[2023] KETAT 129 (KLR)

Switchgear Limited v Commissioner of Customs & Border Control (Appeal 637 of 2021) [2023] KETAT 129 (KLR) (Civ) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 129 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 637 of 2021

E.N Wafula, Chair, RM Mutuma, RO Oluoch & EK Cheluget, Members

March 17, 2023

Between

Switchgear Limited

Appellant

and

Commissioner Of Customs & Border Control

Respondent

Judgment

BACKGROUND 1. The Appellant is a limited liability company and deals in manufacture and supply of electrical switchboards motor control panels among others.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. 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 Actwith 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 & 2 of the First Schedule to the Actfor the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent conducted an audit on the Appellant’s import of wall cabinet, mounted enclosure with mounting plate, entry no 2020ICD282533, which were declared under HS code 8538. 10. 00 which code was found inappropriate by the Respondent who applied HS code 9403. 20. 00.

4. On the application of the new code the Respondent issued a Tariff ruling and demanded taxes in the sum of Ksh 438,408. 00 vide a demand letter dated June 17, 2021.

5. The Appellant applied for a review of the Respondent’s application of the new tariff, vide two separate letters dated April 30, and May 12, 2021.

6. The Respondent gave its review decisions on June 17, and July 23, 2021, respectively, confirming the new applicable Tariff and the demand of the extra taxes.

7. Aggrieved by the review decisions the Appellant appealed to this Tribunal both on the classification and assessment.

The appeal 8. The Appeal is based on the Memorandum of Appeal dated and filed on October 12, 2022 and on the following grounds of appeal;a.That the Respondent erred in law and fact in classifying electrical cabinets imported by the Appellant as furniture under HS code 9403. 20. 00b.That the Respondent erred in law and fact in failing to apply the General Rules of Interpretation of harmonized system in its classification of the electrical boxes.c.That the Respondent erred in law and fact in disregarding the usage of the cabinets imported by the Appellant and by so doing classified the cabinets under a general HS code contrary to the guidelines provided by the World Customs Organisation (WCO) for HS code interpretation.a.That the Respondent’s classification lacks basis in law.b.That the Appellant stand to suffer irreparable economic loss and similar interpretation with future shipments unless the relief sought is granted.

9. The Appellant prays to the Tribunal that;a.The assessment of Kshs 438,408. 00 be vacated in its entirety;b.The Respondent and/or its agents be estopped from demanding or taking further steps to enforce recovery of the Additional Assessmentc.The Honourable Tribunal be at liberty to make such orders as it deems necessary in the circumstances.

Appellant's case 10. The Appellant’s case is premised on the Statement of Facts filed on October 12, 2021 and the written submissions dated and filed on October 18, 2022.

11. The Appellant said it imported a consignment of cabinets through Customs Entry No. 2021ICD282533 which was flagged by the Respondent for full verification.

12. It averred that the cabinets could easily be classified under two categories: HS code 8538. 10. 00 and 9403. 20. 00. That the former deals with electrical apparatus for switching or protecting electrical circuits whereas the latter is for office furniture equipment.

13. The Appellant said it classified the cabinets under 8538. 10. 00 by applying the GIR rules and in particular rule 3. Where the goods are classifiable under two headings the more specific of them should be applied.

14. That the Respondent erroneously classified the cabinets as furniture yet they were specifically manufactured for the electrical industry and the enclosing was to ensure that the metal enclosures were dust, fire and water proof to ensure that they are suitable for the use.

15. That GIR 3(b) requires that goods be classified based on the component which gives them the essential character. This character for the cabinets is determined by the use, which is clearly for mounting of electrical wiring and apparatus as stipulated under HS Code 8538. 10. 00 read with 8535.

16. That the Respondent has classified the cabinets under HS Code 9403. 20. 00 whose subheading is very general and includes classification of other metal furniture.

17. That as a result of the classification the Appellant has been forced to halt its production due to the increased cost of business as the cabinets have become expensive.

18. The Appellant in its Submissions stated that under the 2017 East Africa Community Common External Tariff (EAC CET) HS Codes, the classification of the cabinets was proper and the Respondent should not have classified the cabinets as furniture.

19. It said the Respondent relied on the basis of the wrong assumption that the cabinets had no electrical machinery mounted as imported. That the fact that the cabinets had a plate for mounting on the wall and specifically for the electrical apparatus was enough to classify the cabinets as per the Appellant’s classification.

20. That the Respondent’s ruling on the Tariff recognized that the wall mounted cabinets were for fixing of electrical apparatus such as meter boxes. That the disqualification by the Respondent of the cabinets from HS code 8538 to 9403 for the reason that it did not contain any electrical components was wrong.

21. It stated that the Respondent’s witness Mr. Benard Oyucho conceded in his testimony on September 28, 2022 that the Appellant indeed dealt with the manufacture of switchboards, distribution boards, motor control panels among others, was clear that the Respondent was aware that the cabinets were for the same purpose not as office furniture.

22. The Appellant asserted that it imported goods under tariff HS code 8538. 10. 00 Custom Entry no 2021ICD282533 and paid duty at rate of 10% and it did not import any wall mounted enclosure (cabinets) under Custom Entry 2019ICD282533 and therefore the Respondent’s demand for extra taxes vide letter dated June 17, 2021 for HS code 9403. 20. 00 is erroneous and has no basis in law.

23. It said that heading 8538 is reserved for appliances which use apparatus under heading 8535, 8536 0r 8537 which the Appellant’s imports use. That the Respondent’s objective of the classification was not to place the import on the right HS code but to enable it collect more taxes.

24. The Appellant identified four issues it considered to have fallen for determination;a.Whether the Respondent erred in law and fact in classifying electrical cabinets imported by the Appellant as furniture under HS Code 9403. 20. 00b.Whether the Respondent erred in law and fact in failing to apply the GIR of harmonized system in its classification of the electrical boxes.c.Whether the Respondent erred in law and in fact in disregarding the usage of the cabinets imported by the Appellant and by so doing classified the cabinets under a general HS code contrary to the guidelines provided by the WCO for HS Code interpretation.d.Whether the Respondents decision dated 17th June 2021 has a basis in law.The Appellant’s Prayers

25. The Appellant prays that;a.The Respondent’s assessment of Ksh438,408. 00 be vacated in entirety with costs to the Appellant.b.The Respondent and/or its agents be estopped from demanding or taking further steps to enforce recovery of the additional assessment; and the Honorable Tribunal be at liberty to make any such orders as it deems necessary in the circumstances.

The respondent’s case 26. The Respondent opposed the Appeal by filing the Statement of Facts dated November 10, 2021 and filed on November 11, 2021 and the written submissions dated 18th September 2022 and filed on October 19, 2022 together with the legal authorities filed therewith. It also had a witness, Bernard Odhiambo Oyucho, who testified on the September 28, 2022 based on his Witness Statement dated February 1, 2022.

27. The chronology of events of the Respondent rhyme with those of the Appellant. That the Appellant was flagged for classification of its imports termed as wall mounted enclosure with mounting plate under import Entry No. 2020ICD282533.

28. The items were declared under HS Code 8538. 10. 00 and upon verification, the appropriate code was recommended by the Respondent as 9403. 20. 00 vide a letter dated 29th April 2020. The Appellant applied for a review against the classification by two letters one dated 30th April 2021 and the other dated May 12, 2021.

29. That further to the application for review, the Appellant committed by placing a bank guarantee of Ksh 450,000. 00 to allow for the release of the goods. The applications were reviewed and the review decisions issued on the 17th June and the July 23, 2021, classifying the goods under Tariff HS Code 9403. 20. 00 as per 2017 EAC CET.

30. The Respondent averred that indeed it properly applied the EAC CET OF 2017 and the relevant GIRs. It stated that the HS Code 9403. 20. 00 covers metal furniture other than office furniture.

31. It stated that the cabinet is an empty one used for fitting the electric meter box when affixed on the wall or another structure. The item otherwise is an empty cabinet. It stated that for it to fall under 8538 it must have systems and parts affixed to it.

32. That its decision is supported by the WCO classification decision of the 61st Session that classified steel cabinet, treated with decorative powder coating and presented empty under HS Code 9403. 20. 00.

33. That the Respondent issued its review decision on tariff classification on May 4, 2021 clarifying the right code as 9403. 20. 00.

34. It argued that the Appellant was wrong in its classification because the Appellant failed to apply the GIRs sequentially hence wrongly applied Rule 3 thereof by reason that the items are classifiable under two headings 8538 & 9403. That the Appellant failed to appreciate the fact that the cabinets are imported empty and have to be modified to fit HS Code 8538.

35. It further argued that the classification of an item cannot be pegged on its ultimate use where modification has to be done to make it fit that Hs Code.

36. The Respondent has explained in detail how it arrived at the HS Code 9403. 20. 00 which it has applied under GIRs and the WCO rulings and compared its classification with those of other jurisdictions.

37. The Respondent has identified one issue for determination, which is;“whether the respondent erred in the classification of the imported goods.”

38. The Respondent has relied on several authorities among them Keroche Breweries Limited Vs. Commissioner of Customs and Border Control.[2017] eKLR.

Issues for determination 39. The Tribunal having carefully considered the pleadings, submissions of both parties and the witness testimony is of the view that the following issue falls for its determination:“Whether the Respondent rightfully classified the Appellant’s goods under HS Code 9403. 20. 00 instead of HS Code 8538. 10. 00”

40. The Respondent classifies the items under HS Code 9403. 20. 00 which is under Chapter 94 EAC CET and deals with the items as here explained;“Furniture; bedding, mattresses, mattress supports, cushions and similar stuffed furnishings;luminaries and lighting fittings, not elsewhere specified or included; illuminated signs, illuminated name-plates and the like; prefabricated building”

41. The relevant Chapter Heading 9403 provides as below;94. 03 Other furniture and parts thereof.9403. 10. 00 - Metal furniture of a kind used in offices 9403. 20. 00 - Other metal furniture

42. Whereas the Appellant classified the items under HS Code 8538. 10. 00 which is under Chapter 85 and deals with the items explained as below;“Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles”

43. The relevant Chapter Heading 8538 provides as follows;85. 38 Parts suitable for use solely or principally with the apparatus of heading 85. 35, 85. 36 or 85. 37. 8538. 10. 00 - Boards, panels, consoles, desks, cabinets and other bases for the goods of heading 85. 37, not equipped with their apparatus.8538. 90. 00 - Other

44. Heading 85. 35, 85. 36 and 85. 37 deals with the items as listed below.

45. Electrical apparatus for switching or protecting electrical circuits, or for making connections to or in electrical circuits (for example, switches, fuses, lightning arresters, voltage limiters, surge suppressors, plugs and other connectors, junction boxes), for a voltage exceeding 1,000 volts.

46. Electrical apparatus for switching or protecting electrical circuits, or for making connections to or in electrical circuits (for example, switches, relays, fuses, surge suppressors, plugs, sockets, lamp-holders and other connectors, junction boxes), for a voltage not exceeding 1,000 volts; connectors for optical fibres, optical fibre bundles or cables.

47. Boards, panels, consoles, desks, cabinets and other bases, equipped with two or more apparatus of heading 85. 35 or 85. 36, for electric control or the distribution of electricity, including those incorporating instruments or apparatus of Chapter 90, and numerical control apparatus, other than switching apparatus of heading 85. 17.

48. As a general rule of application of the HS Code classification is guided by the WCO and the GIRs based on EAC CET 2017. The GIRs are to be applied sequentially and where the earlier rule does not apply the next should be applied as they follow one another.

49. Rule 1 provides in part;-“…for legal purposes, classification shall be determined according to the terms of the heading and any relative Section or Chapter notes….”

50. Rule 3(a) provides in part;-“…the heading which provides the most specific description shall be preferred to the heading providing a more general description…”

51. From the foregoing, the Appellant’s goods were well described as wall mounted enclosure (cabinet) used for fixing electrical devices. This electrical devises as stated by the Respondent’s witness and as averred by the Appellant are the ones clearly stated in the Chapter 85.

52. As is clear from the two Chapters and the subsequent Chapter notes the Appellant’s imported goods clearly fit more specifically under HS Code 8538. 10. 00 than HS Code 9403. 20. 00 preferred by the Respondent.

53. The Tribunal therefore finds that the Respondent erred in classifying the Appellant’s goods under HS Code 9403. 20. 00 instead of HS Code 8538. 10. 00

Final decision 54. The upshot of the foregoing is that the Appeal is meritorious and the Tribunal proceeds to make the following Orders;i.The Appeal be and is hereby allowed.ii.The Respondent’s review decisions dated 17th June and July 23, 2021 be and are hereby set aside.iii.Each party to bear its own costs.

55. Orders accordingly.

DATED and DELIVERED at NAIROBI this 17th day of March 2023. …………………………… ERIC N. WAFULA CHAIRMAN……………………….. ………………………….ROBERT M. MUTUMA RODNEY O. OLUOCH MEMBER MEMBER….………..…………… EDWIN K CHELUGET MEMBERJUDGMENT- TAT NO. 637 OF 2022 SWITCHGEAR LIMITED -VERSUS- COMMISSIONER OF CUSTOMS & BORDER CONTROLPage | 1