[2023] KETAT 292 (KLR)

Unity West Sez Limited v Commissioner, Customs & Border Control (Appeal 403 of 2022) [2023] KETAT 292 (KLR) (Civ) (2 June 2023) (Judgment)

Neutral citation: [2023] KETAT 292 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 403 of 2022

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

June 2, 2023

Between

Unity West Sez Limited

Appellant

and

Commissioner, Customs & Border Control

Respondent

Judgment

Background 1. The Appellant is a private limited Company incorporated in Kenya. Its principle activity is sale and construction of commercial, residential units and retail space.

2. The Respondent is the Principal Officer appointed under the Kenya Revenue Authority Act Cap 469 Laws of Kenya, 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 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 February 2022 whereupon it issued a demand notice of Kshs 513,143. 53 vide a letter dated 8th February 2022 re-classifying the Appellant’s product from HS Code 8419. 19. 00 to HS Code 8516. 10. 00. HS Code 8419. 19. 00 which the Appellant preferred attracts 10% 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 1st March, 2022 objecting to the reclassification under HS Code 8516. 10. 00 and further requested the Respondent to review its decision.

5. The Respondent considered the Objection and issued its review decision through its letter dated 24th March, 2022 confirming the tax demand for Kshs 513,143. 53. Aggrieved by the review decision, the Appellant filed its Notice of Appeal dated 11th April 2022.

The Appeal 6. In its Memorandum of Appeal and Statement of Facts filed on 20th April, 2022, the Appellant premised its Appeal on the following grounds of Appeal: -a.That the Respondent erred in law and fact by raising a demand of KES 513,143. 53 arrived at by incorrectly classifying that Appellant’s solar water heaters (hereinafter referred to as “ the Appellant’s Product”) under tariff 8516. 10. 00 as opposed to the tariff code 8419. 19. 00 which solar water heaters are classifiable under.b.That the Respondent erred in law and in fact in finding that the Appellant’s product fell under HS Code 8516. 10. 00, despite the fact that the product does not fit within the heading, sections, and Explanatory Notes of the previously mentioned classification.c.That the Respondent erred in law and fact in failing to appreciate that the 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).Heading 85. 16 provides for “Electric instantaneous 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. In particular HS Code 8516. 10. 00 provides for “Electric instantaneous or storage water heaters and immersion heaters.”d.That the Explanatory Notes further categorize the HS Code 8516. 10. 00 to include Geysers, storage water heaters, Dual-System Heaters, electrode hot water boilers, immersion heaters and Electric equipment for producing boiling water.e.Thatthe 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 Instantenous or Storage Water Heaters And Immersion HeaterSThis group includes:1. Geysers in which the water is heated as it flows through.2. Storage water heaters (whether or not of the pressure type), i.e. heat-insulated tanks with immersion heating elements. In these heaters water is heated gradually.3. Dual-System Heaters in which the water is heated either electrically or by connection to a fuel-heated hot water system; they are often equipped with a thermostatic control to operate them electrically only when the alternative means is insufficient.f.That the Respondent erred in law and in fact by stating that a Dual-System Heater operates under both solar power and electricity when it is noticeably clear from the Explanatory Notes above that water in Dual-System Heaters is heated either electrically or by connection to a fuel-heated hot water system. It is on the basis of this flawed misinterpretation of the law that the Respondent misclassified the Appellant’s Product.g.That the Respondent erred in law and fact by failing to appreciate Dual-System Heaters do not operate under both solar and electricity as alleged by them. Dual system Heaters are in fact explicitly defined in the Explanatory Notes to Heading 85. 16 as: “system in which the water is heated either electrically or by connection to a fuel heated hot water system”h.That the Respondent erred in law and fact by failing to appreciate that the key consideration in Dual-System Heaters is how the water in the storage tank is heated. The water can be heated directly by an electric powered element or through a connection to a fuel heated hot water system. It is generally accepted that fuel means; material 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 suns 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 solar water heating is the suns thermal energy and not electricity as alleged by the Respondent. Similarly, Appellant’s solar water heaters lack connection to a fuel heated system and as such cannot qualify under heading 85. 16 EAC/CET.j.That the Respondent erred in law and fact by failing to appreciate that the nature of the product in dispute is not a Dual-system Heater but rather a solar water heater with a provision of an electric element to heat the water connected to a storage tank.k.That the Respondent erred in law and fact by failing to appreciate that Heading 8419. 19. 00 as read together with chapter 84 Explanatory Notes (EN) provide for the most accurate classification of solar water heaters.l.That in addition Explanatory notes to 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, including solar water heaters, domestic or not. If electrically heated, such appliances are excluded (heading 85. 16).”m.That the Respondent erred in fact by implying in their Review decision, that in solar water heating systems incorporating an electrical heating element, the system would not be effective in heating water when the solar energy is inadequate. However, the system would work perfectly without the solar component. This inference by the Respondent is flawed and failed to consider that the solar water heating systems imported by the Appellant are solely powered by the suns thermal energy which gives them their essential character and ability to perform their principal function of heating water through the solar energy otherwise they would not be termed as solar water heating systems.n.That the Respondent erred in fact in failing to appreciate that the principal heating system in the solar water heaters imported by the Appellant is solar energy (suns thermal energy) and that they are not heated electrically or by connection to a fuel heated system and thus cannot be classified under heading 85. 16 of the EAC/CET.o.That the Respondent erred in law and fact by opting to base their decision to classify the solar water heaters as Dual-System Heaters on an alleged World Customs Organization (WCO) opinion dated 3rd November 2021 whose veracity is highly in doubt. The alleged opinion is incomplete and lacks a signature and the capacity in which the sender is allegedly proffering the opinion.p.That the Respondent breached the Appellant’s right to access information in line with Article 35 of the Constitution of Kenya, by denying the Appellant access to information that is very crucial to this dispute. The said information requested by the Appellant included:i.A copy of the Kenya Revenue Authority’s letter submitted to the WCO Secretariat dated 30th August 2021 requesting the Secretariat’s advice on a product named “dual-system solar water heater” and further presented their submissions to the Secretariat from consideration; andii.A complete signed copy of the WCO decision from the Secretariat dated 3rd November 2021. q.That the Respondent erred in law and fact by failing to appreciate that goods classified under heading 84. 19 are subject to pre-export verification of conformity (PVoC) through a physical inspection by SGS as the appointed agent of Kenya Bureau of Standards. If any discrepancy with what was declared would have been found, it would have been reported and goods could have not entered the Country.r.That the Respondent erred in law and fact by failing to appreciate that the Appellant’s goods were subjected to two inspections, both conducted by personnel appointed by the Respondent: one at the point of origin and one at the point of entry, and neither found any discrepancy with what was declared or confusion/error with the code applied.s.That the Respondent erred in law and fact by failing to appreciate that the Respondent through their agents and/or representatives created a legitimate expectation when its customs officers at the point of clearance verified the containers, examined the imports, sighted the solar water heating systems imported by the Appellant and established that the declared tariff code 8419. 19. 00 was correct, and at no point in time did the officers raise concerns on the classification. As a result, the Appellant relied on this legitimate expectation to its detriment.t.That the Respondent erred in law and fact by failing to appreciate the presumption of regularity providing that all official acts are done properly, and all procedures were lawfully followed. Upon verification of the containers, examination of the imports and approval by the Respondent and /or their agents that tariff code 8419. 19. 00 was correct, the Appellant had no reason to doubt the procedure and eventually the outcome and correctness of its declaration.u.That the Respondent erred in law and in fact by failing to appreciate that was there a discrepancy with regards to the tariff classification; it should have been raised in the first instance and at the point of entry upon inspection by the Respondent and/or their agents. Their failure to do so is solely attributable to the Respondent and should not be held against the Appellant as it was relying on the presumption of regularity.

7. Based on the above grounds, the Appellant’s prayer to the Tribunal was for orders that: -a.The Appeal be allowed.b.The Respondent’s demand notice dated 8th February 2022 and subsequent review decision dated 24th march 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 this matter.

Appellant’s Case 8. The Appellant further filed its Written Submissions on the 9th of November 2022 where it argued that it imported solar water heaters which are classified under HS 8419. 19. 00 and not dual system heaters as alleged by the Respondent.

9. It submitted that globally solar water heaters are classified under HS 8419. 19. 00 even where the same come with the electric components installed as was shown in the classification ruling issued by Robert B. Swierupski, the director of National Commodity Specialist Division in the Department of Homeland Security. Bureau of Customs and Border Protection.

10. The Appellant stated that the existence of an electric component will not change the essential nature of the solar water heater to dual system heaters as alleged by the Respondent.

11. The Appellant argued that heading 85. 16, under which the Respondent is valiantly trying to classify the solar water heaters, provides in the Explanatory Note A that:“(a)Electric Instantenous or Storage Water Heaters and Immersion HeatersThis group includes:1. Geysers in which the water is heated as it flows through.2. Storage water heaters (whether or not of the pressure type), i.e. heat-insinuated tanks with immersion heating elements. In these heaters water is heated gradually.3. Dual-system Heaters in which the water is heated either electronically 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.”

12. The Appellant argued that the definition and description of the system as provided by the Explanatory Notes refers to the system as a dual system heater. The use of the word dual means that it consists of two parts or elements for it to be defined as a dual system heater.

13. The Appellant submitted that the Explanatory Notes state that a dual system heater is one in which water is heated either by electricity “or” by a connection to a fuel-heated system. It argued that the use of the word “or” implies and dictates that for it to be deemed a dual system heater, the system must have the capacity to use both electricity and fuel as a means of heating the water.

14. It was contended by the Appellant that solar water heaters are heated by the sun’s thermal energy and that fuel is understood to be a material like coal, gas or oil that is burned to produce heat or power. For these reasons the Appellant asserted that Solar Water Heaters rely primarily on solar energy and therefore, its classification under the criteria of 85. 16 is not appropriate.

15. In support of this assertion the Appellant relied on the case of Republic vs. Commissioner of Domestic Taxes Large taxpayer’s office Ex Parte Barclays bank of Kenya LTD (2012) eKLR

16. The Appellant stated that the Explanatory Notes to Heading 84. 19, EAC/CET further state, in the relevant part 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.”

17. Flowing from the above argument, the Appellant argued that the correct classification of the Appellant’s solar water heaters is Heading 84. 19.

18. The Appellant posited that it had requested for a copy of the Respondent’s letter submitted to the WCO Secretariat dated 30th August 2021 requesting the Secretariat’s advice on a product named dual-system solar water heater. In response, the Respondent informed it that its request was superfluous. The Appellant further stated as follows in regard to that opinion, that:a.It was incomplete, lacked a sign off, signature and the capacity in which the sender is allegedly proffering the opinion.b.Its veracity was highly in doubt.c.It was possibly based on a subjective question about “Dual-system water heaters”.

19. It thus urged the Tribunal to ignore the WCO opinion.

20. The Appellant took the position that it had imported and cleared the water heaters for several years under heading 84:19 and therefore this practice had created for a legitimate expectation that the Solars were classifiable under heading 84:19. It supported this position with the case of Republic v Kenya Revenue Authority Ex parte Cooper K-Brands Limited (2016) eKLR and Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others Nairobi HCMA No. 743 of 2006 [2007] KLR 240 .

21. The Appellant argued that the in case of uncertainty in the law then the law should be interpreted in favour of the taxpayer as was stated in the case of Keroche Industries Ltd v KRA & 5 others [2007] eKLR.

22. The Appellant concluded by stating that the Respondent’s rationale for classification of Solar Water Heaters under tariff code 8516. 10. 00 was not based on the explicit provision of the East Africa Community External Tariff 2017 and it also relied on the non-binding opinion of the WCO.

The Respondent’s Case 23. In its Statement of Facts filed on 17th May, 2022 and Written Submissions filed on the 17th of November 2022 wherein is stated as follows, that:a.Sections 235 and 236 of the East African community Customs Management Act (EACCMA), 2004 gives the commissioner 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 and issue an additional assessment according to the information available to him and his best judgment.b.Its Policy and International Affairs Division received a WCO Advisory opinion on the 3rd November 2021 classifying the dual system water heaters products under tariff 8516. 10. 00. c.The Appellant’s products have an electric component and therefore considered dual water heating systems. They are thus classifiable under a dual-system because water heater operates under both solar power and electrically.d.The system can also operate solely on electricity or on solar energy and that the system would not be effective without the solar component.e.In accordance with GIR 1,6 and Explanatory Notes, the solar water heaters are classifiable under 8516. 10. 00 which covers electric instantaneous or storage water heaters and immersion heaters.f.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. g.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 temperatures 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.’

24. Based on the above arguments, the Respondent posited that:a.Note (A) to Heading 8516 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 thermostatic control to operate them electrically only when the alternative means is sufficient.b.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. c.Note (1) to heading 84. 19 concludes that the apparatus described in the note (i.e. Heating or cooling plant and machinery) is essentially used industrially, but the heading also covers non-electric instantaneous water heaters and storage water heaters, including solar water heaters, domestic or not. If electrically heated, such appliances are excluded (heading 85. 16).

25. It continued by asserting that based on the above explanations, it was of the view that the Appellant’s products have an electric component and are therefore considered dual water heating systems that cannot effectively heat water without the electrical element when the solar energy is inadequate.

26. It was thus its view that the post clearance audit revealed the true identity of solar water heaters whose taxes had been short levied, or erroneously refunded. Section 135 and 249(1) of the EACCMA therefore empowered it to recover any such amount short levied or erroneously refunded with interest at a rate of two percent per month for the period the taxes remain unpaid.

27. The Respondent concluded by stating that the Appellant had not provided sufficient evidence to show that its products were classifiable under CET Heading 8419. It is on this basis that it prayed that the Appellant’s Appeal be dismissed and its assessment of additional duties amounting to Kshs 882,306. 36 be upheld.

Issues for Determination 28. The Tribunal having carefully reviewed the filings made by the parties, the supporting documentation and the submissions made is of the considered view that the Appeal herein crystalizes into two issues for determination, namely: -a.Whether the Respondent erred in the interpretation of the EAC/CET GIRs and wrongly classified the Appellant’s imported solar water system under HS code 8516:10:00. b.Whether the Respondent’s decision to assess the Appellant for short levied duties in the sum of Kshs 882,306. 36 was justified.

Analysis and Determination 29. The Tribunal shall determine these issues in the following sequential manner:

a) Whether the Respondent erred in the interpretation of the EAC/CET GIRs and wrongly classified the Appellant’s imported solar water system under HS code 8516:10:00. 30. The Appellant is aggrieved by the Respondent’s decision to classify its imported water heating systems under HS code 8516:10:00. The Appellant contended that the applicable heading for classification of solar water heaters is under Hs Code 8419:19:00. The Appellant also contended that HS code 8516:10:00 is not applicable to solar water heaters as the same covers instantaneous water heaters.

31. The pertinent point of disparity is that the Respondent contended that the Appellant’s product is dual (both solar and electric) thus classifiable under the tariff for dual systems, while the Appellant asserted that its product is a solar heater, with an electric back up and it was therefore not fit for dual classification.

32. The fundamental submission made by the Appellant on the HS code 8516. 10. 00 which it contends is not applicable to its solar water heating system was that:i.It was not an importer of dual system heaters but rather it imported a solar water heating system.ii.The solar imported does not meet the requirements of Heading 85. 16 because they do not have thermostatic controls.iii.Its solar system is not heated electrically or by connection to a fuel heated systemOn the other hand, the Respondent contended that the Appellant’s water heating system has an electric heating component, thus it was dual in nature, in the sense that they operate under both solar power, and electricity, thus classifiable under the tariff for dual systems which is 8516:10:00.

33. The Respondent further submitted that the Appellant’s solar water heating system is specifically covered under sub-heading 8516; 10:00, which covers; “Electric instantaneous or storage water heaters and immersion heaters”.

34. That the heading 8419:19:00 covers non-electric water heaters, as it provides as follows:-“Instantaneous or storage water heaters, non-electric “

35. The Respondent also asserted that the WCO had also given it an advisory opinion on the 3rd of November 2021 confirming that the products in question are classifiable under Tariff 8516. 10. 00.

36. Paragraph A (3) of the Explanatory Note to Heading 85. 16 has defined 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”.

37. From the above description, it is clear that the heater that qualifies as a dual system under this definition is required to heat its water through electricity or by connection to a fuel heated hot water system. This means that the duality of the solar is obtained when the said solar system is heated by either electricity or fuel heated hot water system.

38. The solar systems that are the subject matter of the dispute rely on the electricity to obtain their energy. They do not rely on a connection to a fuel heated hot water system to obtain their energy. The fact that they are not heated by fuel heated hot water system means that they cannot fall within the definition of duality that is envisaged under Paragraph A (3) of the Explanatory Note to Heading 85. 16.

39. This product has failed the classification test under GIR 1 because the product does not fall for classification according to the terms of the headings and any relative section or notes. The Tribunal shall now move to consider if it is classifiable under GIR 2.

40. Rule 2 (a) deals with articles that are incomplete or unfinished. The appropriate Rule would thus be Rule 2( b) which provides that:“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 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”.

41. Rule 3 which has been referred to above provides guidance on which of the two HS codes is more applicable to the product in question and it states follows;-“3. 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 refer only to part only of the materials or substances contained in a mixed or composite goods or to part only of the items in a set 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 under 3a, 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.”

42. Rule 3 dictates that classification ought to be done on the basis of the essential character of the product in question. In this Appeal, the Appellant stated that it bought a solar water heater and that is what was sold to it by the suppliers. The Tribunal also took judicial notice that the said solar heaters are inevitably placed on the roofs of houses to tap onto the sunlight for its operation. If it did not require the sun then it could have been placed on any high point within the compound to achieve the effect of gravity in its operation without any need for the sun.

43. The Tribunal has also taken judicial notice of the fact that the insertion of the electric component into the solar water heaters emanated from recent directive by the Government requiring all imported solar water heaters to have an electric component. The purchasers of solar water heaters are therefore merely complying with the Government’s directive but their main target of purchase remains the purchase of solar. Put another way, the purchasers do not have a necessary need for this electric component in the solar water heaters, and if this directive is rescinded then they would continue with importation of the product in its original format.

44. The imported product also has solar panels that are typically fitted on any solar water heater. Whereas it has an electric component, it is clear that the intention of the Appellant was not the purchase of a water heater which could be augmented with a solar water heater.

45. Based on the above analysis, and being guided by the GIR 3(b) on the need to determine the essential character of the product under review, the Tribunal hereby arrives at the conclusion that the essential character of the Appellant’s imported product was solar water heater. It therefore, aptly falls under Hs Code 8419. 19. 00.

46. In light of the foregoing, The Tribunal finds and holds that the Appellant’s imported solar water heaters is classifiable under the EAC/CET HS code 8419:19:00, and not HS code 8516:10:00 that is preferred by the Respondent.

47. In light of foregoing, the Tribunal holds that the Respondent erred in interpreting the EAC/CET GIRs and wrongly classified the Appellant’s imported solar water heaters under tariff HS code 8516:10:00 instead of HS code 8419:19:00.

b) Whether the Respondent’s decision to assess the Appellant for short levied duties in the sum of Kshs 882,306. 36 was justified. 48. Having made a finding that the correct classification for the Appellant’s products is HS code 8419:19:00 and not Hs Code 8516. 10. It follows that the issue, of determining whether the Respondent’s decision to assess the Appellant for short levied duties in the sum of Kshs 882,306. 36 has become moot.

Final Decision 49. The upshot of the foregoing is that the Appeal is 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 24th March 2022 confirming the assessment and demand for Kshs 882,306. 36 be and is hereby set aside.c.Each party to bear its own costs.

50. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 02TH DAY OF JUNE, 2023. ............................................ROBERT M. MUTUMACHAIRPERSON……………………………DELILAH K. NGALAMEMBER.......................................ELISHAH N. NJERUMEMBER………………………….EDWIN K. CHELUGETMEMBER............................................RODNEY O. OLUOCHMEMBER