a commentary on the scope of each heading and therefore indicative of the proper interpretation of these headings.

13. The Appellant asserted that Chapter 84 covers all electric machinery and equipment other than Machinery and apparatus of a kind covered by Chapter 84 which remains classified there even if electric. The Appellant also emphasized the contents of the explanatory notes to Chapter 84 which state in relevant part: it should be noted that machinery and apparatus of a kind covered by chapter 84 remains in this chapter even if electric. The Appellant therefore holds the position that the solar water heaters are classifiable under heading 84:19.

14. The Appellant referred to the explanatory notes to heading 84. 19 which states in relevant part: the apparatus described above is essentially used industrially, but the heading also covers non – electric instantaneous water heaters and storage water heaters, including solar water heaters, domestic or not, if electrically heated such appliances are excluded (heading 85;16).

15. According to the Appellant, the Respondent’s decision to classify the solar water heaters incorporating a backup 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. The Appellant noted that this provision defines dual system water heaters as follows: - ‘Dual-system heaters in which the water is heated either electrically or by connection to a fuel-heated hot water system; they are often equipped with a thermostatic control to operate then electrically only when the alternative means is insufficient.’

16. It is the Appellant’s position that the products in dispute are basically solar water heaters which incorporates a backup heating element and not dual system water heaters as the Respondent would want this Tribunal to believe. The Appellant asserted that solar water heaters do not in any way utilize fuel and are therefore not connected to a fuel-heated hot water system. It argued that Solar water heaters are not equipped with a thermostatic control and neither are they immersion heaters. Therefore, the Appellant concluded that solar water heaters do not meet the definition of dual system heaters as prescribed under explanatory note A (3) of heading 85. 16.

17. According to the Appellant, the fact that the solar water heaters cannot be classified under heading 85. 16 is buttressed by the last paragraph of explanatory note A (5) of heading 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. Solar water heaters are also classified in heading 84. 19.

18. The Appellant argued that heading 85. 16 excludes solar water heaters and provides that they are classifiable under heading 84. 19. It maintained 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. It was the Appellant’s view that solar water heaters are classifiable under heading 84. 19, therefore there is no reason why the Respondent would move to reclassify solar water heaters under any other heading.

19. The Appellant noted that Respondent indicated that solar water heaters are excluded from the provision of heading 84. 19 by dint of the last paragraph of heading 84. 19 which provides as follows: - instantaneous or storage water heaters, non-electric. However, it is the Appellant’s position that this is an erroneous interpretation of the law since solar water heaters are not instantaneous or storage water heaters. Further, the Appellant argued that incorporation of an auxiliary heating element does not change the nature of these products which remains under heading 84. 19 as is the practice worldwide. According to the Appellant, this has been the practice in Kenya since 2019 when the Respondent under pressure to meet tax targets decided otherwise.

20. It was the Appellant’s case that Rules of the chapter notes to heading 84. 19 further suggests that solar water heaters are classified under this heading. This note provides as follows: - The machinery and plant classified in this heading may or may not incorporate mechanical equipment. They may be heated by any system (coal, oil, gas, steam, electricity, etc.), except in the case of instantaneous water heaters and storage water heaters which are classified in heading 85. 16 when heated electrically.

21. It asserted that it is apparent that there is no provision either in heading 84. 19 or the chapter notes to this heading which excludes solar water heaters from this section. It argued 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.

22. The Appellant noted that the 2022 version of the HS Code has created a new tariff 8419. 12. 00 for solar water heaters which also indicates that solar water heaters have always been classified under heading 84. 19 and continues to be classified under this heading by dint of the 2022 version of the HS Code.

23. The Appellant argued that it brought to the attention of the Respondent the fact that in the event the solar water heaters in question could not be classified under HSC 84:19 their classification must be done in line with the General Interpretation Rules (GIR). According to the Appellant, the specific rule applicable is rule 3(b) which deals with mixtures and composite goods consisting of different materials which cannot be classified by reference to the headings under the tariff. Rule 3 (b) provides as follows: “Mixtures, composite goods consisting of different materials or made up of different components and goods put up in sets for retail sale, which cannot be classified by reference to 3(a), shall be classified as if they consisted of the material or component which gives them their essential character in so far as this criterion is applicable.”

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

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

26. On the issue of misapplication of the WCO Explanatory Notes (WCOEN), the Appellant indicated that the WCOEN creates four considerations for any classification to be made on composite goods. Consideration should be given to the following areas:a.Nature of the material or componentb.Bulk, weight or valuec.The role of a constituent material in relation to its used.The valuation of the different component

27. In light of the solar water heaters in question, the Appellant asserted 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 tank. The Appellant also stated that whereas the solar collector is providing heat 365 days a year, the electrical backup element is only in use for about 30 days of the year when the solar heat alone is insufficient. The Appellant stated that system would still function even without the electric component signalling that the role is not primary to the functioning of the system.

28. The Appellant argued that in review decision dated 3rd January, 2023, the Respondent asserted that the solar water system can be can operate solely on electricity. The Appellant stated that this position is erroneous as the solar water system cannot function without the solar panel. It added that the design of vacuum tube system cannot allow this since it is not possible to block all the 30 holes in the tank to operate as electric heater without vacuum tubes. The Appellant maintained that the tubes are the main heating source with the electric heater playing a backup role in the rare event when solar energy is not sufficient.

29. On the valuation of the components, the Appellant argued that the backup electrical heating element bought as a stand-alone is significantly cheaper than when bought together with the solar water heating system. It stated that it is therefore unlikely that someone interested in purchasing an electric component would purchase the solar water heater system. The Appellant also averred that the valuation and cost of the solar components significantly outweigh the valuation and cost of the backup electrical heating component.

30. On breach of the right to fair administrative action, the Appellant contended that Article 47 of the Constitution provides for the right to a fair administrative action. It stated that this right is further enshrined under the Fair Administrative Actions Act CAP 7L of the Laws of Kenya (hereinafter “FAAA”). The Appellant cited Section 4(3) of the FAAA which requires that where an administrative action is likely to adversely affect the rights or fundamental freedoms of any person, the administrator shall give the person affected by the decision a statement of reasons and the information, materials; and evidence to be relied upon in making the decision or taking the administrative action.

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

32. The Appellant further stated that the decision of the WCO Secretariat dated 3rd November, 2021 attached to the demand is incomplete therefore, it demanded for a complete copy of the same. Further, the Appellant requested for a copy of the letter dated 30th August, 2021 through which the Respondent sought the opinion of the WCO Secretariat. The Appellant argued that would enable the Appellant appreciate how the Respondent represented the dispute between the WCO.

33. The Appellant also stated that the authenticity of the WCO Secretariat advisory opinion dated 3rd November, 2021 is questionable as the same does not have the signing off page and that the Secretariat of the WCO has no mandate to render rulings or advisory opinions on the interpretation of the harmonized system since those functions are the preserve of the HS Committee in line with Article 7(1)(b) of the HS Convention.

34. It was the Appellant’s position that it had over the years imported the product in question under HS Code 84:19. 19. 00 and the Respondent had never raised an issue with the classification of the product or issue any additional demand. The Appellant argued that this therefore created a legitimate expectation on the Appellant that the Respondent shall in future classify these products under the same HS Code. It maintained that the Respondent is estopped from acting contrary to the consistent best practice from which the Appellant’s legitimate expectation emanated.

35. According to the Appellant, the decision to re-classify products and demand taxes for imports that took place in 2016 based on a ruling arrived at in 2021 is unfair and unreasonable, especially considering that these taxes were not passed to the final consumers. The Appellant also stated 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.

36. The Appellant averred that despite the above stated reasons, the Respondent delivered its review decision on 3rd January, 2024 where it upheld its demand dated 25th November 2021 and grossly misdirected itself on the classification of the product. The Appellant noted that in the review decision, the Respondent did not dispute that the WCO ruling shared with the Appellant was incomplete save to stating that the part shared with the Appellant was sufficient to justify the classification of the “dual system water heaters”.

37. In support of its Appeal, the Appellant filed written submission dated 30th May 2024 and filed on 7th of June 2024. The Appellant identified the 3 issues for determination which it analysed as hereinunder:

1. Whether by allowing the imports of the Solar water heaters for a period of over 5 years the Respondent created a legitimate expectation that the correct tariff for importation of solar water heaters was 8419. 19. 00. 38. The Appellant submitted that it had been importing the item in issue for over five years under HS Code HS Code 8419. 19. 00 and that the Respondent never raised an issue with the classification of the product. Therefore, the Appellant submitted that the Respondent 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 84:19. 19. 00. The Appellant cited the case of Re Westminster City Council, [1986] A.C. 668 at 692 as cited in the case of Oindi Zaippeline & 39 others v Karatina University & another [2015] eKLR, where the Court stated as follows:“Legitimate expectation applies the principles of fairness and reasonableness, to the situation in which a person has an expectation, or interest in a public body retaining a long-standing practice, or keeping a promise. An instance of legitimate expectation would arise when a body, by representation or by past practice, has aroused an expectation that is within its power to fulfil a promise.”

39. The principles that guide the court when determining whether or not a legitimate expectation exists, the Appellant cited the case of Kenya Revenue Authority v Universal Corporation Ltd [2020] eKLR where the court stated as follows:“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. The Appellant also relied on the case of Communications Commission of Kenya & 5 Others vs Royal Media Services Limited & 5 Others, Petition No. 14 of 2014 where the Supreme Court stated 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 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 verified the entries of the product in issue and the duty paid on the same. This happened for a number of years which created legitimate expectation that the Appellant’s goods would be cleared under the same HS Code. The Appellant relied on the case of Scandinavian Solar Systems Ltd v Commissioner of Customs & Border Control Tax Appeal No. 249 of 2021 wherein this Tribunal held as follows:‘‘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.’’

2. Whether the solar water heaters are classifiable under heading 84. 19 or 85. 16 and which is the correct application of the General Interpretation Rules (GIR) 42. On this issue, the Appellant submitted that the Tribunal should look at what is stated under heading 84. 19. The Appellant submitted that in doing so, the Tribunal will note that the products that the Appellant imported fell under HS Code 84. 19 and not 85. 16.

43. The Appellant also submitted that tax laws should be read in plain language and as such, words should be read in plain English without room for intendment or inference. It relied on the case of Commissioner of Domestic Taxes v Unga Limited [2021] eKLR where the court observed that the courts have reiterated the principle that tax laws should be interpreted strictly and leave no room for intendment. As such it would be a great miscarriage of justice for the Respondent to interpret the explanatory notes with intendment with an objective of passing on a tax burden that otherwise would not be imposed on the Appellant had the Act been read in plain English.

44. Further, in support of the preposition that the product in issue is not a dual system, the Appellant cited the case of Tile and CarpetLimited v Commissioner of Customs & Border Control Tax Appeal No. 763 Of 2022 where this Tribunal held as follows:“The Tribunal was therefore of the view that a system is only deemed a dual system heater if it uses both electricity and the combustion of fuel to heat water. There was no evidence adduced that the solar water heaters imported by the Appellant have the capability, components or elements to undertake the combustion of fuel.”

45. The Appellant did not analyse the third issue that it had identified for determination which was whether it was entitled to costs.

Appellant’s Prayers 46. The Appellant prayed that the Tribunal would allow its appeal and annul the Respondent’s review decision dated 3rd January, 2024 with costs to the Appellant.

Respondent’s Case 47. In response to the appeal, the Respondent lodged its Statement of Facts dated 5th June 2024 and filed on 6th June 2024 with leave of the Tribunal vide orders dated 20th June 2024. In addition, the Respondent also made written submissions dated 5th June 2024 and filed on 6th June 2024 in response to the Appeal.

48. The Respondent stated that on 3rd November 2021, the Policy and International Affairs Division received a World Customs Organization (herein after to be referred to as WCO) Advisory opinion on the classification of dual system water heaters wherein WCO classified the products under tariff 8516. 10. 00 based on the application of GIR 1 and WCO Explanatory Notes.

49. The Respondent stated that the Customs Post Clearance Audit team conducted a desk review of customs entries of other importers of Solar water heating systems pursuant to Sections 235 and 236 of the EACCMA. The examination of the entries revealed that the Solar water heating systems imported by the companies have an electric component and are therefore dual water heating systems classifiable under tariff code 8516. 10. 00 and the Appellant was among the importers that were profiled.

50. The Respondent averred that the General Interpretation Rules (GIR) as cited in the EACCET govern classification of goods. The Respondent stated that according to GIR1, classification shall be determined according to the terms of the headings and any relative section or chapter notes and, provided the headings or notes do not require otherwise, according to GRIs 2 through 6. Further, the Respondent stated that GIR 6 provides that ‘For legal purposes, the classification of goods in the subheadings of a heading shall be determined according to the terms of those subheadings and any related Subheading Notes and, mutatis mutandis, to the above Rules, on the understanding that only subheadings at the same level are comparable. For the purposes of this Rule the relative Section and Chapter Notes also apply, unless the context otherwise requires.

51. According to the Respondent the Harmonized Commodity Description and Coding System Explanatory Notes as well as the Additional Notes constitute the official interpretation of the Common External Tariff and provide the scope of each heading under EACCET. In accordance with GIRs 1, 6 and Explanatory Notes, the items are classified under 8516. 10. 00.

52. The Respondent stated that heading 8419 covers ‘Machinery, plant or laboratory equipment, whether or not electrically heated (excluding furnaces, ovens and other equipment of heading 85. 14), for the treatment of materials by a process involving a change of 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.’

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

54. The Respondent averred that Note (A) 3 to heading 8516 also classifies dual system heaters in heading 8516, in which the water is heated either electrically or by connection to a fuel heated hot water system; they are often equipped with a thermostatic control to operate them electrically only when the alternative means is insufficient.

55. According to the Respondent, the Explanatory notes to the heading 8419 state that heading machinery covered under this heading may be heated by any system (coal, oil, gas, steam, electricity, etc.) except in the case of instantaneous or storage water heaters which are classified in heading 8516 when heated electrically. The Respondent averred that, note (I) to heading 8419 concludes that the apparatus described in the note (i.e. Heating or cooling plant and machinery) is essentially used industrially, but the heading also covers non-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).

56. The Respondent emphasized that a dual-system water heater operates under both solar power and electricity. The system can operate solely on electricity or on solar energy. Without the electrical element, the system would not be effective in heating water when the solar energy is inadequate. However, the system would work without the solar component.

57. The Respondent stated that it was also guided by Article 8 and Article 12(4) of the Protocol on the Establishment of the East African Customs Union provides for the adoption and use of the Harmonized Customs Commodity Description and Coding System as the EACCET.

58. According to the Respondent, the Harmonized Systems (HS), which is the basis of HS Codes was developed and is maintained by the WCO, an independent intergovernmental organization with over 179 members and is based in Brussels, Belgium. The HS is the standard coding structure and related product descriptions used in international trade. Further, the Respondent stated that the Harmonized System (HS) is administrated by the WCO and is updated every five years. It serves as the foundation for the import and export classification systems used in the United States and by many trading partners.

59. The Respondent averred that it is alive to the fact that the Tribunal has rendered various judgments touching on the classification of a product called “dual system solar water heater” wherein it was held that HS Code 8419. 19. 00 is applicable instead of HS Code 8516. 10. 00 proposed by it.

60. The Respondent stated that the issue of classification was taken to the WCO by Kenya, as one of its members, for clarification on which body tasked with guiding customs organization on matters classification and matters customs and trade and the Harmonised System Committee of the WCO has since deliberated on the appropriate classification of the dual system heater and concurred with the Respondent’s classification under HS Code 8516. 10. 00.

61. According to the Respondent, the aforementioned amendment is now officially part of the Harmonised Systems Compendium of Classifications as the decision was affirmed through a meeting by the Harmonized Systems Committee where a delegate from Kenya in attendance, sought guidance on this classification question.

62. The Respondent averred that further to the question of classification raised above, over 10 delegates from several other countries supported the classification in heading 85. 16, which by consensus members agreed that the HS Code 8516. 10. 00 should be applied and minutes of the meeting that took place sometime in September 2022 were produced and shared.

63. The Respondent maintained that the decision of the WCO was drawn from the WCO’s website as evidence in the foot notes of the document with the ruling/decision, confirming it is indeed a legitimate document and further the same is hereby produced and annexed to the Respondent’s statement of facts to be placed on record before the Tribunal for consideration.

64. The Respondent urged the Tribunal to take cognizance and note that WCO is the overall body mandated to guide on the classification under article 7 of the International Convention on the Harmonised Commodity Description and Coding System (HS Convention). The Respondent stated that it is bound to apply the decisions of the Harmonised System Committee of the WCO by virtue of Article 2(6) of the Constitution since it forms part of the Laws of Kenya.

65. The Respondent prayed for the Tribunal to take cognizance of the fact that this matter before it, is unique and different from the previous ones that it has pronounced itself on, as in this matter the review decision was issued by the Respondent on 3rd January 2024 classifying the solar water heaters under HS Code 8516. 10. 00 after the new WCO ruling had come into effect on 15th June 2023.

66. The Respondent submitted its decision of 3rd January 2024 came after the new decision of the Harmonised System Committee of the WCO that came into effect on 1st June 2023. The Respondent also stated that in light of the new developments and the uniqueness of this matter urged this Tribunal to recognise that is different from the previous ones the Tribunal has ruled on.

67. According to the Respondent the decision is directly relevant to the issue at hand as it offers critical guidance on the classification of dual solar water heaters. Particularly, page XVI/67 provides as follows:“i.Dual system water heater for domestic use, which can be operated by solar power or electricity or both. The product has a solar panel with a collector, a pump and a hot water storage tank. When presented, the product contains all the electrical components except copper coil needed for auxiliary electric heating element to function.”

68. The Respondent emphasized that the item in question is specified to be a dual system solar water heater that could be operated by both solar power and electricity. The system is designed to heat water and circulate the heated water to showers of faucets in homes.

69. According to the Respondent, the question was whether the solar water heaters with the provisions of electric heating element are classifiable under EACCET 2017 HS Code 8516. 10. 00 as suggested or HS Code 8419. 19. 00 as was declared. The basis of the decision on the tariff classification is the EACCET, 2022 EACCET Explanatory notes and the item as presented at the time of importation.

70. The Respondent also stated that it has moved to the High Court to challenge and have the decision of the Tribunal on these solar water heater matters reversed and that in view of the foregoing, and as guided by the GIR 1 of the Harmonized System, the Respondent maintained that a complete dual-system solar water heater with a provision of an electric heating element; whether presented with the electric heating element or not at the time of importation, is considered classifiable in EACCET 2017 HS Code 8516. 10. 00.

71. The Respondent relied on 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 29 January 1988. The entry into force of the convention came into effect in Kenya on 15th January 1989. ”

72. The Respondent maintained that the Appellant’s imported solar water heating systems are classifiable under Chapter 85 of the EACCET which is derived from the International Convention on the Harmonized Commodity Description and Coding System to which Kenya is a signatory. The Respondents averred that the WCO did not change the classification but rather affirmed the its position.

73. According to the Respondent, section 235 and 236 of EACCMA gives it powers to call for documents and conduct a Post Clearance Audit on the import and export operations of a taxpayer within a period of five years from the date of importation or exportation. Where the Post Clearance Audit reveals that taxes were short levied, or erroneously refunded, section 135 and 249(1) of EACCMA empowers it to recover any such amount short levied or erroneously refunded with interest at a rate of two percent per month for the period the taxes remain unpaid.

74. The Respondent cited section 229 of EACCMA which provides for application for review by any person affected by the decision or omission of the Commissioner on matters relating to Customs and provides the legal timelines to be observed.

75. In further opposition of the Appeal, the Respondent in its submissions identified the following issues for determination:a.Whether the Tribunal is bound by WCO rulingsb.Whether the Respondent erred in classifying the Solar Heating Systems under tariff code 8516. 10. 00 instead of tariff code 8419. 19. 00.

76. The Tribunal notes that the contents of the Respondent’s written submissions are the same as those of its statement of facts. Therefore, the Tribunal summarises the Respondent’s submissions as hereunder.

a. Whether the Tribunal is bound by WCO rulings 77. The Respondent submitted that it is alive to the fact that the Tribunal has rendered various judgments touching on the classification of a product called “dual system solar water heater” wherein it was held that HS Code 8419. 19. 00 is applicable instead of HS Code 8516. 10. 00 proposed by the it. However, the Respondent urged the Tribunal to take cognizance and note that WCO is the overall body mandated to guide on the classification under Article 7 of the International Convention on the Harmonised Commodity Description and Coding System (HS Convention) therefore, the Respondent is bound to apply the decisions of the Harmonised System Committee of the WCO by virtue of Article 2(6) of the Constitution since it forms part of the Laws of Kenya.

78. The Respondent submitted that in light of the new developments and the uniqueness of this matter that is different from the previous ones the Tribunal has ruled on, the Tribunal ought to invite itself to consider keenly this case on its own merits and treat it as differently as it is to avoid a miscarriage of the law.

b. Whether the Respondent erred in classifying the Solar Heating Systems under tariff code 8516. 10. 00 instead of tariff code 8419. 19. 00. 79. The Respondent maintained that the item in question is specified to be a dual-system solar water heater that could be operated by both solar power and electricity. The system is designed to heat water and circulate the heated water to showers of faucets in homes. It submitted that the item is classifiable under HS Code 8516. 10. 00 as suggested and not under HS Code 8419. 19. 00 as was declared.

80. In urging the Tribunal to apply HS Code 8516. 10. 00 as ruled by the WCO, the Respondent relied on the case of Beta Healthcare International Ltd v Commissioner of Customs Services [2010] eKLR where the court held that 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. ” The Respondent submitted that the pronouncement of WCO are binding in Kenya by virtue of Article 2(6) of the Constitution since the convention under which WCO derives its mandate forms part of the Laws of Kenya

81. The Respondent relied on Powermax Solar Solutions v Commissioner of Customs and Border Control (Tax Appeal 681 of 2022) [2023] KETAT 523 (KLR) where the Tribunal at paragraphs 87 to 94 acknowledged that the Respondent’s classification was also applicable in that particular case under heading 8516 but went on to distinguish by looking into the components of the imported solar water heater by the Appellant and thus agreed with the Appellant.

Respondent’s Prayers 82. The Respondent made the following prayers:a.That the Tribunal be pleased to admit the decision of the Harmonised System Committee of the WCO and the subsequent amendments to the Harmonised System Compendium of Classification Opinions discussed in the 71st session conducted in March 2023 and the decision that came into effect on 15th June 2023;b.That the Tribunal do find that the Respondent correctly classified the item under HS Code 8516. 10. 00 in line with the decision on (a) above;c.That the Tribunal be pleased to uphold the Respondent’s decision to charge tax amounting to Kshs. 8,178,712. 70 being extra taxes computed, as due and payable (Import Duty and VAT); andd.That the Tribunal dismisses the Appeal with costs to the Respondent for want of merit.

Issues for determination 83. The Tribunal having considered the parties pleadings, documents and written submissions puts forth the following two issues for determination:a.Whether the Tribunal is bound by the WCO Ruling dated 3rd November 2021. b.Whether the Respondent erred in re-classifying the Solar Heating Systems under tariff code 8516. 10. 00.

Analysis and Findings 84. The Tribunal will proceed to analyse the issues as hereinunder:

a. Whether the Tribunal is bound by the WCO Ruling dated 3rd November 2021. 85. The dispute arose when on 3rd November 2021, the Respondent’s Policy and International Affairs Division received a WCO Advisory opinion on the classification of dual system water heaters wherein the WCO classified the products under tariff 8516. 10. 00 based on the application of GIR 1 and WCO Explanatory Notes. The Respondent in its pleadings and submissions urged the Tribunal to depart from past judgments that it has made concerning the classification of the product in issue. The Appellant also alleged that had appealed against the Judgments of the Tribunal on this issue.

86. The Tribunal notes the assertions of the Respondent that it is bound to apply the decisions of the Harmonised System Committee of the WCO by virtue of Article 2(6) of the Constitution since it forms part of the Laws of Kenya. The said Article provides as follows:“Any treaty or convention ratified by Kenya shall form part of the laws of Kenya under this Constitution.”

87. The Tribunal examined the provisions of the International Convention on the Harmonised Commodity Description and Coding System (the Convention) with respect to the mandate of Harmonized System Committee (the Committee). Pursuant to Article 7 of the Convention, the mandate of the Committee includes proposing amendments to the Convention, preparing Explanatory Notes, Classification Opinions or other advice as guides to the interpretation of the Harmonized System, preparing recommendations to secure uniformity in the interpretation and application of the Harmonized System; furnishing information or guidance on any matters concerning the classification of goods in the Harmonized System among other roles.

88. The Tribunal notes that a broad interpretation of the provisions of the Convention would leads one to conclude that the Committee does not issue decisions but issues recommendations and advisory opinions. The Respondent obtained such an advisory from the said Committee. The Respondent argued that the advisories issued by the said Committee are binding on the Tribunal.

89. The role of this Tribunal is to interpret and apply the provisions of the law including international law as is in relation to the tabled facts. There is no doubt that any treaty or convention ratified by Kenya forms part of the law of Kenya pursuant to the provisions of Article 2(6) of the Constitution of Kenya. The Tribunal is of the view that a litigant would be expected to adduce evidence to support its arguments to enable the Tribunal to make its findings and decision on the same. A party that is aggrieved by the decision of the Tribunal is at liberty to lodge an appeal to the High Court pursuant to Article 165(3) (c) of the Constitution of Kenya as read in tandem with section 32 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”).

90. The Tribunal notes the Respondent’s submission that it had moved to the High Court to challenge and have the decisions of the Tribunal on similar cases on solar water heater reversed. However, the Respondent did not adduce as evidence, any Order from the High Court or decision from the High Court, reversing the Tribunal’s past decisions. The Tribunal is bound by the decisions of the High Court pursuant to the doctrine of ‘stare decisis’. This underscores the fact that in any case, a precedent is not applied blindly by the Tribunal which must examine the facts of each case brought before it and make a determination upon applying the relevant laws to those facts.

91. The Tribunal also notes the assertion of the Respondent that the Ruling of WCO dated 3rd November, 2021 was binding on the Tribunal. Upon review of the Ruling that the Respondent adduced as evidence, the Tribunal found first that it was incomplete and unsigned; Secondly, the Tribunal found that the Respondent submitted a request for an advisory concerning a dual system solar water heater for domestic use manufactured by Helios Argisol but did not mention the manufacturer of the item in issue that was to be examined by WCO. The Tribunal was therefore unable to determine whether the item that the Appellant imported was the same as the one that the Respondent submitted to WCO for an advisory and whether it was the basis fo the Ruling dated 3rd November, 2021.

92. In view of the foregoing, the Tribunal is not bound by the WCO Ruling dated 3rd November, 2021.

b. Whether the Respondent erred in re-classifying the Solar Heating Systems under tariff code 8516. 10. 00. 93. The Tribunal reiterates its decisions in Scandinavia Solar Systems Ltd v Commissioner of Customs and Border control TAT 249 of 2021 and Sollatek Electronics (K) Ltd v Commissioner of Customs and Border control TAT 142 of 2022 and TAT 135 of 2022 where the Tribunal found that solar heaters are classifiable under HS code 8419. 19. 00.

94. Accordingly, the Tribunal having found no reason to deviate from its earlier decisions finds that the Respondent erred in re-classifying the Solar Heating systems under tariff code 8516. 10. 00.

Final Decision 95. The upshot of the foregoing is that the Tribunal finds that the Appeal succeeds and proceeds to make the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s review decision dated 3rd January 2024 be and is hereby set aside.c.Each party to bear its own cost.

96. It is so Ordered.

DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF SEPTEMBER, 2024. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANGA - MEMBEROLOLCHIKE S. SPENCER - MEMBER