Customs & Trade in Israel

12 November, 2023

The Court Canceled A Deficit Notice Based On Compliance With Section 3 Of The Indirect Taxes Law

The Herzliya Magistrate’s Court recently issued a verdict that resulted in the cancellation of deficit notices served to an importer under the Indirect Taxes Law. This decision was based solely on the importer’s compliance with Section 3 of the Indirect Taxes Law, without focusing on the classification issues involved in this matter.

Background: The case involved an importer of cables used for various applications, such as laying concrete and walkways. The classification of these goods depends on their carbon content; carbon level exceeding 0.6% results in exemption from customs duty, while carbon levels below 0.6% incur an 8% customs charge.

The imported cables and wires from China were supported by the supplier’s statement indicating a carbon level exceeding 0.6%. Based on this information, the importer classified the goods under the exempt customs category. However, the Ashdod Customs House disputed this classification, issuing deficiency notices totaling NIS 1 million, in addition to NIS 66,000 paid by the importer under protest.

The importer filed a declaratory relief claim with the Herzliya Magistrate’s Court, seeking to establish that the classification aligns with the importer’s position on this matter, which would, therefore, cancel the deficit notices, allowing a refund of the taxes paid under protest. He alternatively requested to determine that the deficit notices should be canceled by Section 3 of the Indirect Taxes Law.

Court Proceedings: After filing the claim, the importer requested that the court first examine his compliance with the Indirect Taxes Law. The court accepted this request, focusing the hearing solely on the importer’s compliance with the law.

The importer argued that carbon content is irrelevant to his product’s marketing. He also contended that he could have purchased goods from Turkey, a country with a trade agreement, exempt from duty regardless of carbon content. To ensure compliance, the importer obtained laboratory certificates from the supplier for every shipment, making the case that he provided accurate information and met the conditions of Section 3(1) of the law.

The importer maintained that he relied in good faith on the laboratory certificates, further noting that customs authorities had inspected the shipments without raising doubts about the certificates’ reliability. He claimed that he couldn’t have known about the deficiency, thereby satisfying the conditions of Section 3(2) of the law.

Regarding the non-rollover of taxes, the importer argued that the retrospective taxes were not added to the sales price, which had remained unchanged.

Customs Authority’s Stance: The customs authority argued that the importer provided incorrect information due to faulty classification and that he did not market the product as having a carbon content exceeding 0.6%. They also contended that the importer described the goods as “tying cables” rather than “concrete treading cables” in catalogs and in applications to the Israel Standards Institute. Additionally, the customs authority claimed that the importer switched customs agents and altered the goods’ customs classification, alleging a lack of good faith.

Court Decision: The court rejected the customs authority’s claims regarding how the goods were presented, as they provided no evidence to challenge the importer’s position. The court ruled that giving a name to a product, as long as its description is clear, isn’t enough to prove a lack of good faith.

The court also noted that the customs authority did not produce witnesses supporting their claims regarding the importer changing customs agents or the importer’s employee requesting inaccurate carbon content for the goods.

The court concluded that until the customs authority changed the classification, they had never before questioned the goods’ descriptions or the carbon content.

Regarding the non-rollover of taxes, the court favored an expert testimony provided by the importer and rejected the customs authority’s position based on assumptions and hypotheses.

The court stressed the importance of an unchanged sales price as a crucial factor in determining that the importer did not pass on the taxes. It rejected the customs authority’s argument that, despite the unchanged sale price, the importer had failed to prove that the taxes were not shifted. The court stated that accepting the customs authority’s stance would make it impossible for any importer to meet the burden of proof in cases with low customs rates.

Consequently, the court ruled in favor of the importer, canceling the deficit notices. It also imposed NIS 20,000 in expenses on the customs authority.

In Summary: This case highlights the importance of meeting the conditions in Section 3 of the Indirect Taxes Law when faced with deficit notices related to customs duties. In this instance, the importer’s compliance with these conditions led to the cancellation of the notices, underscoring the significance of good faith and proper documentation in such cases.

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.

Written by: Adv. Gil Nadel, Adv. Moran Oz

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