Sagoo v Commissioner of Customs and Border Control [2023] KETAT 1016 (KLR)

Sagoo v Commissioner of Customs and Border Control (Tax Appeal 187 of 2022) [2023] KETAT 1016 (KLR) (Commercial and Tax) (15 September 2023) (Judgment)

Neutral citation: [2023] KETAT 1016 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal 187 of 2022

RM Mutuma, Chair, W Ongeti, M Makau, EN Njeru & BK Terer, Members

September 15, 2023

Between

Harneel Singh Sagoo

Appellant

and

Commissioner Of Customs And Border Control

Respondent

Judgment

Background 1. The Appellant is an adult, residing and working for a gain in Nairobi, Kenya.

2. The Respondent is a principal officer appointed under and under Section 13 of the Kenya Revenue Authority Act, The Authority is charged with the responsibility of among others, assessment, collection, accounting, and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent’s Customs Post Clearance Audit team conducted a desk review of customs entries of the Appellant and other solar water heating systems for November 2016 to October 2020 after receiving a W.C.O Advisory Opinion on the classification of dual system water heaters dated 3rd November 2021 in response to a request from the Respondent on 30th August 2021.

4. The Respondent found that the solar water heating systems imported by the companies have an electric component and are thus dual water heating systems classifiable under H.S Code 8516. 10. 001.

5. On 3rd December 2022, the Respondent issued a demand notice to the Appellant for Kshs. 3,677,579. 12.

6. The Appellant applied for a review vide a letter dated 5th January 2022 which resulted in the Respondent confirming the demand notice together with accrued interest amounting to Kshs. 3,677,579. 12.

7. Being dissatisfied with the review decision, the Appellant filed the current Appeal with the Tribunal.

The Appeal 8. The Appeal is premised on the following grounds listed in the Memorandum of Appeal dated 23rd February 2022 and filed on 24th February 2022:-i.That 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 2014. ii.That Section 4 (3) of the Fair 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.The statement of reason and the information, materials and;ii.The evidence relied upon in making the decision or the administrative action.iii.That by failing 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 rights.iv.That the Respondent erred in law and in fact by purporting to authoritatively rely on the opinion of the W.C.O Secretariat without disclosing how the same opinion was arrived at. That, specifically, the Respondent failed to provide a complete and certified copy of the said advisory opinion as well as its application to the secretariat of the W.C.O seeking the said Advisory Opinion.v.The Respondent erred in law and in fact by purporting to misrepresent that the Advisory Opinion dated 3rd November 2021 is a ruling as opposed to an advisory opinion. That to the best of the Appellant’s knowledge and information, the harmonized system committee had its 67th session in April 2021 and made specific amendments on the classification of various goods, this being the last meeting of the committee, it is unclear why the Respondent intended to suggest that the Advisory opinion delivered on 3rd November 2021 is a ruling.vi.That the Respondent erred in law and fact by misrepresenting to the secretariat of the W.C.O that dispute at issue concerned ‘dual system’ water heaters as opposed to a composite good containing a primary solar heating component and an electric backup, thereby posing a question that was alien to the language of East African Community Common External Tariff since there is no use of the words “dual system” in EAC CET.vii.That 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.viii.That the Respondent erred in law and in fact 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.ix.That 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 which caters for “machinery, plant or laboratory equipment whether or not electrically heated for treatment of materials by a process involving a change of temperature such as heating, cooking…”x.That the Respondent erred in law and fact by failing to appreciate that in the event that the solar water heater 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.

The Appellant’s Case 9. The Appellant’s case was premised on its Statement of Facts dated 23rd February 2022 and filed on 24th February 2022.

10. The Appellant stated that the solar water heaters can only be classified under Heading 84:19 and not under any other heading relying on the provisions of Chapter 84 of the HS code, the Explanatory Notes to Heading 84:19, and Rule 3 (b) of the General Rules of Interpretation (GIR).

11. The Appellant averred that the solar water heaters consist of 3 components which are:-i.The solar collectors are in the form of solar a panel that collects heat from the sun to heat the cold water from the storage tanks. The Appellant further stated that the solar collectors account for 80% of the solar water heater system’s value and size and are the central part of the system and without them, the system would not function as intended.ii.The storage tank which is thermo-insulated and connected directly above the solar collector and is connected directly to the user’s plumbing system to provide hot water as needed and can keep the water hot throughout the night.iii.The backup heating element is a minor component inside the storage tank which the user can opt to switch on to provide a small amount of electrically generated heat in addition to the solar heat from the collectors in case sunlight is not sufficient for the water to be fully heated by the solar collector.

12. The Appellant argued that according to Rule 3 (b) of the GIR, the solar water heaters are given character by the solar collectors which account for 80% of the functionality of the system, and not the electrical backup element which is not intended to provide the core function of the system.

13. The Appellant averred that it sought clarification from the manufacturers of the solar water heaters, Viessmann Faulquemont SAS who, through a letter dated 16th December 2021 informed that the product is a thermal solar system for heating of domestic water with the electric heater being used as a backup when solar energy is inadequate and that the product is sold under HS Code 84:19:00 and not any other tariff code.

14. The Appellant averred that the electric component is not a significant part of the system and the bulk and weight of the system are the collectors and tank with the backup electrical element playing an incidental role in the functioning of the system.

15. The Appellant stated that it is unlikely that someone interested in purchasing an electric component would purchase the solar water heater system as the backup electrical heating system bought as a stand-alone is significantly cheaper than when bought together with the solar water heating system.

16. Further, the Appellant averred that the Respondent did not provide any document to demonstrate its application to the World Customs Organization as well as the Complete ruling opinion of W.C.O. denying the Appellant the benefit of the documents while making an application for review.

17. The Appellant reiterated that the authenticity of the W.C.O Secretariat advisory opinion dated 3rd November 2021 is questionable as the same does not have the signing off page and further, the W.C.O Secretariat has no mandate to render rulings or advisory opinions on the interpretation of the Harmonized system as those functions are the preserve of the H.S Committee as per Article 7 (1) (b) of the H.S Convention.

18. The Appellant asserted that the Respondent did not dispute in its review decision dated 1st February 2022 that the W.C.O ruling it shared with the Appellant was incomplete and stated that the part shared with the Appellant was sufficient to justify the classification of the dual system water heaters.

19. The Appellant stated that it contacted the W.C.O which declined to comment on the matter indicating that correspondence between itself and its members is confidential thus it could not supply confidential documents in response to a request from a third party.On whether the reclassification of the solar water heaters infringed on the Appellant’s right to legitimate expectation.

20. The Appellant submitted that it has imported the product in question over the years under HS Code 84:19. 19. 00 and the Respondent has never raised an issue with the classification of the product thus creating a legitimate expectation that the Respondent would in the future classify the product under the same HS code. It added that the Respondent is estopped from acting contrary to the consistent best practice from which the Appellant’s legitimate expectation emanated.

21. The Appellant cited the case of Oindi Zaippeline and 39 Others vs. Karatina University and Another [2015] eKLR where the court cited the case of re Westminster City Council, [1986] A.C. 668 at 692 (Lord Bridge) in which it was stated that:-“Legitimate expectation applies the principles of fairness and reasonableness, to the situation in which a person has an expectation, or interest in a public body retaining a long-standing practice, or keeping a promise. An instance of legitimate expectation would arise when a body, by representation or by past practice, has aroused an expectation that is within its power to fulfill a promise.”

22. The Appellant submitted that the process of clearance of goods is a lengthy one with the Respondent through its agents being involved in the importation process with the Appellant not playing any role in the process of setting the applicable standards.

23. The Appellant asserted that the fact that all the importers of the solar water heaters were importing under tariff 8419. 19. 00 for a long period indicates that the Respondent was also of the view that this was the applicable tariff until the Respondent’s Post Audit Clearance department thought differently thereby acknowledging that it has been applying the wrong taxes and demanding back taxes for the past 5 years.

24. The Appellant argued that the Government through the Finance Act, 2014 amended item 45 Part I of the First Schedule to the VAT Act 2013 to exempt “specialized solar equipment and equipment, including solar water heaters and deep cycle-sealed batteries which exclusively use or store solar power” and reintroduced VAT on solar water heaters through the Finance Bill 2020.

25. The Appellant contended that the dispute over the importation of solar water heaters was not attributed to the classification of the product but to the Respondent’s change in the interpretation of the applicable HS Code thus making it unfair to pin the burden of this change on the Appellant.

26. The Appellant relied on the case of Kenya Revenue Authority vs. Universal Corporation Ltd [2020] eKLR where the court stated thus:-SUBPARA (ii)in an instance where the appellant failed to explain itself for inaction, the trial Judge cannot be faulted for finding its action of moving to recover the short levied taxes at a time when the respondent was not in a position to recover the same unfair, irrational and unreasonable; (iii) the appellant’s gain in recovering the short levied taxes from the respondent at that point in time was not proportional to the total loss the respondent stood to suffer on account of inability to recover refunds lawfully due to it and which it would have rightfully claimed had it not been for the appellant’s inaction and default in failing to demand for the same timeously, and which move the learned Judge properly found unfair; (iv) the appellant’s decision was irrational because no reasonable public authority properly directing its mind to the issue would have failed to realize that its decision to demand for the said short levied taxes at that point in time was not only unfair but also unjust; (v) it was unreasonable because no justification was given for the appellant’s action of moving at that point in time to penalize the respondent for the appellant’s mistakes arising from it having in place a system of operations established and managed by itself which led to the late discovery that there were short levied taxes owed to it by the respondent; ”

27. The Appellant further argued that it relied on the case Communications Commission of Kenya & 5 Others vs. Royal Media Services Limited & 5 Others, Petition No. 14 of 2014:“...there must be an express, clear and unambiguous promise given by a public authority; the expectation itself must be reasonable; the representation must be one which it was competent and lawful for the decision-maker to make; and there cannot be a legitimate expectation against clear provisions of the law or the Constitution”

28. The Appellant cited the case of Krish Commodities Limited vs. Kenya Revenue Authority [2018] eKLR where the Court held as follows:-“More so, taking into account that the respondent’s own officers verified the entries made and even inspected the consignments. The respondent’s officers were not acting as a conveyor belt performing a perfunctory exercise. The reason they were there was to verify the accuracy of the entries and the duty payable before clearance of the consignments in question. Having verified the entries in issue, rate applied and assessed duty as correct, a legitimate expectation arose in favour of the appellant that the assessed duty was correct.”

29. The Appellant reiterated that the inaction of the Respondent to raise the classification issues leading to the Appellant pricing its solar water heaters without factoring any additional taxes estops the Respondent from reneging on its promise and the conduct of the Respondent of demanding taxes at the end of five years from the date of the importation without explaining the inordinate delay is both unreasonable and disproportionate as it passes on an illegal tax burden to the Appellant.On whether the solar water heaters are classifiable under heading 84. 19 or 85. 16.

30. The Appellant cited Rule 9 of the GIR EAC CET 2017 and Heading 8419 submitting that the solar water heaters are classifiable under Heading 8419 as is the practice worldwide. It added that there is no need of considering the Explanatory Notes since the heading is clear on the treatment of the solar water heaters since the heading takes precedence over the Explanatory Notes which would only be referred to when in case the heading lacks clarity.

31. The Appellant cited Heading 8516. 10. 00 and submitted that the same is not applicable to solar water heaters because it covers instantaneous electric water heaters and does not address solar water heaters incorporating a backup electric heating element.

32. They argued that classifying solar water heaters incorporating solar water heaters with backup electric heaters under HS Code 8516. 10. 00 is purporting to enlarge the scope of the heading offending the requirements of Rule 3 (b) of the GIR.

33. The Appellant submitted that both embattled headings indicate that the solar water heaters are classifiable under Heading 84. 19.

34. The Appellant submitted that the Respondent quoted Explanatory Note A (3) of Heading 85. 16 on the definition of dual system water heaters. It argued that the products in question are solar water heaters but in the definition of dual-system consisting of a fuel-heated hot water system with a thermostatic control to operate when the fuel-heating system is not sufficient. It contended that solar water heaters are not fuel-heated water systems that utilize fuel as the primary heating system and solar is not defined as a form of fuel.

35. In submitting that law should be read in plain language without room for intendment, the Appellant relied on the case of Commissioner of Domestic Taxes vs. Unga Limited [2021] eKLR where the court observed:“Our courts have reiterated the principle that tax laws should be interpreted strictly and leave no room for intendment”

36. The Appellant cited the last paragraph of the explanatory notes to heading 85. 16 which excludes solar water heaters. It further relied on Rule r of the Explanatory Notes to Heading 84. 19 positing that there is no clear provision in the heading and Explanatory Notes excluding solar water heaters from the heading.

37. The Appellant observed that the 2022 nomenclature has under HS Code 8419. 12. 00 created a new tariff for solar water heaters thus indicating that solar water heaters have always been classified under Heading 84. 19 which the World Customs Organization is using in respect of solar water heaters manufactured and sold together with a backup electric heating element. It relied on the case of United States of America Customs and Border Protection in Tariff Ruling NY N030231 - June 2028(CLA-2-84:RR: NC:106).

38. The Appellant reiterated that Rule 3 (b) of the GIR shows that solar water heaters should be classified based on the components that give them character. The solar collectors account for 80% of the functionality of the system and the electric component is not a significant part of the system.

39. The Appellant cited the case of Republic vs. Commissioner of Domestic Taxes Large Taxpayers Office Ex-parte Barclays Bank of Kenya Ltd [2012] eKLR where the court approvingly cited the case of Russell vs. Scott [1948] 2 ALL ER 5 where it was held;“My Lords, there is a maxim of income tax law which, though it may sometimes be overstressed yet ought not to be forgotten. It is that the subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax upon him.”On whether the Respondent’s Post Audit Department acted ultra vires.

40. The Appellant quoted Sections 235 (1) and 236 (2) of the EACCMA and submitted that the Respondent is limited in the exercise of its power to inspect for purposes of verification of the entry of the goods as opposed to reclassifying products under HS code and cited the W.C.O Objectives for Post Clearance Audits.

41. The Appellant reiterated that the Respondent has allowed the importation of solar water heaters under HS code 8419. 19. 00 and that the Post Clearance Audit was to be limited to confirming if the importer had used the allowable tariff.

42. The Appellant cited the case of Republic vs Cabinet Secretary, Ministry of Agriculture, Livestock, and Fisheries [2019] eKLR in which the court held:“A decision is illegal if it: - (a) contravenes or exceeds the terms of the power which authorizes the making of the decision; (b) pursues an objective other than that for which the power to make the decision was conferred; (c) is not authorized by any power; (d) contravenes or fails to implement a public duty.”

43. The Appellant submitted that Sections 235 and 236 of the EACCMA did not intend for the Respondent to overhaul the meaning or redefine the Application of the HS code.

44. The Appellant cited the case of Commissioner of Domestic Taxes vs. Unga Limited [2021] eKLR.“Our courts have reiterated the principle that tax laws should be interpreted strictly and leave no room for intendment. The law regarding the procedure for filing self-assessment, the consequences for late filing and of failure to file are clearly set out in the TPA as I have set out above. There is nothing in those provisions that allows the Commissioner to circumvent those provisions and none can be implied on reading of the statutes.”

45. The Appellant argued that there is no direct authority for the Respondent to reclassify or change a HS Code and the provisions of Sections 236 and 237 of the EACCMA cannot be read with intendment to clothe the Respondent with such powers.

46. The Appellant cited Article 16 of the HS Convention and asserted that the legal mandate to make changes to the HS Code and the procedure for exercising the same is given to the HS committee and the Respondent should have notified the Committee of its intention to change the HS code for solar water heaters from 8419. 19. 00 to 8516. 10.

47. The Appellant argued that the unilateral decision by the Respondent to change the HS code has not only created an undue tax burden on the Appellant but has also deviated from the acceptable practice by all the member states.

48. The Appellant submitted that being a public body, the Respondent was required to comply with the provisions of Article 47 of the Constitution and Section 4 (3) of the Fair Administrative Actions Act which it has neglected to do despite the Appellant asking for the same.

49. The Appellant reiterated that it was never called upon by the Respondent to air its opinion on the reclassification of the solar water heaters despite being a member of the Kenya Renewable Energy Association further offending various constitutional provisions requiring public/stakeholder’s participation on matters touching on public finance.

The Appellant’s Prayers 50. The Appellant consequently prayed that the Tribunal:-i.Annuls the Respondent’s decision dated 16th February 2022 with costs to the Appellant.

The Respondent’s Case 51. The Respondent’s case is premised on;i.Respondent’s Statement of Facts dated and filed on 25th March 2022 together with the documents attached thereto.ii.Respondent’s written submissions dated 10th of March 2023 and filed on 13th March 2023.

52. The Respondent stated that prior to July 2018, Paragraph 45 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. Dual solar water heaters were not exempt from VAT because they do not exclusively use and/or store solar power.

53. The Respondent reiterated that the solar water heating system in dispute is for use by both solar and electricity classified under tariff code 8516. 10. 00 according to the EAC CET.

54. It contended 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 the CET.

55. The Respondent averred that GIR as cited in the EAC CET govern classification of goods provide that 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.

56. The Respondent stated that Explanatory Notes to the Heading 8419 state that machinery covered under this heading may be heated by any system except in the case of instantaneous or storage water heaters which are classified in heading 8516 when heated electrically.

57. The Respondent reiterated that under Note I to Heading 8419, apparatus described therein 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.

58. The Respondent averred that the Appellant’s products have an electric component and are considered to be dual water heating systems operating under both solar power and electricity and can solely operate on electricity or solar energy. The Respondent added that without the electrical element, the system would not be effective in heating water when the solar energy is inadequate but the system would work perfectly without the solar component.

59. The Respondent asserted that Sections 235 and 236 of the EACCMA gives the Respondent powers to call for documents and conduct a post clearance audit on the import and export operations of a taxpayer within 5 years from the date of importation or exportation.

60. The Respondent maintained that where the Respondent’s Post Clearance Audit reveals that taxes were short levied or erroneously refunded, Sections 135 and 249 (1) of the EACCMA empowers the Respondent to recover any such amount short levied or erroneously refunded with interest at a rate of 2% per month for the period the taxes remain unpaid.

61. The Respondent averred that the Appellant did not produce any evidence to support the argument that the products under audit were classifiable under CET Heading 8419.

62. The Respondent cited Sections 235 (1) and 236 of the EACCMA and submitted that they give the Respondent powers to call for documents and conduct a Post Clearance Audit on the import and export operations of a taxpayer within 5 years from the date of importation or exportation.

63. The Respondent asserted that it has a statutory duty to carry out Post Clearance Audits on the import declarations made by taxpayers by verifying the accuracy of the goods or documents and determine whether direct customs declarations were made and all taxes that are due were paid.

64. The Respondent urged the Tribunal to apply the interpretation provided under the VAT Act and the Rules of the HS Code which Kenya is a signatory to determine the current dispute.

65. The Respondent submitted that the solar water heaters imported by the Appellant were misclassified under tariff code 8419. 19. 00 and since they have an electric component are correctly classifiable under tariff code 8516. 10. 00 as per the GIR and Explanatory Notes to heading 8516. 10. 00 and 8419. 19. 00.

66. The Respondent relied on the case of Republic vs. Commissioner General & Another Ex parte Awal Ltd [2008] eKLR where the court cited the case of Associated Battery Manufacturers Limited vs. Commissioner of Customs Services [2020] eKLR in which it was stated: -“In the end I must conclude that looking at the material placed before me and the submissions tendered by learned counsels, that the Respondents had the statutory duty to impose duty according to the tariff classification provided by law under the customs and Excise Act and under the Harmonised Commodity Description and Coding System provided by the world custom organization explanatory notes in which Kenya is a signatory. ”

67. The Respondent further cited Section 135 of the EACCMA 2004 and submitted that it demanded extra taxes of Kshs. 3,677,579. 12 in accordance with the law as the items in question are solar water heaters used to heat domestic water and is mounted on a roof or grid with its main source of energy being solar energy but electricity is secondary and supplies power when solar energy function fails when temperatures fall below 55 degrees celsius qualifying it as a dual powered system. It added that it is not disputed by the Appellant that the solar water heater has a supportive electric element.

68. The Respondent quoted Rule I of the GIR and argued that the product specification or the dual system for domestic use is one with a provision for use of both solar water heater and electric water heater on one product as in the product in the instant case.

69. The Respondent reiterated that according to the GIR 1, classification shall be determined according to the terms of the headings and any relevant sections or Chapter Notes and, provided the headings and any relative section or chapter notes do not require otherwise according to GIR 2 to 6. It added that according to GIR 1 to 6 and Explanatory Notes, the Appellants’ imported solar water heating systems are classified under 8516. 10. 00

70. The Respondent maintained that under Note I to Heading 8419, apparatus described therein 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. It added that if electrically heated, such appliances are excluded to tariff code 8516. 00 and the machinery covered under this heading may be heated by any system except in the case of instantaneous or storage water heaters which are classified in heading 86. 16 when heated electrically.

71. The Respondent further urged the Tribunal to be guided by the case of Adamson vs. Attorney General (supra), T.M. Bell vs. Commissioner of Income Tax [1960] EA 224, Cape Brandy Syndicate vs. Inland Revenue Commissioners [1920] 1KB 64: -“and the first judgment represents a correct statement of the law, namely strict construction of tax legislation, so that the tax demand must fall within the terms of the statute without ambiguity. If there’s any ambiguity in the legislation, it is not to be rectified by considerations of intendment, but by amending the legislation. However, determination of whether there is clarity or ambiguity in the legislation or whether a tax demand is precise and within the terms of the legislation, is not an abstract or pedantic exercise.”

72. The Respondent further relied on the case of Deputy Minister of National Revenue for Customs and Excise vs. Ferguson Industries Ltd et al where it was stated thus:“Under the Customs Act, goods are to be classified at the time of entry. Accordingly, what was important was the nature of the goods when they were entered, and the fact that they had been ordered from the Belgian supplier, rather than directly from the English manufacturer, was irrelevant to their proper classification.”

73. The Respondent submitted that the Explanatory Notes to tariff code 84. 19 expressly excludes appliances that are electrically heated referring them to Heading 85. 16.

74. The Respondent maintained that it did not rely on the W.C.O Advisory Opinion of 3rd November 2021 as the same was not binding and could not be used as a basis for the ruling and relies on the review decision where the Appellant was informed of the extent of the application of the W.C.O Secretariat decision. It reiterated that the classification was based on the HS Code.

The Respondent’s Prayers 75. The Respondent prayed that the Tribunal: -i.Dismisses the Appeal.ii.Upholds the assessment of additional duties of customs amounting to Kshs. 3,677,579. 12.

Issues For Determination 76. After careful consideration of the Memorandum of Appeal, the parties Statements of Facts and submissions produced before it, the Tribunal is of the opinion that the following is the issue for determination:i.Whether the Respondent erred in law in classifying the Appellant’s imports under HS Code 85. 16.

Analysis And Findings 77. The Tribunal having ascertained the issue, proceeds to analyze the issue as follows:-i.Whether the Respondent erred in law in classifying the Appellant’s imports under HS Code 85. 16

78. In the instant case, the Respondent found that the Appellant had wrongly classified its imports under HS Code 8419. 19. 00 which provide for ‘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, 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.’ instead of HS code 8516. 10. 00, which provides for ‘Electric instantaneous or storage water heaters and immersion heaters’.

79. The Appellant argued that the water heater should be classified under HS 8419. 19. 00. However, the Commissioner on the other hand maintains that the goods as dual water heating systems and should be classified under HS 8516. 10. 00, and on this basis, the Commissioner demands additional taxes from the importers.

80. The Tribunal notes that there is no dispute between the parties that solar water heaters which rely solely on solar energy to heat the water are classifiable under HS 8419 and that water heaters that use electricity or electricity and another fuel are classifiable under HS 8516. It is also noted that there is no dispute as to the identity of the subject goods; they are solar water heaters that have been modified to use electricity when solar energy is not available.

81. The Tribunal observes that these solar water heaters can be classified as either active or passive depending on the mode of fluid circulation. Active systems use mechanical pumps and differential controllers to regulate and direct the flow of the heat-transfer fluid or water from the solar collector to the tank. Some pumps run on electricity (like electricity), and others operate on electricity generated by a solar photovoltaic panel. On the other hand, passive systems rely on gravity rather than electricity using a thermosiphon configuration that uses gravity and convective heat flows.

82. In the current dispute, the water heating systems are solar water heaters with heat collectors running either an active or passive system and also fitted with electric immersion heaters, therefore, can function as electric water heaters. The challenge then is how the water heaters are properly classified in the HS.

83. The objective classification of goods under the HS is guided by rules of interpretation commonly known as GIR. In the instant case, the relevant rules of interpretation are as follows:

84. In the first instance, Rule 1 provides that:“RULE 1The titles of Sections, Chapters, and subChapters are provided for ease of reference only; for legal purposes, classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes and, provided such headings or Notes do not otherwise require, according to the following provisions.”

85. According to the terms of Heading 8419, solar heaters are ideally non-electric equipment correctly classifiable under Heading 8419. The 2022 version of the EAC CET presents the classification as follows:“Instantaneous or storage water heaters, non-electric:8419. 11. 00 -- Instantaneous gas water heaters8419. 12 00 – Solar water heaters8419. 19. 00 – Other”

86. However, the impugned solar water heaters are fitted with an ancillary electric immersion heating element to enable them to use electricity when solar energy is down. Note 1 A (2) to Heading 8419 provides that:“…the heading also covers non-electric instantaneous water heaters and storage water heaters, including solar water heaters, domestic or not. If electrically heated, such appliances are excluded (heading 85. 16).”

87. Water heaters that use electricity are correctly classifiable under HS 8516. 10 which provides as follows:“8516 10 00- Electric instantaneous or storage water heaters and immersion heaters.”

88. It is the view of the Tribunal that solar water heating system with an electric immersion heating element cannot be deemed as a dual system because according to the explanatory notes to this heading, the dual-system heaters of this heading are 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 means which must be of a fuel source is insufficient. In the instant case, the impugned solar water heaters cannot be considered as a fuel-heated hot water system.

89. However, the Explanatory Notes to HS 8516 state that“the Assemblies consisting of immersion heaters permanently incorporated in a tank, vat or other vessel are classified in heading 84. 19 unless they are designed for water heating only or for domestic use, in which case they remain in this heading. Solar water heaters are also classified in heading 84. 19. ”

90. Based on the foregoing, the Tribunal notes that the impugned goods are potentially classifiable under two Headings 8419 and 8516. As presented, the goods can function as a solar heating system and also electric water heaters. They have all the characteristics of a solar water heater and also all the characteristics of an electric water heater. Rule 1 cannot be used to classify the goods because it results in two possible classifications.

91. It is a well-considered view that the heaters are a combination of the two types of heaters and therefore may be classified using rule 2 (b) which provides as follows:“Rule 2 (b)Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances. Any reference to goods of a given material or substance shall be taken to include a reference to goods consisting wholly or partly of such material or substance. The classification of goods consisting of more than one material or substance shall be according to the principles of Rule 3. ”

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

93. The Tribunal observes that heaters cannot be classified according to Rule 3(a) because neither of the two codes gives a more specific description of the imported goods than the other. Consequently, the goods must be classified according to Rule 3 (b). The question then to be asked is what gives the heaters as imported, their essential character? That is what are: “the prominent characteristics which serve to distinguish the heaters”.

94. The Tribunal is persuaded that based on the parties’ pleadings, the essential characteristics of these heaters that distinguish them are the solar collectors commonly fitted to all solar water heaters. They are offered for sale as solar water heaters and must essentially be fitted in a location where they are able to collect solar heat. They mainly function as solar water heaters and revert to electricity only when there is an outage of solar heat. The immersion heaters which is a characteristic of electric heaters form only a small percentage of the system. Furthermore, the electric component is fitted as a regulatory requirement rather than for engineering expedience.

95. In this regard, the Tribunal posits that based on the material presented, the heating system has the appearance and character of a solar heating system. It is the Tribunal’s considered view that the systems are not electric water heating systems fitted with solar components but solar systems fitted with electric accessories to enable them to function as electric heaters.

96. Consequently, by dint of GIR 3 (b), the subject solar water heaters as imported are most appropriately classifiable under HS 8419 and most specifically HS 8419. 12 00.

Final Decision 97. The upshot to the foregoing is that the Appeal is meritorious and the Tribunal consequently makes the following Orders; -i.The Appeal be and is hereby allowed.ii.The Respondent’s review decision dated 3rd December 2021 be and is hereby set aside;iii.Each party to bear its own costs.

98. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 15TH DAY OF SEPTEMBER, 2023ROBERT MUGAMBI.............CHAIRPERSONDR. WALTER ONGETI.................MEMBERDMUTISO MAKAU......................MEMBERELISHAH N. NJERU.....................MEMBERBONIFACE K. TERER..................MEMBER