[2023] KETAT 266 (KLR)

Unity Homes Limited v Commissioner of Customs & Border Control (Appeal 404 of 2022) [2023] KETAT 266 (KLR) (12 May 2023) (Judgment)

Neutral citation: [2023] KETAT 266 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 404 of 2022

RM Mutuma, Chair, D.K Ngala, EN Njeru, EK Cheluget & RO Oluoch, Members

May 12, 2023

Between

Unity Homes Limited

Appellant

and

Commissioner of Customs & Border Control

Respondent

Judgment

1. The Appellant is a private limited Company incorporated in Kenya. Its principle activity is the development of residential property.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act Cap 469 Laws of Kenya, the Kenya Revenue Authority is with the mandate of assessment, receipt and accounting for all government tax revenue, and the administration and enforcement of all laws set out in the First Schedule to the Kenya Revenue Authority Act.

3. The Respondent conducted a desk audit of the Appellant’s imports of solar water heaters for the period January 2017 to October 2020 and vide a letter dated 17th January 2022 issued a demand notice of Kshs 882,306. 36 inclusive of interest being additional import duty and VAT. This arose out of the Respondent’s re-classification of the Appellant’s product from HS Code 8419. 19. 00 to HS Code 8516. 10. 00. HS Code 8419. 19. 00 which the Appellant had applied attracts 0% import duty and 0% VAT, whereas HS Code 8516. 10. 00 preferred by the Respondent attracts 25% import duty and 16% VAT.

4. The Appellant wrote to the Respondent on 16th February, 2022 objecting to the reclassification under HS Code 8516. 10. 00 and further requested the Respondent to review its decision.

5. The Respondent reviewed the application and issued its review decision through its letter dated 28th February, 2022 confirming the demand for Kshs 882, 306. 36. This amount was inclusive of import duty of Kshs 246,234. 19, VAT of Kshs 196,987. 35 and interest of Kshs 439,084. 81.

6. Aggrieved by the review decision, the Appellant lodged with the Tribunal its Notice of Appeal dated and filed on 11th April, 2022.

The Appeal 7. In its Memorandum of Appeal and Statement of Facts dated and filed on 20th April, 2022, the Appellant stated the following as its grounds of appeal: -a.That the Respondent erred in law and fact by raising a demand of Kshs 882,306. 36 arrived at by incorrectly classifying the Appellant’s solar water heaters (hereinafter referred to as “the Appellant’s Product) under tariff code 8516. 10. 00 as opposed to the tariff code 8419. 19. 00 which solar water heaters are classified under.b.That the Respondent erred in law and fact in finding that the Appellant’s products fall under HS Code 8516. 10. 00, despite the fact that the product does not fit within the Heading, Sections and Explanatory Notes of that headingc.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).d.That the Explanatory Notes further categorize tariff 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 which reads as follows: -“(a)electric Instantaneous or Storage Water Heaters andImmersion HeatersThis group includes: -i.Geysers in which the water is heated as it flows through.ii.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.iii.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 electronically 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 electronically when it is noticeably clear from the Explanatory Notes above that the water in dual-system heaters is heated either electronically 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. 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 the mechanism in which 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 produce 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 tariff heading 8419. 19. 00 as read together with Chapter 84 Explanatory Notes provide for the most accurate classification of solar water heaters.l.That in addition, the Explanatory Notes Heading 8419. 19. 00 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 and law 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 (sun’s 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 EAC/CET.o.That the Respondent erred in law and fact by opting to base their decision to classify the solar heater as Dual-System Heater on an alleged World Customs Organization (WCO) opinion dated 3rd November 2021 whose veracity is highly in doubt. The alleged opinion is incomplete and lack a signature and the capacity in which the gender 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 2010 by denying the Appellant access to information that is very crucial to this dispute. The said information requested by the Appellant included:i.A copy of the Kenya Revenue Authority letter submitted to 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 not have entered the county.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 nor confusion/error with the code applied.s.That the Respondent erred in law and fact by failing to appreciate that the Respondent, through its 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 is approved 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 had there been a discrepancy with regard 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.1. Wherefore the Appellant prays that: -a.This Appeal be allowed.b.The Respondent’s demand notice dated 17th January 2022 and subsequent review decision dated 28th February, 2022 be set aside.c.The Appellant’s declaration of its solar water heaters under tariff classification 8419. 19. 00 be allowed to stand.d.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.

The Respondent’s Case 8. In its Statement of Facts dated and filed on 17th May, 2022 the Respondent has responded to the Appellant’s grounds of Appeal and averred:-a.That prior to July 2018, Paragraph 45 of the VAT Act, 2013 exempted VAT for specialized solar equipment and accessories including solar water heaters and deep cycle sealed batteries which exclusively use or store solar power. However dual solar water heaters, were not exempt from VAT because they do not exclusively use and/ or store solar power and that the solar heating system in dispute is for use by both solar and electricity and was classified accordingly under tariff code 8516. 10. 00 according to the East Africa Common External Tariff (EAC CET).b.That Article 8 and Article 12 (4) of the Protocol on the Establishment of the East African Customs Union provides for the adoption and use of the Harmonized Customs Commodity Description and Coding System as Common External Tariff. Further that the General Interpretation Rules (GIR) as cited in the EAC/CET govern classification of goods and that according to GIR 1 classification shall be determined according to the terms of the heading and any relative section of chapter notes, provided the heading notes do not require otherwise, according to GIR 2 through 6. c.That GIR 6 provides that:-“For legal purposes, the classification of goods in the subheading of a heading shall be determined according to the terms of those subheadings and any related subheading Notes and Mutatis Mutandis, to the above Rules, on the understanding that only subheadings at the same level are comparable. Further that for purposes of this Rules the relative Section and Chapter Notes also apply, unless the context otherwise requires.”d.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 GIRs 1 - 6 and Explanatory Notes, the items are classified under 8516. 10. 00. e.That Heading 85. 16 covers electric instantaneous or storage water heaters and immersion heaters, electric space heating apparatus and soil heating apparatus, electro-thermic hair-dressing apparatus (for example hair dryers, curlers, curling tong heaters) and hand dryers, electric smoothing irons, other electro-thermic appliances of a kind used for domestic purposes, electric heating registers other than those of heading 85. 45. f.That Heading 84. 19 covers:-“Machinery plant or laboratory equipment, whether or not electronically 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, non-electric”.g.That Note (A) 3 to heading 85. 16 also classifies dual system heaters in heading 85. 16, 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.h.That Note 5 to Heading 85. 16 also indicates that assemblies consisting of immersion heaters permanently incorporated in a tank, Vat or other vessels are classified in Heading 84. 19 unless they are designed for water heating only or for domestic use, in which they remain in heading 85. 16. i.That Explanatory notes to the heading 84. 19 state that machinery covered under this heading may be heated by any system (coal, oil, gas, steam, electricity etc.) except in the case of instantaneous or storage water heaters which are classified in heading 85. 16 when heated electrically.j.That Note (1) to heading 84. 19 concludes that the apparatus described in the note (i.e. heating or cooling plant machinery) is essentially used industrially, but the heating 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)k.That the Appellant’s product has an electric component and therefore considered dual water heating systems. A dual system water heater operates under both solar power and electricity. The system can operate solely on electricity or on solar energy. Without the electrical element, the system would not be effective in heating water when the solar energy is inadequate. However, the system would work perfectly without the solar component.l.That Sections 235 and 236 gives the Respondent powers to call for documents and conduct a Post Clearance Audit (PCA) on the import and export operations of a taxpayer within a period of five years from the date of importation or exportation.m.That where the Respondent’s post clearance audit reveals that taxes are short levied, or erroneously refunded, Sections 135 and 249 (1) of EACCMA empowers the Respondent to recover any such amounts short levied or erroneously refunded with interest at a rate of two percent per month for the period the taxes remain unpaid.n.That the Appellant did not produce any material evidence to support the argument that the products under the audit were classifiable under CET heading 84. 19. 1.The Respondent prays that:-a.This Appeal be dismissed.b.The assessment of additional duty of Kshs 882,306. 36 is upheld.

Submissions of The Parties 9. In its Written Submissions dated and filed on 15th November, 2022 the Appellant has raised five issues for determination.

a. Whether the Appellant’s solar water heaters are Dual-System Heaters as alleged by the Respondent. 10. The Appellant submitted that the Respondent’s assertions of a solar water heating system operating solely on electricity, without the need for the solar component is highly misconstrued and misleading and is only posed in an attempt to erroneously deem the system as a dual system heater. Further that globally solar water heaters are classified under HS 8419. 19. 00 even where the same come with the electric components installed.

11. The Appellant has relied on the ruling of Robert B. Swierupski, the Director of National Commodity Specialist Division in the Department of Homeland Security, Bureau of Customs and Border Control which ruled that the proper heading of solar water heaters is to be 84. 19 and subheading is 19, regardless of whether the solar water heaters have an electric component and that fundamentally, the existence of an electric component will not change the essential nature of the solar water Heaters to dual system heater as alleged by the Respondent.

b. Whether the Respondent’s reliance on the alleged WCO opinion was justified. 12. The Appellant submitted that the WCO Secretariat who issued the opinion does not have the mandate/authority to proffer such an opinion and that its mandate is only to supply technical, logistical and professional support to various working bodies established by the Council, deliver capacity building, technical assistance, training and development and maintaining of International Customs Instruments and tools.

13. The Appellant asserted that in accordance with Article 7 of the Harmonized System Convention, only the HS Committee is mandated to issue classification opinions or decisions as per International Convention on the Harmonized Commodity Description and Coding System. Article 7 states the functions as follows: -1. “The Harmonized system committee having regard to the provisions of Article 8, shall have the following functions:a.To propose such amendments to this convention as may be considered desirable having regard, in particular, to the needs of the users and to changes in technology or in patterns of international trade,b.To prepare Explanatory Notes, classification Opinions or other advice as guides to the interpretation of the Harmonized System.”

14. The Appellant made reference to the Kenya locus classicus case of Owners of the Motor vessel “Lillian S v. Caltex Oil (Kenya) Ltd (1989) to emphasize the importance of jurisdiction and mandate:-“Jurisdiction is everything. Without it a court has no power to make one more step. Where a court has no jurisdiction there would be no basis for continuation for proceedings pending other evidence. A court of law downs its tools in respect of the matter before it the moment it holds the opinion that it is without jurisdiction……where a court takes it upon itself to exercise jurisdiction which it does not possess, its decision amounts to nothing. Jurisdiction must be acquired before judgement is given”

15. The Appellant submitted that the item submitted to the Secretariat by the Respondent for guidance was manufactured by Helios Argosol. The Appellant’s Solar Water Heaters on the other hand are not manufactured, assembled or in any way worked by the said manufacturer, Helios Argosol. Consequently, the presented item could be fundamentally different from those imported by the Appellant.

16. The Appellant averred that it sought to a copy of the Respondent’s letter submitted to WCO Secretariat dated 30th August, 2021 as per Article 35 of the Constitution of Kenya, 2010. However the Respondent declined to avail the same alleging that letters from the Secretariat remain a property of the WCO and may not be shared with third parties without the permission from the WCO. Further, that even the alleged opinion issued was incomplete, lacked a sign off, signature and the capacity proffering the opinion.

17. It was the Appellant’s assertion that issuing classification decisions is not within the scope, duty or mandate of the Secretariat and it therefore follows that decisions made without mandate/authority are void and should not be binding on this Tribunal. This is especially where a full copy of the aforementioned decision on which reliance is sought has not even been placed before the Tribunal or furnished to the Appellant against whom it is to be enforced.

18. The Appellant sought solace in the words of Lord Denning in delivering on an opinion of the Privy Council in Macfoy v United Africa Co. Ltd [1961] 3 All E.R 1169 as quoted in the case of Omega Enterprises(Kenya) Limited v. Kenya Tourist Development Corporation Limited & 2 other [1998] eKLR where he said that;-“If an act is void, then it is in law a nullity. It is not only bad, but incurably bad. There is no need for an order of the court to set it aside. It is automatically null and void without mere ado; though it is sometimes convenient to have the court declare it to be so. And every proceeding which is founded on it is also bad and incurably bad. You cannot put something on nothing and expect it to stay there. It will collapse.”

c. Whether the Respondent breached the Appellant’s right to Legitimate Expectation 19. It was the Appellant’s contention that it is not a stranger to importation of Solar Water Heaters and that in all its previous consignments it had declared solar water heaters under HS Code 8419. 19. 00. The sudden and erratic change in tariff classification of the Solar Water Heaters constitutes a fundamental breach of the Appellant’s legitimate expectation.

20. The Appellant submitted that its 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 hence any discrepancies with what was declared would have been found and the goods would not have entered the country. Further 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.

21. The Appellant averred that under the 2022 version of the HS Code Nomenclature, solar water heaters are out rightly provided for under Heading 84. 19 which has the implication that going forward classification of the product will be a non-issue.

d. Whether the Respondent’s action have created uncertainty and ambiguity in law 22. It is the Appellant’s submission that the Respondent’s unilateral decision to classify solar water heaters under HS Code 85. 16 has created ambiguity and uncertainty in the taxpayer’s application of the Harmonized Coding System, not just with the Appellant but also within the industry and the international community. The Appellant submitted further that a tax system should be certain with simple rules and regulations that minimize disputes and that in the event of ambiguity of the law which the Respondent has created, the same should be resolved and interpreted in the taxpayer’s favour.

e. Whether the Respondent breached the Presumption of Regularity 23. The Appellant explained the presumption of regularity by citing the case of Chief Land Register & 4 others vs Nathan Tirop Koech & 4 others (2018) eKLR where it was stated: -“There is a presumption that all acts done by a public official have lawfully been done and that all procedures have been dully followed. The presumption of regularity is a presumption that executive officials have properly discharged their official duties. The presumption is aptly captioned in the ancient Latin Maxim “Omnia praesumuntur rite esse acta” which roughly translated means ‘All things are presumed to have been done rightly”.

24. The Appellant submitted that upon arrival of the goods in the Country, the Respondent’s customs officers at the point of clearance, verified the containers, examined the imports, sighted the solar water heating systems and established that the declared tariff code 8419. 19. 00 was correct. That a legitimate expectation was therefore created and the Appellant should now not be punished for relying on a Government authority’s approval as per the presumption of regularity.

25. In concluding its submissions, the Appellant averred that the Respondent has not provided any reasons why HS Code 8516 is the appropriate classification for the goods in question and therefore prays that the Tribunal finds in favour of the Appellant.

26. On its part, the Respondent relied on its Written Submissions dated 14th November, 2022 and filed on the 15th November, 2022. In its defence of the case, the Respondent has submitted on one issue.

Whether the Respondent erred in classifying the Solar Heating Systems under tariff code 8516. 19. 00 27. The Respondent submitted that Sections 235 and 236 of the East African Community Customs Management (EACCMA) 2004 empower it to call for documentation and to conduct a Post Clearance Audit on the import and export operations of a taxpayer within a period of five years from the date of importation or exportation.

28. It submitted further that the rules of interpretation of tariff classification are provided for in the World Customs Organization Explanatory Notes of Harmonized Commodity Description and Coding Systems (HS Code) and that these rules are issued by the World Customs Organization to which Kenya is a signatory. The Respondent therefore urged the Tribunal to apply the interpretation provided for under the Value Added Tax Act, 2013 plus the Rules of HS Code to determine this dispute.

29. It is the Respondent’s averment that the Appellant’s solar water heating systems have an electric component and one therefore correctly classifiable under tariff code 8516. 10. 00 in accordance with the General Interpretation Rules and Explanatory Notes to Heading 8516. 10. 00 and 8419. 19. 00

30. The Respondent has relied on 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 v Commissioner of customs services [2020] eKLR where the court, 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 Respondent 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 explaining notes in which Kenya is a signatory”

31. The Respondent submitted that products classifiable under tariff code 8516. 10. 00 attract import duty at ad valorem rate of 25% and import VAT as provided under the VAT Act 2013, and that it was empowered by Section 135 of EACCMA 2004 to demand the short levied tax.

32. It is the Respondent’s submission that the item in question is a solar heater used to heat domestic water that is mounted on a roof or grid whose main source of energy is solar energy. However, electricity is a secondary and supplies power when the solar function fails as it switches to electricity when the water temperature drops between 55 degrees hence it qualifies as a dual powered system.

33. The Respondent averred that at paragraph 2. 9 of the Appellant’s Statement of Facts, the Appellant has stated that the solar water heater has an electric element supported by a solar water heater which it claims to be insufficient to heat the water. This, according to the Respondent is an admission by the Appellant that the system has an electric component.

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

35. The Respondent submitted further that Explanatory Notes to Chapter 84. 19 state that apparatus described above is essentially used industrially but the heading also covers non-electric instantaneous water heaters and storage water heaters, including solar water heaters, domestic or not and that if electrically heated, such appliances are excluded to tariff code 8516. 00.

36. It is the Respondent’s averment that goods are to be classified at the time of entry and what matters is the nature of the goods at the time of entry and that at the time of entry the Appellant’s solar water heaters had both a solar and an electric element.

37. The Respondent averred that it did not rely on the WCO Advisory opinion delivered on 3rd November, 2021 as the same was not binding and could not be used as a basis for ruling.

48. The Respondent concluded by praying that its demand notice be upheld and that this Appeal be dismissed with costs to the Respondent.

Issues for Determination 49. Having considered the pleadings, documentation availed and the submissions made, the Tribunal is of the considered view that this Appeal has established two issues for determination.a.Whether the Respondent erred in re-classifying the Appellant’s imported solar water heaters under HS Code 8516. 10. 00; andb.Whether the Respondent was justified in confirming the Assessment in its Review Decision dated 28th February 2022.

Analysis and Findings 50. The Tribunal will proceed to analyse the said issues as herein under;

a. Whether the Respondent erred in re-classifying the Appellants imported solar water heaters under HS Code 8516. 10. 001. The Tribunal observes that the bone of contention in this dispute is whether the Appellant’s product is a dual –systems solar water heater or not. The Appellant has contended that its product is a solar water heater and does not use electricity hence is classifiable at HS Code 84. 19 whereas the Respondent has stated that it is a dual system hence classifiable under Heading 85. 16. 2.The Tribunal will reproduce the notes to the two Chapter headings to be able to appreciate the wording of the headings:Heading 84:19 covers“Machinery, plant or laboratory equipment, whether or not electrically( heated excluding furnaces, ovens and other equipment of heading 85:14) for the treatment of materials by a process involving a change of temperature such as heating , cooking , roasting, distilling, rectifying , sterilising, pasteurising, steaming, drying, evaporating, vaporising, condensing or cooling, other than machinery or plant of a kind used for domestic purposes, instantaneous, or storage water heaters, non-electric.”Heading 85:16 covers“Electric instantaneous or storage water heaters and immersion heaters, electric space heating apparatus and soil heating apparatus, electro-thermic hair dressing apparatus (for example, hair dryers, hair curlers, curling tong heaters) and hand dryers; electric smoothing irons; other electro-thermic appliances of a kind used for domestic purposes; electric heating resistors, other than those of heading 85. 45. ”

51. The General Interpretative Rules (GIR) of classification offer a guide on how to classify goods. In particular, GIR 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 heading and any relative section or Chapter Notes and provided such headings or Notes do not otherwise require according to the following provisions”

52. The Notes to these two chapter headings are specific; 85. 16 uses electricity while 84. 19 are apparatus that are non-electric. The Appellant has argued that the products are described aptly under Heading 84. 19 based on its essential characteristic.

53. The Respondent has argued that the Appellant’s products are dual- system heaters hence its justification for reclassification to 85. 16. The dual-system heaters are described under the heading of “Electric Instantaneous or storage water Heaters and immersion, heaters;” which group includes geysers, storage water heaters, electrode hot water boilers and immersion heaters. The description of the dual-system heaters is given as follows;“Dual-system heaters in which the water is heated either electrically or by connection to a fuel-heated hot water system; they are often equipped with a thermostatic control to operate them electrically only when the alternative means is insufficient”

54. From the above description the dual system heaters is either heated electrically or by connection to a fuel –heated hot water system. There is no mention of solar-water heater system in the description relied on by the Respondent. Further that “fuel- heated hot water system” could be gas or other oils.

55. The Tribunal relies on the case of Commissioner of Income tax v Westmont Power (K) Ltd Nairobi High Court Income Tax Appeal No.626 of 2002 where the court while citing Inland Revenue v Scottish Central Electrically Company [1931] 15TC 761 stated 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 no room 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.”

56. It is important to note that tariff classification is done under the Harmonized Coding System to ensure that all goods in the international trade are classified uniformly and consistently according to a common international nomenclature to which the Respondent and by extension Kenya subscribes to, as Kenya is party to the World Customs Organization. The Appellant stated that it is also important to note that Kenya’s key trading partners, including but not limited to the European Union, all recognize tariff code 8419. 19. 00 as the correct tariff code for solar water heaters. That the Respondent cannot therefore unilaterally change an internationally accepted chapter for solar water heaters as this deviation by the Respondent is creating an element of ambiguity and uncertainty in the application of the law and the HS nomenclature.

57. The Tribunal observes that prior to the year 2017, the Respondent classified the solar water heaters under HS Code 8419. 19. 00 which attracts 0% duty. It is important to note that the World Customs Organisation Common External Tariff (CET) for 2022 has classified the solar water heaters under HS Code 84. 19. 12 which indicate that the Heading has not changed. The Respondent has not demonstrated to the satisfaction of the Tribunal any material change in the character of the product features to justify reclassification.

58. The Respondent, in its response to the Appellant’s review letter dated 28th February, 2022 argued that it relied on the World Customs Organizations Secretariat’s decision dated 3rd November, 2021 to reclassify the Appellant’s product. The Respondent has however not shared the application letter to the WCO for the Tribunal to appreciate that indeed the opinion sought was specific to the solar water heaters. However, it has stated in its letter to the Appellant dated 28th February, 2022 that “letters from the Secretariat remain the property of WCO and may not be shared with a third party without permission”. The Tribunal has sighted the alleged opinion of 3rd November, 2021 found at page 31 of the Appellant’s bundles. The said opinion lacks a signature and the capacity in which the sender is proffering the opinion therefore inviting doubt to the Tribunal as to its veracity. It is important to note that the WCO opinion is only persuasive but not binding. The Respondent therefore cannot use any such opinion as a basis of reclassification.

59. Section 107 of the Evidence Act as regards evidence to be relied on provides as follows:-“1)whoever desires any court to give judgement as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.2)When a person is bound to prove the existence of any fact, it is said that the burden of proof lies on that person.”

60In this instant case, the Respondent has relied on the WCO opinion dated 3rd November, 2021 yet the said letter has no ownership as to signature and name of the signatory. Further, it has not shared, with either the Appellant or the Tribunal its application to WCO dated 30th August, 2021 for the Tribunal to appreciate the facts in order to aid in the determination of the issue. In the circumstances, it would be a miscarriage of justice for the Tribunal to consider the said opinion.

61. Based on the above arguments the Tribunal finds that the Respondent erred in reclassifying the Appellant’s imported solar water heater system under HS Code 8516. 10. 00.

b. Whether the Respondent was justified in confirming the Assessment in its Review Decision dated 28th February 2022. 62. Having established that the Respondent erred in reclassifying the Appellant’s solar water heaters, it follows therefore that the said tax demand is not justified and the Tribunal will therefore not delve into the issue.

Final Decision 63. The upshot of the above is that the Appeal in merited and the Tribunal accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby allowed.b.The Respondent’s review decision dated 28th February, 2022 be and is hereby set aside.c.Each party to bear its own costs.

64. Orders accordingly.

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF MAY, 2023. ROBERT M. MUTUMACHAIRPERSONDELILAH K. NGALA ELISHAH N. NJERUMEMBER MEMBEREDWIN K. CHELUGET RODNEY O. OLUOCHMEMBER MEMBER