[2023] KETAT 257 (KLR)

Sollatek Electronics Kenya Limited v Commissioner of Customs & Border Control (Appeal 142 of 2022) [2023] KETAT 257 (KLR) (Commercial and Tax) (26 May 2023) (Judgment)

Neutral citation: [2023] KETAT 257 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Appeal 142 of 2022

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

May 26, 2023

Between

Sollatek Electronics Kenya Limited

Appellant

and

Commissioner of Customs & Border Control

Respondent

Judgment

Background 1. The Appellant is a private limited company incorporated under the Companies Act, 2015 and deals inter alia, in solar energy products.

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

3. The Respondent analyzed the Appellant's imports of solar water heaters for the year 2016 pursuant to Sections 235 and 236 of the East African Community Customs Management Act and applied the tariff for solar water heaters as 8516. 10. 00 and not 8419. 19. 00 as applied by the Appellant. Consequently, it issued a demand for taxes amounting to Kshs. 7,717,141. 17 served on the Appellant vide a letter dated 25th November, 2021.

4. The Appellant objected to the demand for taxes vide a letter dated 14th December, 2021.

5. The Respondent upon receipt of the objection issued a review decision on 12th January, 2022 confirming its demand.

6. The Appellant being dissatisfied with the review decision lodged a Notice of Appeal dated 3rd February, 2022 and filed on the 4th February, 2022.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated and filed on 11th February 2022:a.That the Respondent erred in law and fact by raising a demand of Kshs. 7,717,141. 17 arrived at by incorrectly classifying the Appellant's solar water heaters (hereinafter referred to as "the Appellant's Product") under tariff 8516. 10. 00 as opposed to the tariff code 8419. 19. 00 which solar water heaters are classifiable under.b.That the Respondent erred in law and in fact in finding that the Appellant's product fell under HS Code 8516. 10. 00, despite the fact that the product does not fit within the heading, sections, and Explanatory Notes of the previously mentioned classification.c.That the Respondent erred in law and fact in failing to appreciate that solar water heaters imported by the Appellant do not meet the threshold envisaged by tariff code 8516. 10. 00 of the East African Community Common External Tariff (EAC/CET) (Appendix A). Heading 85. 16 provides for "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 8545. d.That the Explanatory Notes further categorize the HS Code 8516. 10. 00 to include geysers, storage water heaters, dual-system heaters… electrode hot water boilers, immersion heaters and electric equipment for producing boiling water.e.That the Respondent further erred in law and fact by classifying the solar water heaters imported by the Appellant as dual-system heaters on the basis of Explanatory Note A to Heading 85. 16 (Appendix B) which reads as follows:“(A) Electric Instantaneous or. Storage Water Heaters And Immersion HeatersThis group includes:(I) Geysers in which the water is heated as it flows through.(2)Storage water heaters (whether or not of the pressure type), i.e., heat-insulated tanks with immersion heating elements. In these heaters water is heated gradually.(3)Dual-System Heaters in which the water is heated either electrically or by connection to a fuel-heated hot water system; they are often equipped with a thermostatic control to operate them electrically only when the alternative means is insufficient.”f.That the Respondent erred in law and fact by stating that a dual-system heater operates under both solar power and electricity when it is noticeably clear from the Explanatory Notes above that water in dual-system heaters is heated either electrically or by connection to a fuel-heated hot water system. It is on the basis of this flawed misinterpretation of the law that the Respondent misclassified the Appellant's product.g.That the Respondent erred in law and fact by failing to appreciate dual-system heaters do not operate under both solar and electricity as alleged by them. Dual-system heaters are in fact explicitly defined in the Explanatory Notes to Heading 85. 16 as, “system in which the water is heated either electrically or by connection to a fuel heated hot water system”.h.That the Respondent erred in law and fact by failing to appreciate that the key consideration in dual-system heaters is how the water in the storage tank is heated. The water can be heated directly by an electric powered element or through a connection to a fuel heated hot water system. It is generally accepted that fuel means materials such as coal, gas or oil that is burned to produced heat or power.i.That the Respondent erred in law and fact by failing to appreciate that the sun’s thermal energy is not named, listed, or understood to be a source of heat in a dual-system heater. It cannot be overstated that the principal heating system in a solar water heating system is the sun’s thermal energy and not electricity as alleged by the Respondent. Similarly, the Appellant's solar water heaters lack connection to a fuel heated system and as such cannot qualify under heading 85. 16 EAC/CET.j.That the Respondent erred in law and fact by failing to appreciate that the nature of the product in dispute is not a dual-system heater but rather a solar water heater with a provision of an electric element to heat the water connected to a storage tank.k.That the Respondent erred in law and fact by failing to appreciate that Heading 8419. 19. 00 (APPENDIX C) as read together with Chapter 84 Explanatory Notes (EN) provide for the most accurate classification of solar water heaters.l.That in addition EN to Heading 8419. 19. 00 (Appendix E) reads in the relevant part, "The apparatus described above is essentially used industrially, but the heading also covers nonelectric instantaneous water heaters and storage water heaters, including solar water heaters, domestic or not. If electrically heated, such appliances are excluded (heading 85. 16)."m.That the Respondent erred in fact by implying in their review decision, that in solar water heating systems incorporating an electrical heating element, the system would not be effective in heating water when the solar energy is inadequate. However, the system would work perfectly without the solar component. This inference by the Respondent is flawed and failed to consider that the solar water heating systems imported by the Appellant are solely powered by the sun’s thermal energy which gives them their essential character and ability to perform their principal function of heating water through the solar energy otherwise they would not be termed as solar water heating systems.n.That the Respondent erred in fact in failing to appreciate that the principal heating system in the solar water heaters imported by the Appellant is solar energy (suns thermal energy) and that they are not heated electrically or by connection to a fuel heated system and thus cannot be classified under heading 85. 16 of the EACCET.o.That the Respondent erred in law and fact by opting to base their decision to classify the solar water heaters as dual-system heaters on an alleged World Customs Organization (WCO) opinion dated 3rd November 2021 whose veracity is highly in doubt. The alleged opinion is incomplete and lacks a signature and the capacity in which the sender is allegedly proffering the opinion.p.That the Respondent breached the Appellant's right to access information in line with Article 35 of the Constitution of Kenya, by denying the Appellant access to information that is very crucial to this dispute. The said information requested by the Appellant includedi.A copy of the Kenya Revenue Authority's letter submitted to the WCO Secretariat dated 30th August 2021 requesting the Secretariat's advice on a product named "dual-system solar water heater'' and further presented their submissions to the Secretariat for consideration; andii.A complete signed copy of the WCO decision from the Secretariat dated 3rd November 2021. q.That the Respondent erred in law and fact by failing to appreciate that goods classified under Heading 84. 19 are subject to pre-export verification of conformity (PVoC) through a physical inspection by SGS as the appointed agent of Kenya Bureau of Standards. If any discrepancy with what was declared would have been found, it would have been reported and goods could have not entered the country.r.That the Respondent erred in law and fact by failing to appreciate that the Appellant's goods were subjected to two inspections, both conducted by personnel appointed by the Respondent: one at the point of origin and one at the point of entry, and neither found any discrepancy with what was declared or confusion/ error with the code applied.s.That the Respondent erred in law and fact by failing to appreciate that the Respondent through their agents and/or representatives created a legitimate expectation when its customs officers at the point of clearance verified the containers, examined the imports, sighted the solar water heating systems imported by the Appellant and established that the declared tariff code 8419. 19. 00 was correct, and at no point in time did the officers raise concerns on the classification. As a result, the Appellant relied on this legitimate expectation to its detriment.t.That the Respondent erred in law and fact by failing to appreciate the presumption of regularity providing that all official acts are done properly, and all procedures were lawfully followed. Upon verification of the containers, examination of the imports and approval by the Respondent and/ or their agents that tariff code 8419. 19. 00 was correct, the Appellant had no reason to doubt the procedure and eventually the outcome and correctness of its declaration.u.That the Respondent erred in law and fact by failing to appreciate that was there a discrepancy with regards to the tariff classification, it should have been raised in the first instance and at the point of entry upon inspection by the Respondent and/or their agents. The failure to do so is solely attributable to the Respondent and should not be held against the Appellant as he was relying on the presumption of regularity.

Appellant’s Case 8. The Appellant’s case is premised on the following documents:a.The Appellant’s Statement of Facts dated and filed on 11th February, 2022 together with the documents attached thereto and proceedings before the Tribunal.b.The Appellant’s written submissions dated and filed on 28th November 2022 together with the authorities attached thereto

9. That the Respondent erroneously assumed the Appellant's solar water heating systems have an electric heating component and are thus dual-system water heaters correctly classifiable under HS Code 8516. 10. 00 in accordance with GIR 1 and Explanatory Notes to heading 85. 16.

10. That the Respondent in its classification of the Appellant's solar water heaters as dual-system heaters, relied on an opinion allegedly proffered by the WCO. That the said opinion's veracity is highly in doubt as the alleged opinion does not bear the name of the sender or the sending authority, it lacks a signature and the capacity in which the sender is allegedly proffering the opinion.

11. That it should be noted that the WCO Secretariat has no legal mandate to issue classification opinions or other advice as guides to the interpretation of the Harmonized System. That the mandate of the Secretariat is to supply technical, logistical, and professional support to the various working bodies established by the Council, deliver capacity building, technical assistance, and training, and develop and maintain international Customs instruments and tools.

12. That it cannot be overstated that the Appellant's solar water heater cannot be a dual-system heater as it does not fall within the definition of the additional Explanatory Notes to Heading 85. 16 elaborating on dual- system heaters.

13. That had the Respondent engaged the services of any engineer or forensic expert with thermal technical knowledge, it would have confirmed that the electric elements supported by a solar water heater, assuming that they are used, would be insufficient to heat the water capacity of the tank to any acceptable temperature in a reasonable amount of time.

14. That it is also worth noting that a solar water heater relying heavily on its electric system, as alleged by the Respondent, is no longer a solar water heater and is in fact an electric heater which is an entirely different product from what the Appellant imports.

15. That further, assuming the Appellant's solar water heater had an electric system on which it relied heavily, the solar water heater would not be fit for purpose or use, as the electric component would be insufficient to adequately heat the water in a reasonable amount of time.

16. That Heading 84. 19 adequately covers the classification of 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, sterilizing, pasteurizing, steaming, drying, evaporating, vaporizing, condensing, or cooling, other than machinery or plant of a kind used for domestic purposes; instantaneous or storage water heaters, nonelectric.

17. That the World Customs Organization Explanatory Notes to Heading 84. 19 stipulate that machinery of that heading covers non-electric instantaneous or storage water heaters, including solar water heaters, domestic or not.

18. That in relation to the above, the Respondent failed to appreciate General Interpretation Rules (GIR) 4 providing those goods which cannot be sufficiently classified according to the rules, shall be classified under the heading appropriate to the goods to which they are most akin;kKinship of course depending on description, character, and purpose.

19. That solar water heaters are therefore adequately covered for and are in fact outrightly named under Heading 84. 19. That correspondingly, the Appellant's solar water heaters are most akin in description, character and purpose to those under Heading 84. 19 as opposed to Heading 85. 16 as alleged by the Respondent.

20. That to put it shortly, the Respondent's entire claim that the Appellant's solar water heaters are dual-system heaters, and as such should be classified under Heading 85. 16, hinges on an unsigned and unverified document alleging the same to be a WCO decision.

21. It is the Appellant's contention that the Respondent submitted to the WCO in bad faith, for an opinion on dual water system heaters as opposed to solar water heaters as declared by the Appellant. That consequently, the alleged decision focuses solely on dual-system heaters and not on solar water heaters.

22. That the Respondent conveniently failed to notify the Appellant of its intention to seek for an opinion from the WCO allowing for input from the Appellant who would have undoubtedly opined unto the Respondent that its request for the opinion is only dual water system heaters and does not adequately address the dispute between the Appellant and the Respondent

23. That the unverified WCO decision, on which the Respondent chose to rely, also fails to appreciate and apply the Explanatory Notes to heading 84. 19 which clearly provides that other machinery incorporating electrical heating elements shall remain in Chapter 84 even if electric.

24. That it should also not be overlooked that the Respondent erred in its reliance on an unverified WCO decision which disregarded the provisions of the Explanatory Notes. That it should be noted that the Explanatory Notes are the official interpretation of the HS Code and can only be changed by the HS Committee. That the Notes constitute the official interpretation of the Harmonized System at the international level and are an indispensable complement to the system.

25. That the Explanatory Notes provide a commentary on the scope of each heading of the EACCET and are indicative of the proper interpretation of these headings.

26. That in accordance with Article 7 of the Harmonized System Convention (Appendix 3), it is the mandate of the HS Committee to issue classification opinions or decisions as per International Convention on the Harmonized Commodity Description and Coding System.

27. That additionally, it is trite law that goods classified under Heading 84. 19 are subject to pre-export verification of conformity (PVoC) through a physical inspection by SGS as the appointed agent of Kenya Bureau of Standards. That if any discrepancy with what was declared would have been found, it would have been reported and goods could have not entered the country.

28. That should there have been a discrepancy with regards to the tariff classification, it should have been raised in the first instance and at the point of entry upon inspection by the Respondent and/or its agents. That the failure to do so is solely attributable to the Respondent and should not be held against the Appellant as it was relying on the presumption of regularity.

29. That by allowing the goods past the ports and accepting the declared tariff code by the Appellant, the Respondent is now estopped from denying the same as it was on reliance of its acceptance that the Appellant went ahead to sell the goods within the Country. That any holding contrary to declared tariff classification will lead to the detriment of the Appellant whose actions were wholly reliant on the approvals provided by the Respondent and/or its agents at the point of inspection.

30. That in response to the above, the Respondent issued the Appellant with its review decision on 12th January 2022. That from the said review decision, it is important for this Honourable Tribunal to appreciate that there are various grounds to demonstrate that the bases upon which the Respondent has issued its decision are misguided and in bad faith.

31. That the Respondent has incessantly continued to term the Appellant's solar water heaters as "dual-system heaters" throughout its letters despite the Appellant's efforts to clarify that it does not import dual-system heaters. The Appellant therefore reckons that the use of the term "dual-system heater" is intended to fit the heading the Respondent wants to classify the Appellant's products as opposed to what is actually imported by the Appellant.

32. That the Respondent has also alleged that a dual-system heater operates under both power and electricity, when it is noticeably clear from the Explanatory Notes to Heading 85. 16 that water in dual-system heaters is heated either electrically or by connection to a fuel-heated hot water system.

33. That the Respondent has further purported that, “in solar water heating systems incorporating an electrical heating element, the stem would not be effective in heating water when the solar energy is inadequate. However, the system would work perfectly without the solar component.” That this inference by the Respondent is flawed and failed to consider that the solar water heating systems imported by the Appellant are solely powered by the sun’s thermal energy which gives them their essential character and ability to perform their principal function of heating water through the solar energy otherwise they would not be termed as solar water heating systems.

34. That in regard to the WCO Secretariat Decision, the Respondent has stated that the Commissioner does not find it necessary to share the complete findings of the WCO decision as well as its letter submitted to the WCO Secretariat dated 30th August 2021, unless the Appellant has doubts on the authenticity of the decision.

35. The Appellant submitted that in as much as it does not doubt the authenticity of the decision, it is more concerned that the argument made by the WCO decision in response to the Respondent's query, may have been compromised by the wrongly formulated question; that expressly enquires about "dual-system water heaters", a term which carries implications which go beyond the nature of the goods imported by the Appellant.

36. That it is worth noting that the Respondent has termed the Appellant’s request for a copy of the Kenya Revenue Authority's letter submitted to the WCO Secretariat dated 30th August 2021 requesting the Secretariat's advice on a product named "dual-system solar water heater" and further presented its submissions to the Secretariat for consideration and a complete signed copy of the WCO decision from the Secretariat dated 3rd November 2021 as superfluous.

37. That the above request is well within the Appellant's right to access information in line with Article 35 of the Constitution of Kenya; a right which the Respondent has breached by denying the Appellant access to information that is very crucial to this dispute.

38. That the Appellant and the solar industry at large have all along, in their imports, relied on HS Code 8419. 19. 00, a code that is applied internationally. That it is also important to note that, most suppliers, when requested to export using a different HS Code other than 8419. 19. 00, are completely disregarding the request on the basis that, it would be inconsistent with HS Codes that apply to exports of solar water heaters worldwide. That the question the Appellant posed at this juncture therefore was, why would Kenya have a different classification for the same product when compared to other jurisdictions, yet we are all governed by the same principles of the World Customs Organization?

39. That in line with the illustrious words of Justice Nyamu in the case of Keroche Industries Ltd. vs. KRA & 5 Others [2007] eKLR , the Appellant would seek to highlight that the abrupt, unilateral change in tariff code by the Respondent was occasioned despite the Appellant's products not changing.

40. That the non-binding partial classification opinion, issued without authority or mandate and made based on an alleged dual system water heater, not in any way related to the Appellant nor manufactured by its supplier, cannot be the basis of a lawful reclassification. That we indeed have to bear in mind that this supposed reclassification is happening after years of importation under tariff code 84. 19, all with the approval and clearance of the Respondent at all levels, from the point of departure of the goods from the exporting Country to the importation of the goods into Kenya.

41. The Appellant submitted that the decision of the Respondent herein to tax the Appellant's goods under tariff 8516. 10. 00, despite having its goods taxed under Tariff code 8419. 19. 00 in the past, goes against the principle of legitimate expectation and against the Respondent's duty to act fairly. That allowing such acts of belligerent disregard to the provisions of the law would set a dangerous precedent for other Government bodies who would choose to act arbitrarily just as the Respondents have.

42. That the Appellant's frustrations are further aggravated by the fact that under the 2022 version of the HS Nomenclature, solar water heaters are outrightly provided for under Heading 84. I9. That this means, going forward classification will be a non-issue. That the unfortunate situation the Appellant finds itself in, is one of a demand being made for an alleged wrongful classification under Heading 84. I9, only to again continue declaring under Heading 84. 19 as prescribed by the 2022 EACCET.

43. That the Appellant relied on the cases of:a.Waweru & 3 Others (suing as officials of Kitengela Bar Owners Association) & Another vs. National Assembly and 2 Others; Institute of Certified Public Accountants of Kenya (ICPAK) & 2 Others (Interested parties) (Constitutional Petition E005 & E001 (Consolidated) of 2021 [2021] KEHC 58 (KLR).b.Commissioner of Income Tax vs. Westmont Power (K) Ltd Nairobi High Court Income Tax Appeal No. 626 of 2002. c.Keroche Industries Ltd. vs. KRA & 5 Others [2007] eKLR.d.Stanbic Bank Ltd vs. Kenya Revenue Authority [2009] eKLR.e.Ecobank Kenya Limited vs. Commissioner of Domestic Taxes [2012] eKLR.f.Law Society of Kenya vs. Kenya revenue Authority & Another [2017] eKLRg.Republic vs. Commissioner of Domestic Taxes Large Taxpayers Office Ex-Parte Barclays Bank of Kenya Ltd [2012] eKLR.h.McFoy vs. United Africa Co. Ltd [1961] 3 AII E.R. 1169i.Chief Land Registrar & 4 Others vs. Nathan Tirop Koech & 4 Others [2018] eKLR.j.Kibos Distillers Limited vs. Benson Ambuti Adega & 3 Others [2020] eKLR.

Appellant’s Prayers 44. The Appellant prays that the Honourable Tribunal grants the following prayers:-a.That this Appeal be allowed.b.That the Respondent's demand notice dated 25th November 2021 and subsequent review decision dated 12th January 2022 be set aside.c.That the Appellant's declaration of its solar water heaters under tariff classification 8419. 19. 00 be allowed to stand.d.That the Respondent be restrained from taking any enforcement mechanisms with respect to the demand for taxes in the years of contention pending the determination of this matter

Respondent’s Case 45. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:-a.The Respondent’s Statement of Facts dated and filed on 7th March 2022 together with the documents attached thereto.b.The Respondent’s written submissions dated and filed on 19th October 2022 together with the legal authorities filed therewith.

46. The Respondent submitted that the issues for determination in this dispute are as follows:a.Whether the Respondent erred in value uplift and transaction value applied?b.Whether the Respondent took into consideration all additional information availed before making the decision?c.Whether the assessments issued were excessive based on transaction value appliedd.Whether the Respondent issued the assessments in breach of Section 122 read together with the Fourth Schedule to the East African Customs Management Act 2004

47. The Respondent submits that the assessments were correctly issued and conform to the Custom tax laws and the onus of proof in tax objections is on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different objection decision. That the documents and literature provided did not provide any additional information which would have led to the change in tariff.

48. The Respondent submitted that the Appellant did not provide any evidence that would have altered the tax assessment based on the transaction value used. That the law places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different transaction value. That classification of goods for levying customs duty is governed by the International Convention on Harmonized Commodity Description and Coding system or Harmonized System, which is vital in keeping statistics worldwide.

49. The Respondent further submitted that the taxpayer had filed all necessary entries and declared the solar water heaters using an erroneous transaction value which it assessed itself. The Respondent found that the values as declared by importers including the Appellant were too low and were not a true reflection of the correct transaction value for the imports. The Respondent submitted that the transaction value applied was lawful and justified under the Section 122(4) of the East Africa Community Customs Management Act (EACCMA). That the Section provides as follows:-“Nothing in the Fourth Schedule shall be construed as restricting or calling into question the rights of the proper officer to satisfy himself or herself as to the truth or accuracy of any statement, document or declaration presented for customs valuation purposes.”

50. The Respondent insisted that it was keen to ensure that the imports were valued correctly and at a more standard rate where necessary. That the Section provides that:“A person directly affected by the decision or omission of the Commissioner or any other officer on any matter relating to customs shall within thirty days of the date of the decision or omission is lodge an application/or the review of that decision or omission.”

51. That in addition, the Respondent submitted that the transactional value method as proposed by the Appellant was not justified as there were no documents given to back up its position. That further to that, there were discrepancies of the value as declared by the Appellant and values as charged, the Respondent was therefore unconvinced by the documents produced by the Appellant forcing it to change the valuation method.

52. The Respondent submitted that the Commissioner issues private rulings as per the provisions of Section 248(A) of EACCMA and are only binding to the Commissioner for a period of one year. Further, that there is a disclaimer on the tariff rulings that the classification is based on the nature of imports and material information and do not absolve the importer from any liability that may arise at the time of importation. That accordingly, the private rulings issued do not create a legitimate expectation on the Appellant.

53. That Sections 248 and 249 of the EACCMA provide as follows:“248(1)Goods imported into a Partner State and are still under Customs control, may be:(a)re-exported from a Partner State;(b)destroyed;(c)abandoned.249. Where an amount of duty or other sum of money which is due under this Act remains unpaid after the date upon which it is payable, an interest of two per cent per month or part of the month, of the unpaid amount shall be charged.”

54. The Respondent submitted that it is not restricted by law to accept the documents of the Appellant or any taxpayer as provided by Section 122(4) of the EACCMA. That the Respondent is allowed to depart from the transactional value method where there is doubt for which reason the EACCMA provides other valuation methods to be used where the Transactional Value method fails. That the Respondent guided by the law followed the method permissible in law and found that the value of the imports as given by the Appellant was much lower than the actual value and the same was increased to the value as charged on other importers, an act which the law allows for.

55. The Respondent averred that it strictly adhered to the General Interpretative Rules (GIR) while classifying the goods, Explanatory Notes excerpt and WCO tariff advisory which places the solar water heaters under tariff code 85. 16. That further to that, the Respondent asserted that it demanded the tax on the short-levied import duty and resultant Value Added Tax as per the provisions of Section 249(1) of EACCMA, having subjected the product for analysis and determined that the same was properly classifiable under tariff heading 85. 16.

56. That Section 235 of the EACCMA provides as follows:“(1)The proper officer may, within five years of the date of importation, exportation or transfer or manufacture of any goods, require the owner of the goods or any person who is in possession of any documents relating to the goods­(a)to produce all books, records and documents relating in any way to the goods; and(b)to answer any question in relation to the goods;”

57. The Respondent submitted that Section 135 of EACCMA empowers the Respondent to bring to charge a short levy. That the Section provides as follows:“(1)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 01· erroneously refunded, as the case may be, were liable.(2)Where a demand is made for any amount pursuant to sub-section (1), the amount shall be deemed to be due from the person liable to pay it on the date on which the demand note is served upon him or her, and if payment is not made within thirty days of the date of such service, or such further period as the Commissioner may allow, a further duty of a sum equal to five pe1·cent of the amount demanded shall be due and payable by that person by way of a penalty and a subsequent penalty of two percent for each month in which he or she defaults.(3)The proper officer shall not . make any demand after five years from the date of the short levy or erroneous refund, as the case may be, unless the short levy or erroneous refund had been caused by fraud on the part of the person who should have paid the amount short levied or to whom the refund was erroneously made, as the case may be.”

58. The Respondent insisted that the Appellant was uncooperative in the provision of records and failed to respond to request of documents hence the Respondent’s actions were necessary in order to harmonize the valuation of goods and do away with undervaluation that led to attracting lower duty than others even where the goods imported were identical or similar.

59. The Respondent submitted that the Tribunal should be guided by the following considerations;a.Were any documents provided to justify the Appellant's objection?b.Was the transaction value applied by the Appellant correct per the laws?c.Were any transactions omitted from or incorrectly recorded in the Appellant's books of accounts /bankings?

60. Further, the Respondent prayed for the Tribunal to be guided by the following case laws:a.Cape Brandy Syndicate vs. Inland Revenue Commissioner [1921] 1 KB 64b.Africa Cash & Carry Ltd vs. Commissioner SARS(2019)ZASCA148c.TAT NO.415 OF 2018 - Rai Plywood (K) Ltd vs. Commissioner of Domestic Taxesd.Kudheiha vs. Kenya Revenue Authority and others (2014)eKLR

Respondent’s Prayers 61. The Respondent prays that:a.In view of all the above, it urges this Honourable Tribunal to uphold the transaction value applied by the Respondent and order the Appellant to pay the confirmed tax assessments issued by the Respondentb.The Appeal be dismissed for lack of merit.c.Award the Respondent the costs of the Appeal.

Issue for Determination 62. The Tribunal upon due consideration of the pleadings of the parties was of the considered view that the Appeal raises only one issue for its determination, namely:Whether the Respondent erred in law and in fact in reclassifying the Appellant’s solar water heaters from tariff code 8419. 19. 00 to tariff code 8516. 10. 00

Analysis and Determination 63. The Tribunal having ascertained the issue for determination as set out above proceeds to deal with the same as hereunder.

64. This dispute arose from a re-classification of solar water heaters by the Respondent on the basis of a WCO advisory opinion.

65. 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 legitimate expectation that the solar water heaters shall in future be imported under HS Code 8419. 19. 00 and not any other Code.

66. The Appellant further submitted that the decision by the Respondent to retrospectively apply the opinion of the WCO dated 3rd November 2021 to imports that took place many years before the same opinion was delivered was unfair. That further, this opinion’s veracity is highly in doubt and that the alleged opinion is incomplete and lacks a signature and the capacity in which the sender is allegedly proffering the opinion.

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

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

69. The Appellant also averred that Chapter 85 covers all electric machinery and equipment other than machinery and apparatus of a kind covered by Chapter 84 which remains classified there even electric. That 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. That the Appellant therefore holds the position that the solar water heaters are classifiable under heading 8419.

70. The Respondent on its part argued that its assessments were correctly issued and conform to the Customs tax laws and the onus of proof in tax objections is on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different objection decision. That the documents and literature provided did not provide any additional information which would have led to the change in tariff.

71. The Respondent submitted that the Appellant did not provide any evidence that would have altered the tax assessment based on the transaction value used. That the law places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different transaction value. That classification of goods for levying customs duty is governed by the International Convention on Harmonized Commodity Description and Coding system or Harmonized System, which is vital in keeping statistics worldwide.

72. The Respondent further submitted that the taxpayer had filed all necessary entries and declared the solar water heaters using an erroneous transaction value which the Appellant itself assessed. That the Respondent found that the values as declared by importers including the Appellant were too low and were not a true reflection of the correct transaction value for the imports. The Respondent submitted that the transaction value applied was lawful and justified under the Section 122(4) of the East Africa Community Customs Management Act (EACCMA).

73. The Respondent averred that the analysis of the products imported was communicated to the Appellant and placed the samples in HS Code 85. 16 hence the Respondent as per law confirmed the taxes demanded as per the re-classification and upon the taxpayer failing to provide further information as provided for in Section 229 of EACCMA. The Respondent further insisted that it was keen to ensure that the imports were valued correctly and at a more standard rate where necessary.

74. The Tribunal has established that the demand by the Respondent was on the basis of an application made by the Respondent to the WCO and an advisory opinion issued by the WCO which documents were neither availed to the Appellant nor to the Tribunal.

75. 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 on the basis of the WCO opinion.

76. 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.”

77. 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.

78. 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.

79. It is clear to the Tribunal that HS tariff classification codes are internationally used to facilitate global trade. The WCO in the 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 84.

80. 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.”

81. The Tribunal reiterates its decisions in similar matters, TAT 249 of 2021 - Scandinavian Solar Systems Ltd Vs. Commissioner of Customs & Border Control and TAT 135 of 2022 – Climacentro Green Tech Ltd Vs. Commissioner of Customs & Border Control, where the Tribunal found that solar water heaters are classifiable under HS Code 8419. 19. 00 during the period under review. The Tribunal has found no reason to deviate from its earlier decisions.

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

Final Decision 83. The upshot of the above is that the Tribunal finds that the Appeal as filed is merited and succeeds. The Tribunal accordingly proceeds to issue the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s review decision dated 12th January 2022 be and is hereby set aside.c.Each party to bear its own costs.

84. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 26TH DAY OF MAY, 2023………………………ERIC N. WAFULACHAIRMAN...................................CYNTHIA MAYAKAMEMBER....................GRACE MUKUHAMEMBER....................................ABRAHAM KIPROTICHMEMBERJEPHTHAH NJAGIMEMBER