24 August, 2022
In this article we will review the court’s ruling regarding the classification of a Kawasaki Ninja EX 400 motorcycle imported by Metro Motor to Israel. Even though it is a ruling by a lower court – the Magistrate Court – it contains several decisions whose significance extends beyond the case itself.
The dispute focused on the classification of the motorcycle – Metro argued that it should be classified under Customs Article 87.11-3060 of the Customs Ordinance, which relates to an engine power of between 25KW-35KW with a 7% import duty and a 50% purchase tax. On the other hand, the Customs Authority argued that the motorcycle should be classified under Customs Article 87.11-3070 of the Customs Ordinance, which relates to an engine power of over 35KW with a 7% import duty and a 60% purchase tax.
The dispute therefore relates to a 10% difference in purchase tax tied to the engine power – if the engine power is below 35KW, the importer is correct, and if it is over 35KW, the Customs Authority is correct.
So how is the engine power defined under the Customs Ordinance? It is defined as “the maximum power that may be produced by a vehicle’s engine as designed by the manufacturer of the model without limitation”.
On the surface, this appears to be a simple factual question that should be easy to answer.
Even so, Metro explained that due to different standardization in different jurisdictions, the manufacturer produces two separate models of engines, each designed differently by the manufacturer. One engine is intended for the European market (including Israel), with a 33.4KW engine power. the other is a 36KW engine intended for the Asian market. Metro argued that it imported the 33.4KW engine to Israel.
On the other hand, the Customs Authority argued that while there are indeed two versions of the maximum engine power on the global market, there is no difference in the engines themselves – it is the same engine, only one comes with a 33.4KW engine power limit and the other with a 36KW engine power limit.
The court therefore had to determine what the maximum engine power without limitation is for the motorcycle as designed by the manufacturer.
The court ruled that the motorcycle’s engine power is 33.4KW.
How did the court reach this conclusion? The court accepted the testimony of a senior deputy manager in Kawasaki Motors Europe’s technical division, and noted that “the engines are different models that were designed differently by the manufacturer, each according to an engine power set by the manufacturer and designed as such. It is not a simple technical matter that changes the engine power, or a limitation of the control unit… it is a complete set of different components in the engine that result in a different engine power, as designed… the engine model for the European and Israeli market is designed and manufactured so that the engine power is limited to 33.4KW, through the control unit and other parts of the motorcycle, that are part of the motorcycle model”.
In other words, this is an engine designed to produce a certain engine power, and not a limitation set upon an existing engine in order to achieve a lower engine power.
It is important to note that with this ruling the court rejected the expert opinion of a court-appointed expert on the subject (who supported the Customs Authority’s position) in order to reach this conclusion. It is a rare occurrence for the court to prefer the position of one of the parties over the position of a court-appointed expert.
The court noted the intent behind the legislation and its goal as well. The court determined that “a reduced tax rate for a lower engine power… promotes among others important goals, such as safety aspects – reducing the risk of driving a two-wheel vehicle and the environmental aspects – reducing air pollution. The secondary legislator sought to encourage manufacturers to meet a certain engine power for two wheeled vehicles, in order to receive a lower tax rate. As a result, the end price for the consumer will be reduced, in light of the limitations designed by the manufacturer in the vehicle and/or engine”.
The court rejected additional testimonies presented by the Customs Authority, ruling that their evidentiary weight is not significant. The court stressed that the Customs Authority’s witnesses did not examine the motorcycle and are not motorcycle experts or mechanical engineers.
Another point of interest is a Transportation Ministry document presented by Metro, which states that “motorcycle engine power, for tax purposes, is in accordance with the COC certificate of the article itself. The certificate contains only one engine power value, which is the immutable maximum value of the engine power”. This obviously supports the position presented by Metro, and the court wondered how it came to be that the Transportation Ministry states a position contrary to the Tax Authority’s position. The court noted that “such a contradiction may confuse the civilian, cause hindrance and cast doubt, which under certain circumstances may and will be in the favor of the civilian”.
Beyond the court’s ruling in the case itself, there are a few points that should be noted:
First of all, if government authorities present two different positions – the confusion and doubt may be in favor of the civilian under certain circumstances.
Second, if it is not justified to tax the product – the court will prefer the interpretation that will support not taxing the product.
Third, testimony of witnesses that did not examine the product itself and are not experts in the specific field upon which they are testifying, even if they are witnesses called forth by the state, their testimony will not hold significant evidentiary weight.
[TA 57355-12-18, Metro Motor Marketing (1981) Ltd. V. The State of Israel; before judge Jacob Shaked, ruling given on 20.1.21. Metro represented by Adv. Hillel Kornfeld, State of Israel represented by Adv. Fierstein]
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