The Court Adopts the Position of the Department of Customs - Fire Extinguisher Containers Are Fire E
Adv. Gill Nadel, Adv. Omer Wagner
This overview will describe a recent ruling by the Rishon Letzion Magistrates Court, in which issues of customs classification of various items designated for fire detection and extinguishing systems were discussed.
The ruling also included discussion of the question whether, in the case of the import of components that are assembled in Israel into a complete system, the importer does or does not have to prove that the cost of the tax was not shifted on to the consumers in the selling price.
The court adopted the position of the Department of Customs and decided that the classification proposed by the importer would be rejected, and also adopted the position of the Department of Customs with regard to the issue of passing on the tax.
The Case Facts:
AFCON (the importer) imports to Israel various parts that are meant for fire extinguishing systems (containers, valves, fire detectors). A dispute arose between the company and the customs authority with regard to the customs classification of the goods.
With regard to the fire extinguishing containers, the importer claimed they are classified as H.S. Code 84.24-8990 ("mechanical appliances for spraying liquids or powders-others") or as H.S. Code 84.24-9090 ("machines and mechanical appliances with independent functions") or as H.S. Code 85.31-1090 ("burglar or fire alarms"), while the customs authority claimed they are classified as H.S. Code 84.24-1000 ("fire extinguishers").
With regard to the valves meant to be attached to the containers, the importer claimed that they should be classified in the same way as the containers, while the customs authority claimed that the classification is as H.S. Code 84.81 ("valves").
With regard to fire detectors, the importer claimed that they are classified as conditional H.S. Code 622 ("typical equipment for fire fighting and rescue"), and alternatively, that they are classified as H.S. Code 85.31-1090 ("burglar or fire alarms"), while the customs authority claimed that they are classified as H.S. Code 85.31-9010 ("detectors ").
The two parties were also in dispute with regard to the importer's compliance with the terms of the Indirect Taxes Law, and in particular as to the question whether the importer must prove that no tax passing on occurred at the time of sale.
The court ruled that the facts show that the subject is various containers with volumes of up to 600 liters, permanently installed and connected to hoses for the purpose of extinguishing fires, containing material in liquid form that is released as gas.
The court rejected the importer's interpretation, according to which the phrase "fire extinguishers" in H.S. Code 84.24-1000 refers exclusively to portable fire extinguishers. The court ruled that the containers under dispute resemble fire extinguishers in their outer appearance and serve a similar purpose of extinguishing fires. The court was aided by dictionary definitions and relevant Israeli standards, and learned from them that there are also stationary fire extinguishers.
The court ruled that the customs codes suggested by the importer, such as 84.24-8999 or 84.24-9090 are not appropriate for classifying the containers as they refer to spraying liquids or powders, they are "inclusive" custom codes, and in this case what is sprayed is gas.
The court also rejected the importers argument for classification as a fire extinguishing system, H.S. Code 85.31-1090, and ruled that the importer should have acted in accordance with the Customs Department's instructions by issuing a secretarial file and proving that all the goods are designated for the same purpose, especially as there is no single customs code that denotes a complete fire extinguishing system.
The court also ruled, beyond what is required, that the main function of that system is fire extinguishing and not fire detection, and therefore the system cannot be classified as H.S. Code 85.31-1090.
The court also adopted the customs authority's argument regarding the valves and ruled that they cannot be classified together with the system but separately, according to their essence as valves, as H.S. Code 84.81.
The court criticized the importer for not presenting an expert opinion to the court as well as an example of the products under dispute, and for not bringing the customs agent who classified the products to testify.
With regard to the passing on the tax issue, the court ruled that in this case the importer imports components - containers, valves, detectors - and assembles a complete system and provides maintenance services. In these circumstances, the court ruled that the actions executed by the importer do not change the essence of the imported product, and therefore he must prove that no passing on occurred when the systems were sold.
By so doing, the court differentiated from the well known ruling in the Holis case (Civil Appeal 992/11) where it was decided that in the case of the import of raw materials, for which the tax is paid, and the sale of a finished product - the importer is exempt from proving no tax passing on occurred during the sale of the finished product.
As to the case in question, the court ruled that the importer did not successfully prove that he did not shift the tax burden on to his clients. The court stated that the importer did not present an expert opinion on the matter and only submitted the testimony of the project manager, who does not have education in accounting. It also stated that the importer did not make a comparison with other products for which tax was not paid, and did not present an organized position that proves that the tax was not shifted.
In light of all of the above, the importer's claim was rejected, including all its components, and the importer was required to pay court costs totaling NIS 25,000.
[Civil Suit (Rishon Letzion Magistrates Court)1907/09 AFCON Control and Automation Ltd. vs. The State of Israel (Department of Customs and VAT), Justice Erez Yekuel, given on 4.9.14. Parties' representatives: for the importer - Adv. Ehud Kronfeld from Eitan, Mehulal & Sadot. For the customs authority - Adv.Revital Ben David].
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This document provides a general summary and is for information purposes only. It is not intended to be comprehensive nor does it constitute legal advice.If you are interested in obtaining further information or wish to follow the legal developments in this matter, please contact Adv. Gill Nadel - Chair of the firm's Import, Export and International Trade Law Practice, Tax and Executive Compensation Department. Email: Gill.Nadel@goldfarb.com, phone: 03-6089848.