[2023] KETAT 300 (KLR)

Suntech Power Limited v Commissioner of Customs & Border Control (Tax Appeal 143 of 2022) [2023] KETAT 300 (KLR) (12 May 2023) (Judgment)

Neutral citation: [2023] KETAT 300 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 143 of 2022

E.N Wafula, Chair, Edwin K. Cheluget, Rodney Odhiambo Oluoch & Robert M. Mutuma, Members

May 12, 2023

Between

Suntech Power Limited

Appellant

and

Commissioner Of Customs & Border Control

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and whose principal business activity is the supply and distribution of solar and energy related equipment.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act Cap 469 Laws of Kenya. Under Section 5(1) of the Act, 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 function under subsection (1), it is mandated to administer and enforce all provisions of the written laws as set out Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenue in accordance with those laws.

3. The Respondent conducted a Post Clearance Audit ('PCA') with respect to the Appellant’s solar water heaters ('SWHs') consignments for the period November 2016 to date.

4. Following the audit exercise, the Respondent issued a demand notice dated on November 25, 2021 of Kshs 10,207,370. 00 for additional customs duty and VAT.

5. The extra taxes were a result of the Respondent’s decision to re- classify the Appellant’s solar water heaters ('SWHs') under a Tariff Code 8516. 10. 00 instead of Tariff Code 8419. 19. 00 under which the Appellant had declared the SWHs. The latter Tariff Code was zero-rated whereas the former was subject to duty at a rate of 25%.

6. The Appellant objected to the assessment vide a letter dated 14th December 2021. In response, the Respondent rendered a review decision dated January 12, 2022 upholding its earlier decision.

7. The Appellant, dissatisfied with the review decision, filed this Appeal at the Tax Appeals Tribunal.

THE APPEAL 8. The Appellant filed its Memorandum of Appeal dated and filed on in which it raised the following grounds for appeal: -i.That the Respondent arrived at its demand by incorrectly classifying the Appellant’s SWHs under HS Code 8516. 10. 00, as opposed to HS Code 8419. 19. 00 under which SWHs are classifiable;ii.That the Respondent failed to appreciate that SWHs imported by the Appellant do not meet the threshold envisaged by Tariff Code 8516. 10. 00 of the EAC CET;iii.That the Respondent erred by basing its decision on classifying the Appellant’s SWHS as dual water heaters on the basis of an alleged WCO advisory opinion dated November 3, 2021 whose veracity is doubtful; andiv.That the Respondent failed to appreciate that the principal heating system in the Appellant’s SWHs is solar energy and they are not heated electrically or by connection to a fuel-heated system.

Appellant’s Case 9. The Appellant’s case is premised on its Statement of Facts dated and filed on February 11, 2022, the witness statement of Wanjohi Muchemi dated and filed on July 19, 2022 admitted on oath on August 25, 2022 and the Appellant’s written submissions dated September 19, 2022 and filed on September 20, 2022. The Appellant identified same issues as falling for determination and made submissions on the separate issues.

On whether the Respondent erred in re-classifying the Appellant’s SWHS under 8516. 10. 00 10. The Appellant submitted that the Respondent made an incorrect decision of re-classifying the Appellant’s SWHs under Tariff Code 8516. 10. 00 instead of Tariff Code 8419. 19. 00.

11. The Appellant further submitted that the Respondent failed to appreciate that the SWHs 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'). HS Code 8516. 10. 00 specifically covers:'Electric instantaneous or storage water heaters and immersion heaters.'

12. That the Chapter Heading under which HS Code 8516. 10. 00 falls 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. '

13. It is the Appellant’s submission that its SWHs fall under Heading 84. 19. The Explanatory Notes ('EN') to Heading 84. 19 which provide that:'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.'

14. The Appellant submitted that Respondent erred in basing its decision to re-classify the SWHs as dual water heaters on the basis of an alleged WCO advisory opinion, a document whose veracity is questionable. The said opinion is incomplete, unsigned and it is not clear in what capacity the sender is providing the opinion.

15. The Appellant also submitted that role and mandate of the WCO 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. that it has no legal duty, obligation and or mandate to issue classification opinions or advice on the interpretation of the Harmonized System.

16. The Appellant submitted that the Respondent failed to appreciate that the principal heating system in the SWHs imported by the Appellant is solar energy and that they are not heated electrically or by connection to a fuel-heated system.

On whether the Respondent’s actions have created uncertainty and ambiguity in law 17. The Appellant contended that Respondent’s unilateral decision to classify the SWHs under Heading 85. 16 creates an ambiguity and uncertainty to the taxpayer and its business. That it is a cardinal and fundamental principal of a taxation system that the tax laws of a country be certain and leave no room for ambiguity. That ideally, taxation calls for clear and simple rules and regulations that minimise disputes.

18. The Appellant referred the Tribunal to the case of Waweru & 3 others [Constitutional Petition E005 & E001 (Consolidated) of 2021] [2021] KEHC 58 (KLR) where the court held that:'The fundamental principle of rule of law as encapsulated in Article 10 of the Constitution is that the law must be certain. Certainty of the law is especially more critical in legislation that imposes taxes on members of the public.'

19. The Appellant therefore submitted that in the event that law is uncertain, indeterminate or ambiguous, then it should be interpreted in favour of the citizen or the taxpayer. That this view was upheld in the case of Commissioner of Income Tax-vs-Westmont Power (K) Ltd [Nairobi High Court Income Tax Appeal No 626 of 2002]. The High Court, while citing Inland Revenue-vs-Scottish Central Electricity Company [1931] 15 TC 761, expressed itself as follows:'Even though taxation is acceptable and even essential in democratic societies, taxation laws that have the effect of depriving citizens of their property by imposing pecuniary burdens resulting also in penal consequences must be interpreted with great caution. In this respect, it is paramount that their provisions must be express and clear so as to leave for ambiguity any ambiguity in such a law must be resolved in favour of the taxpayer and not the Public Revenue Authorities which are responsible for their implementation.'

20. The Appellant also relied on the cases of Keroche Industries Ltd-vs-KRA & 5 others [2007] eKLR and Stanbic Bank Kenya Ltd-vs-Kenya Revenue Authority [2009] eKLR where the former case it held that any ambiguity in tax law must be resolved in favour of the taxpayer and that tax should not be imposed unless the words of the taxing statute unambiguously provide so.

21. The Appellant submitted that the Respondent’s rationale for classification of the SWHs under Tariff Code 8516. 10. 00 is not based on the explicit provision of the EAC CET 2017, but rather, it is on reliance on a non-binding WCO opinion. That the Respondent has created confusion and ambiguity in the law by relying on the non-binding opinion.

22. It is also the Appellant’s opinion that the correct classification of SWHs has always been clear, the Respondent has created a landscape of great confusion and ambiguity by re-classifying the same under Tariff Code 8516. 10. 00.

23. The Appellant submitted that Tariff classifications are not only applied in Kenya, but are utilised and applied consistently across the world. That Kenya's key trading partners, including the European Union, all classify SWHs under Tariff Code 8419. 19. 00.

24. The Appellant made reference to the case of Republic v Kenya Revenue Authority ex-parte Universal Corporation Ltd [2016] eKLR which relied on the reasoning of the court in Cape Brandy Syndicate-vs-Inland Revenue Commissioner [1921] 1 KB 64, where it was held that:'In a taxing Act one has to look merely at what is clearly stated. There is no room for any intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used'

On whether legitimate expectation had been disregarded by the Respondent 25. That the principle of legitimate expectation was considered in the English case of Council of Civil Service Unions-vs-Minister for Civil Service (1995) AC 374. Lord Diplock defined the principle as follows:-'For a legitimate expectation to arise the decision must affect the other person by depriving him of same benefit or advantage which he had in the past been permitted by the decision maker to enjoy and which can legitimately expect to be permitted to continue to do until there has been committed to him some rational grounds for withdrawing it on which he has been given an opportunity to comment .'

26. The Appellant submitted that goods classified under Heading 84. 19 are subject to pre-export verification of conformity (PVOC) through a physical inspection by SGS, the appointed agent of Kenya Bureau of Standards. If any discrepancy arises between the inspection and declaration, the same is reported and the goods are not allowed entry into the Country. The Appellant submitted that its consignments were subjected to two inspections; both by personnel appointed by the Respondent and neither found any discrepancy the declaration made and or applicable code.

27. The Appellant submitted that all of its previous consignments were declared under HS Code 8419. 19. 00 which declaration was allowed by the Respondent. Having allowed the same in the past, the Respondent is now unjustly and unfairly attempting to re-classify the SWHs under a different tariff code which decision is purely motivated by revenue collection. At no point, did the Respondent’s officers raise concerns on the classification.

28. The Appellant therefore submitted that legitimate expectation had been created and refers the Tribunal to the case of Keroche Industries Limited vs Kenya Revenue Authority & 5 Others Nairobi HCMA No 743 of 2006 [2007] KLR 240where the court pronounced itself clearly on the issue of legitimate expectation in the following manner:-'legitimate expectation is based not only on ensuring that legitimate expectations by the parties are not thwarted, but on a higher public interest beneficial to all including the respondents, which is, the value or the need of holding authorities to promises and practices they have made and acted on and by so doing upholding responsible public administration. This in turn enables people affected to plan their lives with a sense of certainty, trust, reasonableness and reasonable expectation. An abrupt change as was intended in this case, targeted at a particular company or industry is certainly abuse of power.'

29. The Appellant also cited the case of Ecobank Kenya Limited-vs-Commissioner of Domestic Taxes [2012] eKLR, where the court stated as follows:'In my finding, that expectation became so legitimate, and so strongly grounded, that it established an economic right that only an express, concise, and specific waiver clearly communicated and delivered, could uproot. The Appellant and other business people have a right of certainty and predictability in the applicability of conduct, rules, policies and procedures which underlie the proper regulation of economic activities. This right necessarily militates against policies, regulations and procedures which are haphazardly resorted to by public regulatory bodies without adequate notice to those whose conduct or behaviour is to be regulated. In an environment of business, that certainty and predictability is so crucial that to deny the same amounts to a denial of an economic right. Now, when such haphazard regulation affects a citizen's income the effect will be felt well beyond the comfort or discomfort of the two parties before the court. It is an issue which a court of law must tread on carefully, and where possible, restore the rights of the appellant and to reduce, as far as possible, the cascading negative impacts on all the parties associated with that income.'

Appellant’s Prayers 30. Hence the Appellant seeks the following orders and reliefs from the Tribunal, i.e:i.That an order be granted directing the Respondent to continue classification of the Appellant’s consignments of SWHs under HS Code 8419. 19. 00 pending the hearing and determination of this Application;ii.That an order be granted prohibiting the Respondent from classifying the Appellant’s consignments of SWHs under HS Code 8516. 10. 00 pending the hearing and determination of this Application;iii.That an order be granted prohibiting the Respondent from classifying the Appellant’s consignments of SWHs under HS Code 8516. 10. 00 pending the hearing and determination of this Application;iv.That the Tribunal issue prohibitory injunctions restraining the Respondent from detaining the Applicant’s incoming and future consignments classifiable under HS Code 8419. 19. 00; andv.That the Tribunal issue prohibitory injunctions restraining the Respondent from using the World Customs Organisation ('WCO') advisory opinion dated 3rd November 2021 to enforce classification of the Appellant’s SWHs under Tariff Code 8516. 10. 00 pending the hearing and determination of this Application.

Respondent’s Case 31. The Respondent’s case is premised on its Statement of Facts dated and filed on March 11, 2022 and the witness statement of Bernard Oyucho filed on July 8, 2022 and admitted in evidence on oath on August 25, 2022 and the written submissions dated and filed on September 9, 2022.

32. In summary, the Respondent's case is premised on the following arguments:i.That the Appellant’s SWHs are dual system water heaters by virtue of containing both electrical and solar components;ii.That the SWHs with provisions of electric heating element are classifiable under HS Code 8516. 10; and not HS Code 8419. 19. 00 as per the Appellant’s Customs declaration; andiii.That the Respondent is empowered to conduct PCA by EACCMA and demand for any short-levied taxes arising discovered.

On Whether the Respondent erred by classifying the Appellant’s SWH under HS Code HS Code 8516. 10. 33. The Respondent submitted that on November 3, 2021, its Policy and International Affairs Division received a WCO advisory opinion on the classification of dual system water heaters in response to a request by the Division sent to the WCO Secretariat on August 30, 2021. That the advisory opinion classified the product under HS Code 8516. 10. 00 based on the application of GR 1 and WCO explanatory notes.

34. The Respondent submitted that it had earlier conducted a PCA on the Appellant’s water heaters, pursuant to Sections 235 and 236 of EACCMA, whereupon it had established that the systems had an electric component and hence were dual water heaters which were classifiable under HS Code 8516. 10. 00.

35. The Respondent submitted that 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 the EAC CET. In accordance with GIR and explanatory notes the items are classifiable under HS Code 8516. 10. 00.

36. The Respondent stated that since the Appellant’s products had an electric component, they were considered to be dual water heating systems which operate under both solar energy and electricity. Without the electricity component the system would not effectively heat water when solar energy is inadequate, However, that the system would work perfectly without the solar component.

37. The Respondent submitted that where the PCA exercise establishes that there was under-declaration of taxes, the Respondent is empowered to recover any amount under-declared or erroneously refunded with interest at a rate of two percent per month for the period the taxes remain unpaid pursuant to Sections 135 and 249(1) of EACCMA.

38. The Respondent submitted that failure to declare goods under the correct tariff is a breach of tax laws. Not collecting the correct taxes using a wrong tariff amounts to committing an illegality.

39. The Respondent referred to the Tribunal the case of Republic-vs-Commissioner General & Another ex-parte Awal Ltd [2008] eKLR, which was quoted in the case of Associated Battery Manufacturers Limited-vs-Commissioner of Customs Services [2020] eKLR, that where the court is faced with a dispute on product classification expressed itself as follows:'In the end I must conclude that looking at the material placed before me and the submissions tendered by learned counsels, the Respondents had the statutory duty to impose duty according to the tariff classification provided by law under the Customs and Excise Act and under the Harmonised Commodity Description and Coding System provided by the World Custom Organization explanatory notes in which Kenya is a signatory.'

40. The Respondent submitted that Sections 235 and 236 of EACCMA 2004 empowers it to call for documents and to conduct a PCA on the import and export operations of a taxpayer within a period of five years from the date of importation or exportation. That consequently, the Respondent has a statutory duty to carry out a PCA exercise on the import declarations made by taxpayers by verifying the accuracy of the entry of goods or documents and determine whether a person has made the correct Customs declarations and paid all the taxes due.

On whether legitimate expectation had been created that the Appellant’s SWHs were exempt from VAT 41. The Respondent stated that legitimate expectation does not mean than an error or illegality should be left unremedied. That the Respondent is allowed to depart from its previous decisions where there is justification for doing so.

42. The Respondent argued that change in the classification of the tariff was grounded on good reasons and based on the law, and not merely an afterthought.

43. In support of its argument, the Respondent referred to HWR Wade & CF Forsyth where the subject of legitimate expectation was addressed. At pages 449 – 450), the authors stated as follows:'It is not enough that an expectation should exist; it must in addition be legitimate. First of all, for an expectation to be legitimate it must be founded upon a promise or practice by the public authority that is said to be bound to fulfil the expectation. Second, clear statutory words, of course, override an expectation howsoever founded. Third, the notification of a relevant change of policy destroys any expectation founded upon the earlier policy.' 'An expectation whose fulfilment requires that a decision-maker should make an unlawful decision, cannot be a legitimate expectation. It is inherent in many of the decisions, and express in several, that the expectation must be within the powers of the decision-maker before any question of protection arises. There are good reasons why this should be so: an official cannot be allowed in effect to rewrite Acts of Parliament by making promises of unlawful conduct or adopting an unlawful practice.'

44. The Respondent submitted that the change of classification was based on good reasons, i.e: the WCO advisory opinion and establishing that the Appellant’s SWHs had both electrical and solar energy components were a good reason for re-classification of the Appellant’s water heaters under a different tariff. Legitimate expectation should not override the tax laws.

45. The Respondent also submitted that that prior to July 2018, Paragraph 45 of the VAT Act 2013 only exempted VAT for specialized solar equipment and accessories, including solar water heaters and deep cycle - sealed batteries which exclusively use or store solar power. That after June 30, 2018, this Paragraph was amended to only exempt specialized equipment for development and generation of solar and wind power including deep cycle batteries which use and/or store solar power.

46. The Respondent therefore submitted that dual solar water heaters did not qualify for exemption from VAT as they do not exclusively use and/or store solar power.

Issues For Determination 47. The Tribunal upon consideration of the pleadings and submissions filed by the parties was of the considered view that the following are the issues that fall for its determination:i.Whether the Respondent erred by classifying the Appellant’s SWH under HS Code 8516. 10;ii.Whether the letters from the Ministry of Energy, the National Treasury and the Respondent created a legitimate expectation that no VAT would be charged on the Appellant’s SWH; andiii.Whether the Appellant’s SWH products were subject to VAT.

Analysis And Findings Whether the Respondent erred by classifying the Appellant’s SWH under HS Code HS Code 8516. 10 48. The Appellant submitted that the Respondent erred in re-classifying the Appellant’s SWHs under HS Code 8516. 10. 00 instead of HS Code 8419. 19. 00. According to the Appellant, the Chapter Heading under which HS Code 8516. 10. 00 covers provides as follows:-'Electric instantaneous or storage water heaters and immersion heaters; electric space heating apparatus and soil heating apparatus; electro-thermic hair-dressing apparatus (for example, hair dryers, hair curlers, curling tong heaters) and hand dryers; electric smoothing irons; other electro-thermic appliances of a kind used for domestic purposes; electric heating resistors, other than those of heading 85. 45. '

49. The Appellant’s contention was that Heading 84. 19 was more appropriate for classification of the SWHs and the Explanatory Notes ('EN') to Heading 84. 19 supported this classification. The EN provide as follows:'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.'

50. The Appellant submitted that Respondent’s decision to re-classify the SWHs as dual system heaters was solely on a WCO advisory opinion, a document whose veracity is questionable.

51. On its part, the Respondent argued that the PCA exercise it conducted established that the SWHs have an electric component and are therefore dual water heaters classifiable under HS Code 8516. 10. 00. The Respondent further contended that a WCO advisory opinion dated November 3, 2021 in response to the Respondent’s request sent on August 30, 2021 had classified the product under HS Code 8516. 10. 00 based on the application of GR 1 and WCO explanatory notes.

52. The Tribunal notes that there is no dispute between the parties that water heaters which rely solely on solar energy to heat the water are classifiable under Heading 84. 19 whereas water heaters that use electricity or another fuel are classifiable under Heading 85. 16. There is also no dispute as to the identity of subject goods; that they are solar water heaters which have been modified to use electricity when solar energy is inadequate.

53. The Tribunal further notes that in the current dispute, the water heating systems are solar water heaters with heat collectors running either an active or passive system, and are also fitted with electric immersion heaters which can enable them to function as electric water heaters.

54. Under the General Rules for the Interpretation of the Harmonized System, the General Interpretative Rule 1 (GIR 1) is the foremost rule of classification. For legal purposes classification is determined by the terms of the headings, the Section or Chapter Notes where relevant, and, if necessary and allowable, the other GIRs.

55. Rule 1 of the GIRs ('GRI 1') provides that:'The titles of Sections, Chapters and sub-Chapters are provided for ease of reference only; for legal purposes, classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes and, provided such headings or Notes do not otherwise require, according to the following provisions, i.e: GR 2 to 6.

56. According to the terms of Heading 84. 19, solar water heaters are ideally non-electric equipment correctly classifiable under Heading 84. 19.

57. The solar water heaters in question are however fitted with auxiliary electric immersion heating element to enable them use electricity when solar energy is down. Explanatory Notes to Heading 84. 19 provides that:'The heading also covers non-electric instantaneous water heaters and storage water heaters, including solar water heaters, domestic or not. If electrically heated, such appliances are excluded (heading 85. 16).

58. Water heaters which use electricity are correctly classifiable under HS Code 8516. 10. 00 which provides as follows:'8516 10 00- Electric instantaneous or storage water heaters and immersion heaters.'

59. The solar water heaters with an electric immersion heating element cannot be deemed to be a dual system. Paragraph A (3) of the Explanatory Note to Heading 85. 16 identifies dual systems to be 'those in which the water is heated either electrically or by connection to a fuel-heated hot water system; they are often equipped with a thermostatic control to operate them electrically only when the alternative is insufficient'.

60. From the foregoing description, the Tribunal is inclined to believe the 'alternative means' referred to must be of a fuel source. In the instant case, the solar water heaters in question cannot be considered as fuel-heated hot water systems.

61. However, the paragraph A (5) of the Explanatory Notes to Heading 85. 16 states that: 'the Assemblies consisting of immersion heaters permanently incorporated in a tank, vat or other vessel are classified in heading 84. 19 unless they are designed for water heating only or for domestic use, in which case they remain in this heading. Solar water heaters are also classified in heading 84. 19. '

62. Based on the foregoing, the SWHs are potentially classifiable under two headings, namely 84. 19 and 85. 16. The goods can function as a solar heating system and also as electric water heaters. They have all the characters of a solar water heater and also the characteristics of an electric water heater. Rule 1 cannot be used to classify the goods because it results into two possible classifications.

63. In view of the above, it is the considered view of this Tribunal that the solar water heaters in question are a combination of the two types of heaters and therefore should be classified using Rule 2(b) which provides as follows:'Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances. Any reference to goods of a given material or substance shall be taken to include a reference to goods consisting wholly or partly of such material or substance. The classification of goods consisting of more than one material or substance shall be according to the principles of Rule 3. '

64. To choose which of the two possible codes is applicable, guidance is therefore sought from Rule 3 which provides as follows:'When by application of Rule 2 (b) or for any other reason, goods are prima facie, classifiable under two or more headings, classification shall be effected as follows:(a)The heading which provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods.(b)Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3 (a), shall be classified as if they consisted of the material or component which gives them their essential character, as far as this criterion is applicable.'

65. The water heaters cannot be classified according to Rule 3(a) because none of the two HS codes gives a more specific description of the imported goods than the other. Consequently, the goods must be classified according to Rule 3(b).

66. The question then to be asked is: 'What gives the heaters, in their imported state, their essential character'? In other words, 'what are the prominent characteristics which serve to distinguish the heaters'?

67. Based on the submissions, the essential characteristics of the water heaters in question that distinguish them are the solar collectors commonly fitted to all solar water heaters. They are offered for sale as solar water heaters and must essentially be fitted in a location where they are able to collect solar energy. They mainly function as solar water heaters and revert to electricity only when there is inadequate solar energy. The immersion heaters which is a characteristic of electric heaters forms only a small percentage of the system. Furthermore, the electric component is fitted largely to ensure compliance with the regulatory requirements.

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

69. Consequently, by dint of GIR 3(b), the subject water heaters as imported are most appropriately classifiable under Heading 84. 19.

70. The Tribunal therefore finds that the Respondent erred in re-classifying the Appellant’s SWHs under HS Code 8516. 10. 00.

Whether the letters from the Ministry of Energy, the National Treasury and the Respondent created a legitimate expectation that no VAT would be charged on the Appellant’s SWH. 71. The Appellant submitted that all of its previous consignments were declared under HS Code 8419. 19. 00 which declaration was allowed by the Respondent. That since the Respondent did not raise any concerns on the classification at the point of the consignments’ declaration and entry then legitimate expectation had been created on the part of the Appellant that its products were properly classified.

72. The Respondent on other hand argued that an error or illegality cannot be left uncorrected on account of legitimate expectation. That the Respondent is allowed to depart from its previous decisions based on a good reason and re-classification of tariffs was grounded on good reasons.

73. On the question of legitimate expectation, the Tribunal refers to the High Court’s decision in Republic-vs-Kenya Revenue Authority ex-parte M-Kopa Kenya Limited [2018] eKLR where the court held that:'The question that arises is whether the Respondent having in the past permitted the Applicant to import the said items without imposition VAT, it could suddenly make an about-turn as it were, and impose the said tax on the said items. In Attorney General of Hong Kong vs Ng Yuen Shiu [1983] 2All ER 346 the court stated that:'When a public authority has promised to follow a certain procedure, it is in the interests of good administration that it should act fairly and should implement its promise, so long as implementation does not interfere with its statutory duty'.

74. The Respondent has however insisted that its position was always clear that those items that did not deserve exemption would remain taxable. It is however clear that the Respondent’s conduct did not reflect this position. That a legitimate expectation may arise either from express stipulations or by conduct was appreciated in Keroche Industries Limited vs Kenya Revenue Authority & 5 Others Nairobi HCMA No 743 of 2006 [2007] KLR 240 where it was held that:'Legitimate expectation is based not only on ensuring that legitimate expectations by the parties are not thwarted, but on a higher public interest beneficial to all including the respondents, which is, the value or the need of holding authorities to promises and practices they have made and acted on and by so doing upholding responsible public administration. This in turn enables people affected to plan their lives with a sense of certainty, trust, reasonableness and reasonable expectation. An abrupt change as was intended in this case, targeted at a particular company or industry is certainly abuse of power. Stated simply legitimate expectation arises for example where a member of the public as a result of a promise or other conduct expects that he will be treated in one way and the public body wishes to treat him or her in a different way. Public authorities must be held to their practices and promises by the courts and the only exception is where a public authority has a sufficient overriding interest to justify a departure from what has been previously promised. In order to ascertain whether or not the respondent’s decision and the intended action is an abuse of power the court has taken a fairly broad view of the major factors such as the abruptness, arbitrariness, oppressiveness and the quantum of the amount of tax imposed retrospectively and its potential to irretrievably ruin the applicant. All these are traits of abuse of power. Thus I hold that the frustration of the applicants’ legitimate expectation based on the application of tariff amounts to abuse of power.'In this case the Respondent accepted the applicant’s past applications for exemptions and proceeded to exempt the applicant’s importation of the items in question. According to Ecobank Kenya Limited vs Commissioner of Domestic Taxes ITA No 8 of 2010 where the Judge relied on the English Case of Council of Civil Services Unions vs Minister for Civil Service 1985 AC 374:'In the English decision of Council of Civil Services Unions V Minister for Civil Service 1985 AC 374 Lord Fraser stated as follows:-‘A legitimate expectation may arise – either from an express promise given on behalf of a public authority or from the existence of a regular practice which the claimant can reasonably expect to continue.’I would add that the expectation herein is not just a legitimate expectation. It is an expectation backed by a written express waiver and a passive conduct in relation thereto for a period of twenty-five years. All this time the Respondent was aware of section 15(7) of the Income Tax Act. In my finding, that expectation became so legitimate, and so strongly grounded, that it established an economic right that only an express, concise, and specific waiver clearly communicated and delivered, could uproot.'

75. In the more recent case of Kenya Revenue Authority-vs-Export Trading Company Limited (Petition no 20 of 2020), the Supreme Court of Kenya pronounced itself as follows on the question of legitimate expectation:'53. Respectfully, we take the view that the question of whether a legitimate expectation arose is more than a factual question. It is not merely confined to whether an expectation exists in the mind of an aggrieved party, but whether viewed objectively, such expectation is in a legal sense, legitimate.

54. This is the position taken by this Court in the CCK Case where it was held that legitimate expectation would arise when a body, by representation or by past practice, has aroused an expectation that is within its power to fulfill. For an expectation to be legitimate therefore, it must be founded upon a promise or practice by a public authority that is expected to fulfill the expectation. We then went on to find the emerging principles on legitimate expectation to be that;

'a. There must be an express, clear and unambiguous promise given by a public authority;b.The expectation itself must be reasonable;c.The representation must be one which it was competent and lawful for the decision-maker to make; and(d)There cannot be a legitimate expectation against clear provisions of the law or the Constitution.'

76. The Tribunal having already determined that the Respondent erred in re-classifying the Appellant’s product then it cannot be argued that the legitimate expectation arising on account that decision would be an illegality.

77. Thus, the Appellant was justified to believe that legitimate expectation had been created by the Respondent.iii.Whether the Appellant’s SWH products were subject to VAT

78. The Appellant argued that its products were zero-rated for VAT by virtue of falling under HS Code 8419. 19. 00.

79. However, the Respondent had on its part submitted that prior to July 2018, paragraph 45 of the VAT Act 2013 only exempted VAT on 'specialized solar equipment and accessories, including solar water heaters and deep cycle batteries which exclusively use or store solar power' and that after July 2018, this paragraph was amended to only exempt 'specialized equipment for development and generation of solar and wind power including deep cycle batteries which use and/or store solar power. It was the Respondent’s contention that the Appellant’s products were dual water heaters and did not exclusively use or store solar energy.

80. The Tribunal does agree with the Appellant’s argument that its products were zero-rated by virtue of their tariff classification. However, having determined that the auxiliary electrical water heating back-up element did not alter the essential characteristics of the Appellant’s products, the Tribunal is of the view that the SWHs would still qualify for exemption under Paragraph 45 of the VAT Act prior to July 2018.

81. The Tribunal is aware that the Cabinet Secretary in the Ministry of Energy recommended the similar products in the market to the National Treasury for exemption following the introduction for recommendation by the Finance Act 2019.

82. In light of the above, the Tribunal finds that the Appellant’s imported products qualified for VAT exemption during the period under review.

Final Decision 83. The upshot of the foregoing analysis is that the Appeal is merited and the Tribunal accordingly proceeds to make the following Orders:i.The Appeal be and is hereby allowed;ii.The Respondent’s review decision dated May 19, 2021 be and is hereby set aside;iii.The Appellant’s solar water heating systems are classifiable under Heading 8419; andiv.Each party to bear its own costs.

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF MAY, 2023. ERIC N. WAFULACHAIRMANEDWIN K. CHELUGETMEMBERRODNEY O. OLUOCHMEMBERROBERT M. MUTUMAMEMBER