18 December, 2022
The Lod District Court recently issued a ruling that dealt with some of the main issues of import taxation. In this article we will review the ruling, in which the court accepted the position of the importer (represented by our firm).
The product in question was the Firebox device imported by the HOT Group, a leading Israeli cable and telecommunications group. Firebox is a telecommunications device with three functions: receiving TV broadcasting, internet services and phone services. It has an internal modem, router and HOT broadcasting receiver.
The dispute between the importer and Customs revolved around the classification of the device under the Customs Tariff. The importer classified the device under Article 85.17.6290, which includes devices for receiving or broadcasting sound, picture or satellite, and is exempt from customs and purchase tax. On the other hand, Customs classified the device under Article 85.28.7140, which includes TV receivers specifically for cable, an article that was subject to customs / purchase tax until the end of 2017. HOT argued that it paid excess import tax, and demanded its return.
How is such a classification dispute resolved? The Supreme court determined that the deliberation will be conducted in three stages: in the first stage, the nature of the goods is examined, as well as their practical use, the material from which they are manufactured, their characteristics etc. in the second stage, the relevant Customs Articles are examined, while the third stage is matching the goods with the most appropriate Customs Article.
What about cases in which one device has several functions? In this case Rule 3 of Section 16 of the Customs Tariff is applied: “Composite machines, which include two or more machines that are installed together as one device and other machines designed to perform two functions or more, complementary or alternative, are classified as if they only include the component or machine that perform the main function”.
In accordance to the above, HOT argued that the device should not be viewed as a TV receiver, as it serves several functions. HOT claimed that the device in effect replaces all former household telecommunications / internet devices: modem, router and phone, and that all internet access in a home is performed thorough the device, whether by computer, laptop, tablet or smartphone. In addition, HOT argued that the device is technically composed of two electric circuits connected by a chip and a cable, and the internet and telecommunications functions can be used even when the TV chip does not work.
Moreover, HOT argued that on a marketing level the goods were not advertised as a TV receiver but as a “smart box”, emphasizing the internet and telecommunications capabilities of the device. For example, in HOT’s website, which is divided to TV, internet and phone sections, the goods were not categorized under any sections, but under a separate section titled “HOT Multi – the next generation of TV and internet in Israel”.
In addition, HOT presented a user survey that showed 46% of the surveyed customers noted that Firebox enables them to enjoy all the services provided by HOT in one box. As for main uses, 65% of the surveyed noted that their main use of the Firebox is for phone calls, internet access through various devices, TV internet access, watching movies / music on a TV screen through their smartphones / disk on key / computer etc. 35% noted that their main use is viewing cable broadcasts on their TV.
The court ruled that the goods are not “specifically” for receiving cable TV and therefore cannot be classified under Article 85.28.7140. the court noted that “the goods are used also for cable TV, but certainly not specifically for cable TV… It cannot be disputed that goods with this nature, are not specifically for TV, as they are used for several devices, of which TV is only one”. On the other hand, the court noted that Article 85.17.6290 uses a broad wording: broadcasting or receiving of sound, picture or information, and addresses the TV function, the internet function and the phone option, thus it describes the device in the best way. Therefore, the court accepted HOT’s classification position.
The Customs argued, among others, that the World Customs Organization (WCO) published “Classification Opinions” in 2006 relating to similar goods that include functions of TV, phone and internet, and determined that such goods should be classified under Article 85.28.71, but the court rejected this argument. The court noted that the device addressed in 2006 was not a “smart communication box” and did not enable internet access throughout the home, and is not similar to the device in question. The court added that WCO’s classification decisions were not adopted by Israeli law, are not binding, and Israeli courts have previously ruled contrary to these decisions.
The court’s ruling also addressed the applicability of the WCO’s Information Technology Agreement (ITA). HOT argued that the State of Israel committed under this agreement not to impose import tax on Set-Top Box devices, such as the goods in question. The Customs argued that the classification of the Firebox is different than what was declared before the WCO. The court accepted HOT’s position and ruled that the Firebox in question meets all parameters included in the agreement, as it is a type of device that is based on a chip with a communication function that integrates a modem that enables internet access and a transfer of information function. The court therefore summarized that when Customs classified the Firebox under Article 85.28 which is subject to import tax, the State apparently acted contrary to its commitments under the ITA.
As excess tax was paid, in order to return the tax the importer must prove that the goods were not sold or that the tax was not included in the sale price to consumers. The court accepted HOT’s position on the matter, ruling that it proved import taxes were not included in the price of the package. Moreover, the court ruled that the goods were not sold but rented – as a sale of a finished product does not constitute a sale of imported raw material, so the lease of goods as part of a service package does not constitute a sale of an imported product. Therefore, the goods should be viewed as raw material used for the manufacture of the final product – the service package – while the “cost of manufacture of the package” does not reflect or correlate to the cost of the goods. In such a case, there is no way to determine if tax paid for the goods was included in the price of leasing the goods as part of a service package.
The court also noted that in order for HOT to prove that the tax was not “rolled”, it does need to provide minute details regarding package costs and pricing and attribute costs to each package, in effect isolating the tax component within all these costs, if HOT claimed that within the package price it included the goods’ price. The court explained that the Customs’ position contradicts standards set by case law, which determined that in the case of excess tax, the general rule is that it should be returned, without making the process unduly difficult for the tax assessee seeking a tax return.
In conclusion, the court accepted HOT’s position and ordered the State to return all excess tax it paid.
The content in this communication is provided for informational purposes only and is not intended to be comprehensive. It does not serve to replace professional legal advice required on a case by case basis. The firm does not undertake to update the information in this communication or its recipients about any normative, legal or other changes that may impact the subject matter of this communication.
For any questions or clarifications on the issues listed in this memorandum, you can contact your contacts at our office or: