Tile and Carpet Limited v Commissioner of Customs & Border Control [2023] KETAT 971 (KLR)

Tile and Carpet Limited v Commissioner of Customs & Border Control (Tax Appeal 373 of 2021) [2023] KETAT 971 (KLR) (15 September 2023) (Judgment)

Neutral citation: [2023] KETAT 971 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 373 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, E Ng'ang'a, AK Kiprotich & B Gitari, Members

September 15, 2023

Between

Tile and Carpet Limited

Appellant

and

Commissioner of Customs & Border Control

Respondent

(An Appeal against the Respondent’s review decision dated 3rd June, 2021)

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya. Its main business is in building materials and interior design products.

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

3. The Respondent conducted a post clearance audit on the solar water heaters imported by the Appellant and subsequently issued a letter of preliminary audit on 11th February 2021 requiring the Appellant to give an explanation within seven (7) days why extra taxes of Kshs 62,162,787. 00 should not be demanded.

4. The Respondent vide a letter dated 12th March 2021 issued the Appellant with a demand notice of Kshs 62,162,787. 00.

5. Appellant replied to Respondent’s letter of findings vide a letter dated 12th March 2021. The Respondent forwarded the case to its Debt Management Unit for enforcement on 4th May 2021.

6. The Appellant wrote to the Respondent seeking a review of the demand vide a letter dated 13th May 2021. The Respondent vide a letter dated 3rd June 2021 issued its review decision.

7. Aggrieved by the Respondent’s review decision, the Appellant filed a Notice of Appeal on 25th June 2021.

The Appeal 8. The Appeal is premised on the Memorandum of Appeal dated 2nd July 2021 and filed on 6th July 2021 stating the following grounds:-i.The Appellant has statutory right to fair administrative action pursuant to the Constitution of Kenya Article 47 and the Fair Administrative Actions Act No. 4 of 2015. ii.Section 4(3) of the Fair Administrative Actions Act directs in mandatory terms that where an administrative action is likely to adversely affect the rights of fundamental freedoms of any person, the administrator shall give the person affected by the decisiona.A statement of reasons and the information; materials andb.Evidence to be relied upon making the decision or taking the administrative action.iii.By refusing to provide information, statement of reasons and evidence relied on in reaching its decision as per the mandatory terms of Section 4(3) pf the Fair Administrative Actions Act the Respondent has infringed the Appellant’s statutory right.iv.The Respondent erred in law and in fact by failing to acknowledge the special rules on classification of products that have more than one component as enumerated by the EAC CET 2017. v.The Respondent erred in both fact and in law by not taking into account that the Appellants solar water heaters do not fall within the classification of the heading under HSC 8516 of HSC 8419 and as such, their classification must be done in line with the World Customs Organization (WCO) General Rules for the Interpretation of the Harmonized System, specifically Rule 3(b) which deals with mixtures and composite goods consisting of different material.vi.The Respondent erred in both fact and in law in arriving at the conclusion that the solar water heaters were classified under Tariff HSC 8516 consequently relying on a component that does not give them their character contrary to Rule 3(b) of the WCO, General Rules of Interpretation of the Harmonized System.vii.The Respondent erred in law by disregarding the principles of interpretation set out in the WCO Explanatory Notes (WCOEN) thus going against accepted international practices and treaties ratified by member states of WTO, Kenya included.

The Appellant’s Case 9. The Appellant’s case is also premised on the following documents and proceedings before the Tribunal:-a.The Appellant’s Statement of Facts dated 2nd July 2021 and filed on 6th July 2021 together with the documents attached thereto.b.The Appellant’s written submissions dated 18th May 2023 and filed on 19th May 2023.

10. The Appellant stated that on the 11th day of February 2021, the Appellant received preliminary post clearance audit findings detailing that it had wrongly classified its solar water heaters between January 2016 and December 2020. The background of the findings was that the solar water heaters contained a heating element and as such was supposed to be classified under HSC 8516. 10. 00 as opposed to HSC 8419. 19. 0.

11. That upon receipt of this letter of findings, the Appellant replied on 12th March 2021 acknowledging receipt of the post clearance audit report and consequently invited the Respondent to visit its warehouses to verify its claim and in the same correspondence, the Appellant attached a summary of its product catalogue detailing its components and functions.

12. That on the same day, the 12th March 2021, and notwithstanding the Appellant’s rights and fundamental freedoms being adversely affected by the unsupported assessment and failure to attend the Appellant’s warehouse to verify its claim, the Respondent issued a demand notice for customs duty amounting to Ksh. 62,162,787. 00 hence preventing the Appellant from exercising its rights to show cause why the taxes should not be levied against it.

13. The Appellant added that it engaged the Respondent over the said demand pleading that the Respondent attends its warehouses to verify its claim and ensure that the Appellant had been given a fair chance to be heard before being accused of owing the said taxes but the Respondent ignored the pleas and instead wrote the letter dated the 11th of May 2021 reiterating its claim and requiring the Appellant to make good the payment.

14. That the Appellant submitted an application for review under the EACCMA 2004 on the 13th of May 2021 to the said assessment and demand as allowed by Section 51 of the Tax Procedures Act, highlighting the following four issues;a.Breach of the right to fair administrative action.b.Misinterpretation of the EAC Common External Tariff 2017. c.Product function giving the product character.d.Misapplication of the World Customs Organization (WCO) Explanatory Notes.

15. On the breach of the right to fair administrative action the Appellant contended that the Constitution of Kenya under Article 47 provides for the right to fair administrative action. That this right is further legislated under the Fair Administrative Actions Act No.4 of 2015. That salient amongst its provisions is the requirement under Section 4(3) which directs in mandatory terms 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 (among others); (1) a statement of reasons and the information, materials; and (2) evidence to be relied upon in making the decision or taking the administrative action. That through the letter dated the 12th March 2021, the Appellant made this request for the Respondent to attend its warehouse and grant it a chance to be heard and enable it appreciate the Respondents decision as this was a right it was entitled to under Section 4(3) of the Act.

16. The Appellant invited the Tribunal to note that the Respondent in its demand notice dated the 12th March 2021, did not address any of the concerns raised in the Appellant's letter dated 12th March 2021 and specifically, did not provide any documents or information on the criteria applied to arrive at the Respondent’s decision.

17. The Appellant reiterated that with the absence of this information and verification by the Respondent, it was prevented from exercising its rights to show cause why the taxes should not be levied against it as directed in the preliminary post clearance audit findings and as such, the application for review had been prepared without the benefit of the rights entitled to it under Section 6 of the Fair Administrative Actions Act.

18. On the issue of Misinterpretation of the EAC Common External Tariff 2017, the Appellant stated that whereas the Respondent’s proposition from the annexed schedule of workings illustrated that the Appellant made entries against which the Respondent contended contained solar water heaters with a heating element, the Appellant objected to the conclusion to levy additional taxes on the ground that under the EAC Common External Tariff 2017 there are special rules on the classification of products that have more than one component.

19. It averred that in line with the Respondent’s contention, the solar water heaters were being reclassified on the grounds that they contain a heating element. That HSC 8419. 19. 00 is applicable for solar water heaters without a heating element and HSC 8516. 16. 00 deals with electric instantaneous water heaters with a heating element. In consideration of the nature of the solar heaters under contest, it was apparent that they are solar water heaters that have an electric component.

20. That in this regard, they therefore do not fall within the classification of the Heading under 8516 or 8419 and as such, their classification must be done in line with the World Customs Organization (WCO), General Rules for the Interpretation of The Harmonized System, specifically 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. 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."

21. ln regard to elaborating the product function the Appellant referred to the Respondents schedule of computations, whereby they had listed entry number 199389 under the description lx40 containing CALPAK solar water mark 4.

22. That by referencing this catalogue number, the Respondent in its letter dated the 12th March 2021 attached the product catalogue which described the product as containing the following components;a.Collectors - collectors are solar panels (usually installed on the roof top) that are responsible for the collection of sun light and converting it to heat. They account for 80 % of the Solar water heater system and they are the most central part of the system such that without them the system would not function. They take different forms and sizes depending on the weather in which they are installed.b.Heat exchanger and storage tank- this is the unit consisting of pipes that transfer the heated water for eventual storage and use.c.The controller system- this is a system that regulates the temperature of the heat exchanger tank and prevent cold water from being recycled back into the system.d.Back up heater- this is a small component that comes with the system and is only utilized in areas where the weather is too cloudy or the sunlight is not sufficient for the solar water heaters to function. That it was prudent to note that the solar water heater is designed to function under very low sunlight and consequently the use of the back-up heater is very rare.

23. The Appellant averred that a true application of the World Customs Organization (WCO), General Rules for the Interpretation of the Harmonized System, specifically Rule 3(b) clearly shows that the solar water heaters in question the Respondent should have classified based on the component that gives them character. That in the sample above the solar water heaters are given character by the collectors which account for 80% of the functionality of the system. That it is therefore inaccurate to conclude that the solar water heaters are given character by the back-up heater considering that this system is not intended to be a core function of the system but a back-up for when there is insufficiency of sunlight.

24. On the issue of misapplication of the World Customs Organization (WCO), General Rules for the Interpretation of the Harmonized System Further, reference to the rules creates four considerations for any classification to be made on composite goods. Consideration should be given to the following areas;a.Nature of the material or componentb.Bulk, weight or valuec.The role of a constituent material in relation to its used.The valuation of the different component.

25. That in light of the Appellant's 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 heat exchange tank. That in consideration of the role, the Appellant demonstrated that the back-up heater plays a very incidental role in the functioning of the system. In any event, the system would still function even without the electric component signaling that the role is not primary to the functioning of the system.

26. On the valuation of the components, the back-up heater bought as a stand-alone is significantly cheaper than when bought together with the solar water heating system. To this end, it is therefore unlikely that someone interested in purchasing an electric component would purchase the solar water heater system. The valuation and cost of the solar components significantly outweigh the valuation and cost of the electric component.

27. That notwithstanding this plausible and compelling reasons, the Respondent disregarded the principles of interpretation set out in the World Customs Organization Explanatory Notes (WCOEN) and issued its objection decision dated the 3rd June 2021 reiterating its demand and grossly misdirecting itself on the application of the explanatory notes.

28. The Appellant contended that the application of these rules is global and any deviation would place Kenya in its own global category on the classification of solar water heaters which, for all intent and purposes would defeat its membership to the World Customs organization whose key objective is to harmonize import classification tariffs and procedures

Appellant’s prayers. 29. The Appellant prayed that the Tribunal annuls the Respondent’s objection decision dated 29th April, 2021 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 4th August 2021 and filed on the same date together with the documents attached thereto.b.The Respondent’s written submissions filed on 3rd July 2023 together with the authorities filed therewith.

31. The Respondent stated that on 29th December 2020, through the Post Clearance Audit (PCA) it profiled the Appellant after receiving an intelligence report on the basis of the profile was mis-declaration of solar water heaters incorporating electrical heating elements in tariff 8419. 19. 00 instead of 8516. 10. 00.

32. It averred that it conducted further analysis of the profile from BIU on all other importers of Solar water heating systems for the period January 2016 to December 2020, and ranked the first 17 companies on the basis of CIF value of their imports. That the Solar water heating systems imported by the companies were -found to have an electric component and were therefore dual water heating systems classifiable under tariff code 8516. 10. 00. That among the companies profiled was the Appellant.

33. The Respondent stated that on 11th February 2021, it issued a letter of preliminary audit findings to the Appellant under Ref. HQ/PCA/RRI/025/2021 requiring the Appellant to give an explanation within seven (7) days from the date of receipt of the letter on why extra taxes of Kshs. 62,162,787 should not be demanded.

34. That the Appellant did not respond to the letter. it stated that on 12th March, 2021, the Respondent formally issued the Appellant with a demand notice of Kshs. 62,162,787. 00 under Ref. HQ/PCA/RRI/025/2021.

35. That on 12th March, 2021, the taxpayer responded to both the letter of preliminary audit findings saying that that the products were correctly classifiable under Tariff 8516. 10. 00 but not 8419. 19. 00.

36. That it was informed that its response was time-barred since the 7-day notice to respond to the letter of preliminary audit findings had elapsed and a formal demand notice had already been issued. That it was therefore asked to respond to the demand notice.

37. That the Appellant did not respond to the demand and the case was forwarded to the Debt Management Unit (DMU) for enforcement on 4th May 2021. The total outstanding amount was Kshs. 62,190,789. 00.

38. That upon enforcement by DMU on 11th May 2021, the Appellant responded on 13th May 2021 seeking a review of the final demand on the following grounds:a.The Product function giving the product its essential character was the solar heater.b.The products are storage water heaters, which are no-electric and only for domestic use.c.It was standard market practice to have the electric water heater element fixed in solar water heaters. However, it is secondary and only supplied separately to clients who demand it.

39. The Respondent stated that the case was referred back to PCA and on 3rd June 2021 the Commissioner responded to the Appellant through a demand review decision Ref. HQ/PCA/RRl/025/2021 and informed the taxpayer that: -'According to the EAC CET and WCO Explanatory Notes Solar water heating systems that rely solely on solar energy· are classified under tariff code 8419. 19. 00 whereas dual water heating systems are classified under tariff code 8516. 10. 00. The taxpayer's products have an electric component and are therefore considered dual water heating systems'.

40. The Respondent was of the view that the Appeal invokes the following issues for determination;a.Whether the solar water heaters that incorporate electrical heating are classifiable as dual system items and hence classifiable in HS Code 851610. 00 of the EAC CET in line with the General Interpretation Rules 1 and 6. b.Whether the Respondent erred in law and in fact by failing to acknowledge the special rules on classification of products that have more than one component as enumerated by the EAC Common External Tariff 2017. c.Whether the Respondent erred in undertaking its obligation as a public officer to accord all taxpayers fair administrative action in accordance with Article 47 (1) and 47 (2) of the constitution.

41. The Respondent stated that a dual-system heater is one in which the water is heated electrically or by connection to a fuel-heated hot water system. That they are often equipped with a thermostatic control to operate them electrically only when the alternative means is insufficient.

42. That Rule 1 provides that classification shall be determined according to the terms of the headings and any relative section or chapter notes, provided such headings or notes do not otherwise require, provisions of Rules 2 to 6. That Note (A) 3 to Heading 8516 classifies dual system water heaters in Heading 8516, in which the water is heated either electrically or by connection to a fuel heated hot water system.

43. That the explanatory notes to the Heading 8419 state that heading machinery covered under the stated heading may be heated by any system (coal, oil, gas, steam, electricity etc) except in case of instantaneous or storage water heaters which are classified in heading 8516 when heated electrically.

44. That further, solar water heating systems that rely solely on solar energy are classified under tariff code 8419. 19. 00 whereas dual water heating systems are classified under tariff code 8516. 10. 00.

45. The Respondent stated that water heaters are classifiable under Heading 84. 19. That the explanatory notes to the heading specifically Note R has an exclusion note excluding electrical apparatus for heating. That further, the Explanatory Notes to Heading 84. 79 exclude instantaneous water heaters and storage water heaters and takes them to HS Code 8516. 10. 00.

46. That the Explanatory Notes to Heading 85. 16 part A at Note 3 states that dual system heaters are classified in that heading. That dual system heaters are those that use two systems of power such that electricity supplements the original/main fuel or power source.

47. It was Respondent's position that the solar equipments, the subject matter of this Appeal that the solar water heater put on a roof or grid and is used to heat water for domestic use. It therefore has solar as its primary source of energy. That electricity is secondary and supplies power when the solar function has failed. The solar heater switches to electricity when temperature drops below 55 degrees Celsius and thus it qualifies as a dual powered system.

48. It was the Respondent's position that the solar water heaters that incorporate electrical heating are classifiable as dual system items and hence classifiable in HS Code 8516. 10. 00 of the EAC CET 2017, in line with the General Interpretation Rules (GIRs) 1 and 6.

49. Regarding the issue of whether the Appellant’s right to fair administrative action was infringed in line with Article 47 of the Constitution and Section 4(3) of the Fair Administrative Actions Act, the Respondent stated that the it issued a letter of preliminary audit findings to the Appellant and in the letter the Appellant was given 7 days to respond on why the taxes should not crystalize. That the Appellant failed to respond prompting the Respondent to issue a demand notice.

50. That the Appellant was given another chance to respond to the demand notice but equally failed to do so giving rise to enforcement by the Respondent.

51. That the Appellant finally responded and its explanation was considered by the Respondent but failed to prove its argument on classification thus a demand review decision was issued confirming the demand notice with accrued penalties and interest.

52. That the Appellant should therefore not claim that it had any of its right on fair administration action infringed as the Respondent at all times gave the Appellant fair chance to explain and allowed its arguments even when it was made late in the spirit of establishing the true tax obligation not a coin less not a coin more.

53. The Respondent averred that final tax demanded after carefully considering the Appellant argument cannot be said as an infringement on this right simply because there was no consensus on taxes due but rather a dispute that allows for appeal to the avenues provided by law.

54. That similarly, Article 47(1) of the Constitution provides as follows:'Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair'.

55. The Respondent reiterated that in its actions the ingredients on right to administrative actions were met to arrive at its decision. To support its arguments, the Respondent relied on the case of Republic vs. The Honourable The Chief Justice of Kenya & Others Ex Parte Moijo Mataiya Ole Keiwua Nairobi HCMCA No. 1298 of 2004.

56. The Respondent averred that through a demand review decision Ref. HQ/PCA/RRl/025/2021 it informed the Appellant that: -“According to the EAC CET and WCO Explanatory Notes Solar water heating systems that rely solely on solar energy are classified under tariff code 8419. 19. 00 whereas dual water heating systems are classified under tariff code 8516. 10. 00. The taxpayer's products have an electric component and are therefore considered dual water heating systems".

57. That the solar water heating systems imported by the companies were found to have an electric component and were therefore dual water heating systems classifiable under tariff code 8516. 10. 00.

58. It contended that according to the Appellant's claim, it was standard market practice to have the electric water heater element fixed in solar water heaters. That however, it is secondary and only supplied separately to clients who demand it. That it is in fact an admission that the solar water heating systems imported did have the electric component that makes it classifiable under tariff code 8516. 10. 00.

59. That 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, 8516. 10. 00- Electric instantaneous or storage water heaters and immersion heaters.

60. That the Appellant had previously declared the imports under tariff code 8419. 19 which explanatory notes on 84. 19 provides;'Machinery, plant or laboratory equipment, whether or not electrically heated (excluding furnaces, ovens and other equipment of heading 85. 14), for the treatment of materials by a process involving a change of temperature such as heating, cooking, roasting, distilling, rectifying, sterilising, pasteurising, steaming, drying, evaporating, vaporising, condensing or cooling, other than machinery or plant of a kind used for domestic purposes; instantaneous or storage water heaters, non-electric'.

61. The Respondent stated that the Appellant classified the imports as falling under tariff code 8419. 19 as other, which charges 0% rate on declaration of tax obligation but now argues that it neither falls under both tariff code 8516. 10 nor 8419. 19.

62. It was the Respondent’s contention that classification of goods is in accordance with the general rules of interpretation taken in Rule 1 which provides that classification shall be determined according to the headings and any relative section or chapter notes, provided such headings or notes do not otherwise require provisions of Rules 2 to 6. That Note (A) 3 to Heading 8516 classifies dual system water heaters in Heading 8516 in which the water is heated either electrically or by connection to a fuel heated hot water system.

63. That the Explanatory Notes to the Heading 8419 state that heading 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.

64. It added that Note 5 to Heading 8516 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 8516.

65. The Respondent insisted that solar water heating systems that rely solely on solar energy are classified under tariff code 8419. 19. 00 whereas dual water heating systems are classified under tariff code 8516. 10. 00.

Respondent’s prayers 66. The Respondent prayed that the Tribunal finds that:-a.The Respondent decision of 30th April, 2021 and tax demand was therefore properly issued.b.This Appeal be dismissed with costs to the Respondent.

Issues For Determination 67. The Tribunal having carefully reviewed the pleadings made by the parties, the supporting documentation and the submissions made, is of the respective view that the following two issues call for its determination:-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 68. 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. 69. The Appellant stated that HSC 8419. 19. 00 is applicable for solar water heaters without a heating element and HSC 8516. 16. 00 deals with electric instantaneous water heaters with a heating element. That in consideration of the nature of the solar heaters under contest, it was apparent that they are solar water heaters that have an electric component.

70. That in this regard, they therefore do not fall within the classification of the Heading under 8516 or 8419 and as such, their classification must be done in line with the World Customs Organization (WCO), General Rules for the Interpretation of the Harmonized System, specifically 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.

71. The Appellant added that the solar water heaters major components were the solar collectors, heat exchanger and storage tank, the collector system and back up heater. That the back-up heater is a small component that comes with the system and is only utilized in areas where the weather is too cloudy or the sunlight is not sufficient for the solar water heaters to function. That it was prudent to note that the solar water heater is designed to function under very low sunlight and consequently the use of the back-up heater is very rare.

72. The Appellant emphasized that the solar water heaters are given character by the collectors which account for 80% of the functionality of the system. That it was therefore inaccurate to conclude that the solar water heaters are given character by the back-up heater considering that this system is not intended to be a core function of the system but a back-up for when there is insufficiency of sunlight.

73. On the other hand, it was Respondent's position that the solar equipments, the subject matter of this Appeal that the solar water heater put on a roof or grid and is used to heat water for domestic use. It therefore has solar as its primary source of energy. That electricity is secondary and supplies power when the solar function has failed. The solar heater switches to electricity when temperature drops below 55 degrees celsius and thus it qualifies as a dual powered system.

74. It was the Respondent's position that the solar water heaters that incorporate electrical heating are classifiable as dual system items and hence classifiable in HS Code 8516. 10. 00 of the EAC CET 2017, in line with the General Interpretation Rules (GIRs) 1 and 6.

75. 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.

76. The Explanatory Notes define and prescribe what two elements must be there for the system to be defined as a dual system heater. The Explanatory Notes are very categorical that a dual system heater is one in which water is heated either.by electricity or by a connection to a fuel-heated system. The use of the word or while further highlighting the dual nature of the system, limits the components applicable to only electricity or fuel. Accordingly, the use of the word 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

77. The Tribunal was therefore 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.

78. 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.

79. 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. 80. The genesis of this dispute was the Respondent’s decision to reclassify solar water heaters imported by the Appellant under Heading 85. 16 which attracts import duty at 25%. The Appellant had imported the items and declared and paid duty under Heading 84. 19 which attracts 0% import duty.

81. It was the Appellant’s contention that a true application of the World Customs Organization (WCO), General Rules for the Interpretation of the Harmonized System, specifically Rule 3(b) clearly shows that the solar water heaters in question the Respondent should have classified based on the component that gives them character. That the solar water heaters are given character by the collectors which account for 80% of the functionality of the system. That it is therefore inaccurate to conclude that the solar water heaters are given character by the back-up heater considering that this system is not intended to be a core function of the system but a back-up for when there is insufficiency of sunlight.

82. The Respondent's on its part averred that the solar water heaters that incorporate electrical heating are classifiable as dual system items and hence classifiable in HS Code 8516. 10. 00 of the EAC CET 2017, in line with the General Interpretation Rules (GIRs) 1 and 6.

83. 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.”

84. 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.

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 intend 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, EAC/ CET further states, in the relevant part; The apparatus described above is essentially used industrially, but the heading also covers nonelectric instantaneous water heaters and storage water heaters, including solar water heaters. domestic or not. if electrically heated, such appliances are excluded (heading 85. 16).

89. The Explanatory Note to Heading 85. 16 similarly provides in the relevant part as follows:-“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 case they remain in this heading. Solar water heaters are also classified in heading 84. 19” {Emphasis Added}.

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 Taxes where 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 succeeds 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 3rd June, 2021 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 15TH DAY OF SEPTEMBER, 2023ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBEREUNICE NG’ANG’A - MEMBERABRAHAM K. KIPROTICH - MEMBERBERNADETTE GITARI - MEMBER