Boiler Technique Engineering Limited v Commissioner of Customs & Border Control [2023] KETAT 553 (KLR)

Boiler Technique Engineering Limited v Commissioner of Customs & Border Control (Tax Appeal 763 of 2022) [2023] KETAT 553 (KLR) (29 June 2023) (Judgment)

Neutral citation: [2023] KETAT 553 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 763 of 2022

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

June 29, 2023

Between

Boiler Technique Engineering Limited

Appellant

and

Commissioner of Customs & Border Control

Respondent

(An Appeal against the Respondent's review decision dated 26th April, 2022)

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and specializing in the provision of mechanical and electrical services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the said Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue.

3. The Respondent conducted a desk audit of the Appellant's imports and issued a demand notice dated 3rd December, 2021 for a sum of Kshs. 3,096,822. 38 comprising Kshs. 1,369,797. 39 for Import duty, Kshs. 527,257. 30 for VAT and interest of Kshs. 1,199,767. 70.

4. The Appellant made a late application for review pursuant to Section 229 of theEACCMAon 7th April, 2022. The Respondent accepted the Appellant’s late application for review vide a review decision letter dated 26th April, 2022 where it upheld its earlier demand of 3rd December, 2021.

5. The Respondent further conducted a site visit to the Appellant to inspect the Appellant’s imports of solar water heaters on 9th May, 2022.

6. Aggrieved by the review decision of 26th April, 2022, the Appellant lodge a Notice of Appeal dated 18th July, 2022 and filed on the 22nd July, 2022.

The Appeal 7. The Appeal is premised on the Memorandum of Appeal dated 18th July, 2022, and filed on 22nd July, 2022, stating the following grounds: -a.The Respondent erred in law and in fact by not taking into account the fact that the solar water heaters imported by the Appellant are not classifiable under Heading 85. 16 but rather Heading 84. 19. b.The Respondent erred in law and in fact by failing to appreciate that in the event the solar water heaters with an electric backup could not be classified under both HSC 85. 16 and HSC 84. 19, the same could only be classified under Rule 3(b) of the W.C.O General Rules for Interpretation of the Harmonized System.c.The Respondent erred in law and in fact by failing to appreciate that the appellant has a right of access to information provided under Article 35 of the Constitution of Kenya 2010. By purporting to authoritatively rely on the opinion of the World Customs Organization dated 3rd November 2021 without disclosing how the same opinion was arrived at, the Respondent has infringed on this right.d.The Respondent erred in law and in fact by purporting to rely on the opinion of the W.C.O Secretariat on the correct classification of the solar water heaters. The secretariat of the W.C.O has no mandate to issue opinions or rulings on the interpretation of the harmonized system since those functions are the preserve of the HS Committee in line with Article 7(1) (b) of the HS Convention.e.The Respondent erred in law and in fact by presenting to the secretariat of the W.C.O a solar water heater whose electric backup had been removed leading the secretariat to apply GIR 2(a) whose purpose is to give character to an unfinished product and classify it together with the finished product which without considering the solar capabilities would be considered electric.f.The Respondent erred in law by purporting to retrospectively apply the opinion of the World Customs Organization dated 3rd November, 2021, to imports that took place many years before the same opinion was delivered.g.The Respondent erred in law and in fact by failing to acknowledge that it had a duty to uphold the Appellant's legitimate expectation to the effect that the solar water heaters were classifiable under tariff code 84:19. Having classified the solar water heaters under tariff code 84:19 for years without raising any additional assessment, the Respondent created a legitimate expectation on the part of the Appellant that the solar water heaters would in future be classified under the same code.h.The Appellant has a statutory right to fair administrative action pursuant to Article 47 of the Constitution of Kenya and the Fair Administrative Actions Act No. 4 of 2015. i.Section 4(3) of theFair Administrative Actions Act requires that where an administrative action is likely to adversely affect the right and fundamental freedom of any person, the administrator shall give the affected person: -i.A statement of reasons and the information, materials andii.Evidence to be relied upon in making the decision or the administrative action.j.By declining to provide the information, statement of reasons and evidence relied on in reaching its decision as per the mandatory terms of Section 4(3) of the Fair Administrative Actions Act, the Respondent infringed on the Appellant's statutory rights.

Appellant’s Case 8. The Appellant’s case is premised on the following documents and proceedings before the Tribunal: -a.The Appellant’s Statement of Facts dated 18th July, 2022, and filed on 22nd July, 2022, together with the attachments thereof.b.The Appellant’s written submissions dated 6th February, 2023, and filed on 7th February, 2023, together with the legal authorities filed therewith.

9. The Appellant stated that it received a demand notice dated 3rd December, 2021. That the demand notice indicated that the desk audit of its imports of solar water heaters for the period November, 2016 to date had been conducted. That the said desk audit had revealed that the solar water heaters imported by the Appellant had been wrongly classified under tariff code 8419:19. 00 instead of 8516:10. 00. That this was based on the understanding that the solar heaters contained a backup electrical heating element. That consequently, the Respondent demanded a total of Kshs. 3,096,822. 38.

10. The Appellant submitted that it made an application for review under the provisions of Section 229 (1) read together with Section 229 (3) of the East African Community Customs Management Act 2004 (EACCMA) on the 7th day of April 2022, objecting to the said demand on the ground that the Respondent had wrongly classified the solar water heaters.

11. That on 26th April, 2022, the Respondent rendered a review decision in which it reiterated its demand and dismissed the Appellant's application for review. That in the said demand the Respondent requested for a site visit to inspect and verify the correct tariff for the Appellant's solar -water heaters. That the site visit was conducted on 9th May, 2022, and its outcome remains unknown.

12. That the Appellant wrote to the Respondent on 8th July, 2022 requesting for formal communication of the outcome of the site visit conducted of 9th May, 2022. That this letter did not elicited any response from the Respondent.

13. It was the Appellant's position that the solar water heaters can only be classified under Heading 84:19 and not under any other heading. That this was because Heading 84:19 covers machinery, plant or laboratory equipment, whether or not electrically heated (excluding furnaces, ovens and other equipment's 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 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.

14. It was the Appellant's position that the solar water heaters can only be classified under heading 84:19 and not under any other Heading. That this was because Heading 84:19 covers machinery, plant or laboratory equipment, whether or not electrically heated (excluding furnaces, ovens and other equipment's 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 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.

15. That the Explanatory Notes "ENs" constitutes the official interpretation of the harmonized system at the international level with each ENproviding a commentary on the scope of each heading and therefore indicative of the proper interpretation of these headings.

16. That in this regard, Chapter 84 covers all electric machinery; and equipment other than Machinery and apparatus of a kind covered by Chapter 84 which remains classified there even if electric. The Appellant emphasized the contents of the Explanatory Notes to Chapter 84 which it averred that it states in relevant part: it should be noted that machinery and apparatus of a kind covered by chapter 84 remains in this chapter even if electric. The Appellant therefore held the position that the solar water heaters were classifiable under heading 84:19.

17. That furthermore, the explanatory notes to Heading 84. 19 states in relevant part as follows: the 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, if electrically heated such appliances are excluded (heading 85;16).

18. It was the Appellant's position that in the event the solar water heaters in question could not be classified under HSC 84:19 their classification must be done in line with the General Interpretation Rules (GIR). That the specific rule applicable is Rule 3(b) which deals with mixtures and composite goods consisting of different materials which cannot be classified by reference to the headings under the tariff. That Rule 3 (b) extracted verbatim provides as follows:“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 in so far as this criterion is applicable.”

19. That in this regard, the solar water heaters consist of 3 major components which the Appellant described as follows: -a.Solar Collectors - these are solar panels (usually installed on the roof top) that are responsible for collecting heat from the sun and using it to heat cold water that is fed through the collectors from a water storage tank. In accordance with the principle of thermos-syphoning, cold water from the tank runs down into the collectors, where it is heated by sunlight. The heated water then rises back up through the collectors and back into the tank and is replaced with more cold water that is again heated with the heat of the sun, and the cycle continues through the day to ensure a constant supply of water heated by sunlight. The water collectors account for 80% of the solar water heaters system’s size and value, and they are the most central part of the system such that without them the system would not function as intended. They take different forms and sizes depending on the location where they are installed (type of roof, the user’s plumbing infrastructure, and the type of water to be heated) and the volume of water to be heated.b.Storage Tank-this is a thermal insulated water storage tank connected directly above the solar collector. Cold water from the tank is fed into the solar collector to be heated by the sun, while heated water rises back to the tank from the solar collector, where its heat is insulated and the hot water stored for use. The tanks connect directly into the user’s plumbing system to provide hot water as needed, and the insulation is such that water can be kept hot throughout the night.c.Back up heating Element-this is a small component inside the storage tank. The user can optimally switch it on to provide a small amount of electricity generated heat in addition to the solar heat from the collectors. This is only utilized on minority of the days when the sunlight is not sufficient for the water to be fully heated by the solar collector. By design, the solar collector provides the majority of heat on the majority of days so that users rarely have to turn on the electrical backup element and can thus avoid electricity costs for heating water. Therein lies the value of the solar water heating system. It is prudent to note therefore that the solar water heater is designed to function under very low sunlight and consequently the use of the backup heater is very rare.

20. The Appellant averred that a true application ofGIR, specifically rule 3(b), clearly shows that the solar water heaters in question should be classified based on the component that gives them character. That in the aforementioned sample the solar water heaters are given character by the solar collectors which account for 80% of the functionality of the system. That it was therefore inaccurate to conclude that the solar water heaters were given character by the electrical backup element considering that this element was not intended to provide the core function of the system but rather a backup for the rare occasions when there is insufficiency of sunlight.

21. The Appellant stated that the W.C.O Explanatory Notes (WCOEN) creates four considerations for any classification to be made on composite goods. That consideration should be given to the following areas;a.Nature of the material or component.b.Bulk, weight or value.c.The role of a constituent material in relation to its use.d.The valuation of the different component

22. That in light of the solar water heaters in question, it was clear that the electric component is not a significant part of the system and further, the bulk and weight of the system is the collectors and tank. That in consideration of the role, the Appellant stated that it had demonstrated that the backup electrical heating element played a very incidental role in the functioning of the system. That whereas the solar collector is providing heat 365 days a year, the electrical backup element is only in use for about 30 days of the year when the solar heat alone is insufficient. The system would still function even without the electric component signaling that the role is not primary to the functioning of the system.

23. On the valuation of the components, the Appellant stated that the backup electrical heating element bought as a stand-alone is significantly cheaper than when bought together with the solar water heating system. That to this end, it was unlikely that someone interested in purchasing an electric component would purchase the solar water heater system. That the valuation and cost of the solar components significantly outweigh the valuation and cost of the backup electrical heating component.

24. Regarding breach of the right to fair administrative action, it was the Appellant's position that Article 47 of the Constitution of Kenya 2010 provides for the right to a fair administrative action. That this right was further enshrined under the Fair Administrative Actions Act No. 4 of 2015. That salient amongst its provision is the requirement under Section 4(3) which requires that where an administrative action is likely to adversely affect the rights or fundamental freedoms of any person, the administrator shall give the person affected by the decision:a.a statement of reasons and the information, materials; andb.evidence to be relied upon in making the decision or taking the administrative action.

25. The Appellant averred that the Respondent did not provide any document to demonstrate its application to the World Custom Organization as well as the complete W.C.O ruling. That the Appellant therefore lacked the benefit of these documents while making the application for review and when filing the application for review.

26. The Appellant averred that the decision of the W.C.O Secretariat dated 3rd November, 2021 attached to the demand was incomplete and shall demand for a complete copy of the same. That further, the Appellant shall request for a copy of the letter dated 30th August, 2021 through which the Respondent sought the opinion of the W.C.O Secretariat. That this will enable the Appellant appreciate how the Respondent represented the dispute between the W.C.O.

27. The Appellant further stated that the authenticity of the W.C.O Secretariat advisory opinion dated 3rd November, 2021 was questionable as the same lacked a number of pages among them the signing off page. That it was also worth noting that the Secretariat of the W.C.O had no mandate to render rulings or advisory opinions on the interpretation of the Harmonized System since those functions were the preserve of the HS Committee in line with Article 7(1)(b) of the HS Convention.

28. It was the Appellant's position that it had over the years imported the product in question under HS Code 84:19. 19. 00 and the Respondent had never raised an issue with the classification of the product or issue any additional demand. That this therefore created a legitimate expectation on the Appellant that the Respondent in future classify these products under the same tariff. That the Respondent was therefore estopped from acting contrary to the consistent best practice from which the Appellant's legitimate expectation emanated.

Appellant’s prayers 29. The Appellant prayed that the Tribunal annuls the Respondent’s review decision dated 26th April, 2022 with costs to the Appellant.

The Respondent’s Case 30. The Respondent’s case is premised on the hereunder filed documents before the Tribunal: -a.The Respondent’s Statement of Facts dated 11th October, 2022, and filed on 18th October, 2022, together with the documents attached thereto.b.The Respondent’s written submissions dated 24th January, 2023, and filed on 6th February, 2023, together with the legal authorities attached therewith.

31. The Respondent stated that the dispute arose as a result of a demand for additional taxes that had been assessed on incorrect tariff classification of solar water heaters incorporating electrical heating elements in tariff 8419. 19. 00 instead of 8516. 10. 00. The latter tariff code attracts both import duty at a rate of 25% and VAT while the former tariff code attracts only VAT.

32. That a desk audit of the taxpayer's imports was done and a demand notice dated 3rd December, 2021, was issued to the Appellant's email addresses registered on itax for payment of taxes as tabulated below: -Import Duty 1,369,797. 39VAT 527,257. 30Interest 1,199,767. 70(2%)Total 3,096,822. 38

33. The Respondent stated that upon receipt of the demand for additional taxes, the taxpayer did not respond within 30 days as guided by Section 229 of EACCMAand the matter was forwarded for enforcement.

34. That on 7th April, 2022, the Appellant applied for a Commissioner's review pursuant to Section 229 of the East Africa Community Customs Management Act2004 (EACCMA).

35. That the Commissioner allowed the late application on 26th April, 2022, and upheld the demand and requested for a site-visit of the taxpayer's premises. That this was conducted on 9th May, 2022, but the taxpayer failed to demonstrate that the product did not have an electric element and therefore the demand stood.

36. Regarding classification of the solar water heater systems the Respondent averred that its examination of the import entries revealed that the solar water heating systems had an electric component and were therefore dual water heating systems classifiable under tariff code 8516. 10. 00.

37. That in addition, from the supplier's website, the Appellant's products had a provision for an electric component and were therefore considered dual water heating systems.

38. The Respondent stated that the General Interpretation Rules (GIR) as cited in the East Africa Community Common External Tariff (CET) govern classification of goods. That according to GIR1, classification shall be determined according to the terms of the headings and any relative section or chapter notes and, provided the headings or notes do not require otherwise, according to GIRs 2 through 6.

39. That GIR 6 provides that 'For legal purposes, the classification of goods in the subheadings 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. For the purposes of this Rule the relative Section and Chapter Notes also apply, unless the context otherwise requires.

40. 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.

41. The Respondent stated that Heading 8419 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, vaporizing, condensing or cooling, other than machinery or plant of a kind used for domestic purposes; instantaneous or storage water heaters, non-electric.'

42. 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, 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.

43. That Note (A) 3 to Heading 8516 also classifies dual system heaters in Heading 8516, 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.

44. The Respondent submitted that the Explanatory Notes to the Heading 8419 state that the 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 8516 when heated electrically.

45. That Note (I) to Heading 8419 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. That if electrically heated, such appliances are excluded (Heading 85. 16).

46. The Respondent stated that the Appellant's products have an electric component and are therefore considered dual water heating systems. A dual-system water heater operates under both solar power and electricity. That the system can operate solely on electricity or on solar energy. That without the electrical element, the system would not be effective in heating water when the solar energy is inadequate. However, the system would work without the solar component.

47. That in accordance with GIRs 1, 6 and Explanatory Notes, the imported solar water heater systems are classified under HS Code 8516. 10. 00.

48. The Respondent contended that the WCO Advisory was sought upon finding that the importers of the solar water heating systems had wrongly classified the products under HS Code 8419. 19. 00 instead of HS Code 8516. 10. 00, the Respondent already had a position prior to seeking the advice on "dual-system solar water heater'.

49. The Respondent averred that the above notwithstanding the WCO agreed with it on the application of the General Rules of Interpretation in arriving at Heading 85. 16 (subheading 8516. 10) as the correct classification for the dual solar water system.

50. That the Respondent's audit and subsequent demand was well within the five- year statutory limitation period.

51. Regarding legitimate expectation, the Respondent asserted that it operates on a self-declaration regime whereby the taxpayers make declarations, assesses and pays taxes on the items they import themselves or through their agents.

52. That contrary to the Appellant's position that the self-declaration creates legitimate expectation as to classification, it is the Respondent who actually presumes that the Appellant shall make correct declarations and pay the correct taxes.

53. That it was for this reason that Section 235 and 236 grants power to the Respondent to verify and audit the accuracy of import entries within the statutory limitation period.

54. That the Respondent had in fact not issued a prior tariff ruling that would inform legitimate expectation upon the Appellant.

55. On the right to fair administrative action, the Respondent stated that it was well within its statutory mandate under Sections 235 and 236 of the East Africa Community Customs Management Act (EACCMA), 2004 in verifying the Appellant's import business.

56. That the Appellant's demand notice and subsequent review decision clearly provide for the reasons for its findings and demand. It averred that in the absence of proof to the contrary, the Appellant assertions were just mere averments.

57. The Respondent insisted that the applicable tariff code for the dual solar water heater system imported by the Respondent fell under the Heading 85;16, specifically, tariff code 8516:10. 00 which both attract import duty at an ad valorem rate of 25% as well as VAT.

58. That the Appellant's allegations as laid out in the Memorandum of Appeal and Statement of Facts unless where in agreement by the Respondent are unfounded in law and not supported by evidence and it expressly denied.

Respondent’s prayers 59. The Respondent prayed that the Tribunal finds that: -a.The dual solar water heating systems imported by the Appellant were wrongly classified in 8419 and uphold the Respondent's assertion that the correct classification is Heading 8516. 10. 00. b.The Respondent's assessment of additional duties, taxes and interest thereof of Kshs. 3,096,822. 38 be upheld.c.The Appeal be dismissed with costs.

Issues For Determination 60. The Tribunal having carefully reviewed the pleadings made by the Parties, the supporting documentation and the submissions made, is the of the respective view that the following are the issues that call for its determination in this Appeal: -a.Whether the solar water heaters imported by the Appellant were dual system heaters.b.Whether the Respondent erred in reclassifying the water heaters imported by the Appellant from tariff code 8419. 19. 00 to tariff code 8516. 10. 00.

Analysis And Findings 61. Having identified the issues falling for its determination, the Tribunal wishes to analyze them as hereunder.

Whether the solar water heaters imported by the Appellant were dual system heaters. 62. The Appellant stated that the solar water heaters consist of 3 major components which it described in details namely; solar collectors, storage tank and backup heating element

63. It was the Appellant’s submission that it was clear that the electric component was not a significant part of the system and further, the bulk and weight of the system is the collectors and tank. That in consideration of the role, the Appellant stated that it had demonstrated that the backup electrical heating element played a very incidental role in the functioning of the system.

64. That whereas the solar collector is providing heat 365 days a year, the electrical backup element is only in use for about 30 days of the year when the solar heat alone is insufficient. The system would still function even without the electric component signaling that the role is not primary to the functioning of the system.

65. The Respondent on its part averred that in the classification of the solar water heater systems its examination of the import entries revealed that the solar water heating systems had an electric component and were therefore dual water heating systems classifiable under tariff code 8516. 10. 00.

66. That in addition, from the supplier's website, the Appellant's products had a provision for an electric component and were therefore considered dual water heating systems.

67. The Respondent stated that the General Interpretation Rules (GIR) as cited in the East Africa Community Common External Tariff (CET) govern classification of goods. That according to GIR1, classification shall be determined according to the terms of the headings and any relative section or chapter notes and, provided the headings or notes do not require otherwise, according to GIRs 2 through 6.

68. The Appellant had submitted that the explanatory notes "ENs" constitutes the official interpretation of the harmonized system at the international level with each EN providing a commentary on the scope of each heading and therefore indicative of the proper interpretation of these headings.

69. The Appellant averred that in this regard, Chapter 84 covers all electric machinery; and equipment other than Machinery and apparatus of a kind covered by Chapter 84 which remains classified there even if electric. The Appellant also emphasized the contents of the Explanatory Notes to Chapter 84 which it averred that it states in relevant part: it should be noted that machinery and apparatus of a kind covered by chapter 84 remains in this chapter even if electric. The Appellant therefore held the position that the solar water heaters were classifiable under Heading 84. 19.

70. The Respondent on the other hand submitted that the Explanatory Notes to the Heading 8419 state that the 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 8516 when heated electrically.

71. That Note (I) to Heading 8419 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. That if electrically heated, such appliances are excluded (Heading 85. 16).

72. It was therefore the Respondent contention that the Appellant's products had an electric component and are therefore considered dual water heating systems. That a dual-system water heater operates under both solar power and electricity. That the system could operate solely on electricity or on solar energy. That without the electrical element, the system would not be effective in heating water when the solar energy is inadequate. That however, the system would work without the solar component.

73. The Tribunal looked at the Explanatory Note A to Heading 85. 16 and found that it provides as follows:A.Electric Instantaneous 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.

74. The Tribunal was of the view that a system is only deemed a dual system heater if it uses both electricity and the combustion of fuel to heat water. There was no evidence adduced that the solar water heaters imported by the Appellant have the capability, components or elements to undertake the combustion of fuel.

75. The Tribunal further noted that the element of duality in the dual system heaters was present to allow for the switching between using of electricity or fuel-based combustion. Both systems must be present for it to be deemed dual.

76. Considering that the Appellant’s solar water heaters did not have a “connection to a fuel-heated hot water system” or “thermostatic control” for the system as prescribed by the Explanatory Note A to Heading 85. 16, the Tribunal finds that the solar water heaters imported by the Appellant are not dual system heaters.

Whether the Respondent erred in reclassifying the water heaters imported by the Appellant from tariff code 8419. 19. 00 to tariff code 8516. 10. 00. 77. The genesis of this dispute was the Respondent’s decision to reclassify solar water heaters imported by the Appellant between November 2016 to 3rd December, 2021, under Heading 85. 16 which attracts import duty at 25%. The Appellant had imported the items, declared and paid duty under Heading 84. 19 which attracts 0% Import Duty.

78. It was the Appellant's position that the solar water heaters could only be classified under Heading 84. 19 and not under any other heading. That this was because Heading 84. 19 covers machinery, plant or laboratory equipment, whether or not electrically heated (excluding furnaces, ovens and other equipment's 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 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.

79. It was further the Appellant’s contention that the backup electrical heating element bought as a stand-alone was significantly cheaper than when bought together with the solar water heating system. That to this end, it was unlikely that someone interested in purchasing an electric component would purchase the solar water heater system. That the valuation and cost of the solar components significantly outweigh the valuation and cost of the backup electrical heating component.

80. The Respondent on its part averred that in the classification of the solar water heater systems its examination of the import entries revealed that the solar water heating systems had an electric component and were therefore dual water heating systems classifiable under tariff code 8516. 10. 00.

81. The Tribunal has looked at the arguments advanced by both parties. The Tribunal finds that the General Interpretation Rules (GIR 1) under the EAC Common External Tariff 2017 provides that classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes. This rule provides as follows:“The titles of Sections, Chapters and sub-Chapters are provided for ease of reference only; for legal purposes, classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes.”

82. The Tribunal noted that since the heading is clear on the treatment of the solar water heaters, there was no need to consider the chapter notes or what other sections provide. This is because the heading takes priority and reference to chapter notes or other sections should only be made when the heading lacks clarity on the classification of the item in question.

83. The Appellant had stated that the W.C.O Explanatory Notes (WCOEN) creates four considerations for any classification to be made on composite goods. That consideration should be given to the following areas;a.Nature of the material or component.b.Bulk, weight or value.c.The role of a constituent material in relation to its use.d.The valuation of the different component

84. The Appellant contended that in light of the solar water heaters in question, it was clear that the electric component was not a significant part of the system and further, the bulk and weight of the system is the collectors and tank. It averred that in consideration of the role, the backup electrical heating element played a very incidental role in the functioning of the system.

85. From the submission of the parties it was clear to the Tribunal that the electric heating element was not a significant part of the system as the bulk of the water heating system is made of the collectors and heat exchange tank. There was no dispute that the backup heater plays a very incidental role in the functioning of the system as the solar system still functions without the electric heating element.

86. According to Rule 1, what one sees when looking at the product in dispute is a solar water heater as opposed to a water heater, boiler, geyser or hot water tank (which the parties agree should be classified under tariff (code 8516). The electric heating element is an accessory to the solar water heater.

87. The HS tariff classification codes are internationally used to facilitate global trade. The WCO in 2022 Nomenclature, introduced tariff 8419. 12. 00 to specifically provide for solar water heaters. The East African Common External Tariff structure that came into force on 1st July, 2022, also classified solar water heaters under HS Code 8419. 12. 00. This is an indication that the WCO and its member states intended that solar water heaters be classified under Chapter 84 thereby reinforcing the Explanatory Notes under Heading 8516 (5) that solar water heaters should be classified under Heading 8419.

88. The Explanatory Note to Heading 84. 19, EACCET further states, 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. if electrically heated, such appliances are excluded (heading 85. 16).”

89. The Explanatory Note to Heading 85. 16 similarly provides in the relevant part as thus; -“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 {Emphasis ours}.

90. Going by the provisions in the Harmonized System (HS) Nomenclature and the Explanatory Notes to the same the Tribunal finds that the correct classification of the solar water heaters imported by the Appellant is Heading 84. 19. Indeed, as captured above, even the Explanatory Note to Heading 85. 16 which is preferred by the Respondent, directs that solar water heaters should be classified under Heading 84. 19.

91. The Tribunal reiterates its decision in TAT 101 of 2022 ORB Energy Private Limited vs. Commissioner of Domestic Taxeswhere it found similar solar water heaters to be classifiable under HS Code 8419. 19. 00 as opposed to HS Code 8516. 10. 00 which the Respondent had classified the same under. The Tribunal did not find any reason whatsoever to depart from this decision.

92. In view of the above, the Tribunal finds that the Respondent erred in reclassifying the water heaters imported by the Appellant from tariff code 8419. 19. 00 to tariff code 8516. 10. 00.

Final Decision 93. The upshot of the foregoing is that the Appeal is merited and the Orders that recommend themselves to the Tribunal are as follows: -a.This Appeal be and is hereby allowed.b.The Respondent’s review decision dated 26th April, 2022 be and is hereby set aside.c.Each party to bear its own costs.

94. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 29TH DAY OF JUNE 2023. ERIC N. WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERGRACE MUKUHA - MEMBERJEPHTHAH NJAGI - MEMBERABRAHAM K. KIPROTICH - MEMBER