Adv. Omer Wagner, Adv. Gill Nadel
The facts of the case and the claims of the parties:
The importer, the Holis Industries Corporation, imported wooden rails to Israel to be used as raw materials for shutters and Venetian blinds.
Until 2007, the importer classified the goods as items liable for customs, and paid customs a sum of around 3.3 million NIS. At a certain stage, the importer discovered his mistake and began to import the goods under customs exemption.
In the present action, the importer requested a refund from Customs of the 3.3 million NIS that were overpaid. The Customs accepted the importer's stance regarding the classification, and the action focused on the question of the need to prove failure to roll-over the tax.
We will mention that according to the Law of Indirect Taxation an importer is entitled to get back overpaid customs, if one of the following two conditions are met:
1. The importer did not sell the goods;
2. The importer sold the goods, but did not roll the tax over to his clients.
In this case, the importer claimed that since the goods were used as raw material to manufacture other goods, sale of the final product cannot be seen as sale of the raw materials, and therefore he claimed that he had met the first condition (failure to sell the goods). On this issue, the importer relied on the famous Supreme Court’s decision dating back to the '80s, in the Hamdia Door Corporation case. Here, the latter imported paper nettings for the purpose of manufacturing doors, and was not considered to have sold the raw materials even though a final product had been sold.
Alternatively, the importer claimed that it is very hard to examine the question of rolling over the tax, when the sale concerned occurs after additional processing and manufacture processes in Israel are made on the imported product. Similarly, the importer claimed that when comparing his profit from this specific product to the profit made from other products, it is clear that this particular product made lower profit, and therefore he claimed that he also met the second condition.
Regarding the sale or non-sale, The Customs claimed that the raw materials had not undergone a manufacture process in Israel, but rather only processing (painting, sanding), and in fact the final product is not fundamentally different from the raw material. Therefore, the customs requested that the importer's interpretation, according to which the product was not sold, be rejected. On this point, The Customs also claimed that the importer needed to have submitted an expert opinion on the difference between "manufacture" and "processing".
Additionally, The Customs claimed that examining the account’s of the importer indicates that one of the reasons the tax was rolled over was that the importer's sale price was higher than that of the competitors, and also because the tax was paid for many years and therefore the assumption is that the importer was forced to roll it over.
The court's decision was as follows:
The court accepted the importer's claim that the final product was a result of various manufacturing processes, and the costs of the final product neither reflect nor correlate the cost of the raw materials during importing. The court further noted when trying to determine wether or not the tax were rolled-over or not , because manufacturing processes are performed on an imported product it is obvious that the cost of the imported goods cannot be compared to their sale’s price, which also takes into account the labor.
In this case, the court believed that the following processes were performed on the imported goods: polishing, painting, cutting, and stringing, all of which require a large amount of manpower. Additionally the court ruled that the use for finished wooden shutters differs from the use made of the raw materials, that cannot be used for shade.
In light of the above, the court ruled that manufacturing processes were performed on the imported goods and not only processing in Israel, and therefore the importer met the condition of the law that the imported goods should not be sold.
Even though it was determined that the importer need not prove failure to roll-over the tax, the court moved on to discuss, as a side point, the question of whether the importer proved that the tax was not rolled over during sale in this case.
On this issue, the court cast doubts on the data that the importer supplied and noted that the importer did not submit the opinion of an accountant and made do with submitting data with only gross and net profit. The court further noted that since it was proved that the importer's prices were higher than the market prices, and since the importer had paid the tax for many years, his claim that he absorbed the tax and did not roll it over is dubious. It was also noted that after the customs were cancelled the price of the importer's goods did not fall.
In the end, the court accepted the action and instructed that Customs refund the importer around 3.3 million NIS plus interest and inflation, and obliged Customs to pay legal expenses and attorney's fees at a sum of 100,000 NIS.
(Judge T. Zilbertal, CA (Jerusalem) 2045/08 Holis Industries Ltd. v. State of Israel- Tax Authority- Customs Branch, decision given 8.11.10).
(Representatives of the parties: for the importer, Advs. Gill Nadel and Rotam Virnick, of our offices; for the state- Adv. Weisel of the Jerusalem District Attorneys- Civil Division).
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