[2023] KETAT 113 (KLR)

Animix Limited v Commissioner of Customs & Border Control (Tribunal Appeal 516 of 2021) [2023] KETAT 113 (KLR) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 113 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 516 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

March 17, 2023

Between

Animix Limited

Appellant

and

Commissioner of Customs & Border Control

Respondent

Judgment

1. The Appellant is a limited liability company registered in Kenya and imports and sells yeast culture to animal feed manufacturers.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act. Cap 469 Laws of Kenya and the Authority is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Appellant in 2017 had imported animal feed additives hereinafter referredto as “Yeast Culture” and classified the same under HS Code 2309. 90. 90.

4. On 7th September, 2020, the Respondent issued a tariff ruling to the Appellant on the animal feed additive in question classifying it under HS Code 2102. 10. 00.

5. The Appellant vide a letter dated 21st September 2020 applied for a review of the findings and insisted that the yeast culture should be covered under HS Code 2309. 90. 90.

6. Thereafter, there was a lot of back and forth between the parties while the shipment was being held by the Respondent. The Appellant in order to lessen its losses in charges which were continually rising, was forced to pay for all the charges and penalties.

7. There followed deliberations between the parties, laboratory tests were also done and the results communicated to the Appellant. The Appellant wrote to the Respondent on 15th February, 2021 appealing against the tariff ruling on the animal feed additive (yeast culture) and a Technical Committee met on 23rd February, 2021, to deliberate further on the matter, with the Appellant in attendance.

8. On 11th May, 2021, the deliberations of the Technical Committee’s meeting were communicated to the Appellant with the conclusion as per the earlier position of the Respondent and thereby rejecting the Appellant’s appeal.

9. The Customs office did the final letter on 31st May 2021 demanding Kshs. 11,982,068 and the same being VAT, 25% duty and interest on the yeast culture imported in 2017.

10. The Appellant being dissatisfied with the Respondent’s review decision filed a Notice of Appeal dated 26th August, 2023.

THE APPEAL 11. The Appeal is set out in the Memorandum of Appeal dated 26th August 2021 and filed on 27th August, 2021 and raises the following grounds of appeal:a.That the Respondent erred in fact and in law by finding that the sample of yeast culture presented was to be classifiable by application of GIR 1 under the Tariff Code 2102. 10. 00b.That the Respondent erred in fact and in law by finding that the heading 2102 covers dried yeast which are both fit for human consumption and animal feeding.c.That the Respondent erred in fact and law by finding that the yeast culture presented was different from the feeding preparation that is described under the heading 2309. d.That the Respondent erred in fact and law that under Rule 1, 2(b) and 6 of the General Interpretation Rules, the yeast culture herein should be read and interpreted as being classified under tariff code 2102. 10. 00e.That the Respondent erred in fact and in law in finding that the subject item, Saccharomyces cerevisiae, is the main component of the yeast culture and as such is classifiable under tariff code 2102. 10. 00. f.That the Respondent erred in fact and law by finding that pursuant to Section 235 and 236 of the EACCMA 2004, the Commissioner may unconditionally call for documents and conduct an audit backdated to 5 years from import.g.That the Respondent erred in fact and in law by demanding for alleged short- levied taxes and interest pursuant to Sections 135 and 249 of EACCMA.h.That the Respondent erred in law and fact by finding that it was the overall mandate of KRA to levy taxes and tariff classification of goods despite the input and official communication from other sector-specific Governmental organizations and parastatals.i.That the Respondent erred in law and fact by finding that the purpose of proper classification of goods and ensuring that taxpayers pay correct taxes is a mandate of the KRA and is exercised in a vacuum and blind to all other extrinsic evidence.j.That the Respondent erred in law and in fact in making an overall finding that the applicable subheading for the yeast culture will be 2102. 10. 00. k.That the Respondent erred in law and in fact by demanding Kshs.12,375,955. 00 being alleged taxes and accrued interest.

APPELLANT’S CASE 12. The Appellant’s case is premised on the following documents and proceedings before the Tribunal.a.Appellant’s Statement of Facts dated 26th August 2021 and filed on 27th August 2021. b.The Appellant’s witness statement of Dr. Ezekiel Onyango dated 5th August 2022 and filed before the Tribunal on 17th August 2022 and which was admitted in evidence on oath on 12th October 2022.

13. The Appellant asserts that “Yeast Culture” is a brand name registered in South Korea as an animal feed additive. It is not edible and not fit for human consumption in contrast to Chapter 21 of the EAC Tariff Book which covers products that fall under the category of “Miscellaneous EDIBLE Preparations”. The Appellant does not deal in edible products as the yeast culture is not edible. The Appellant is registered as an importer and distributor of veterinary medicines and animal feed additives.

14. The Yeast Culture has the label “FOR ANIMAL FOOD ONLY”. The Veterinary Health Certificate issued by Korea Feed Ingredients Association clearly shows that the Yeast Culture is an animal additive and the Material Safety Data Sheet for the product shows that the same is a feed additive not fit for human consumption and that “Determination for its suitability for a particular use should be made by qualified persons familiar with its properties and composition”

15. Due to its technical nature, the Kenyan Government relies on the Director of Veterinary Services and Veterinary Medicines Directorate to evaluate applications for importations of yeast culture that contains Saccharomyces cerevisiae to determine its suitability for use as a feed additive and not for human consumption. Despite the Appellant’s insistence, the Respondent ignored the advice of the DVS and the VMD.

16. The yeast in Chapter 21 is pure EDIBLE baker’s yeast and pure EDIBLE brewer’s yeast. Yeast Culture is not pure as it only contains feed grade yeast and several other ingredients useful for the performance of poultry, dairy and swine. It comprises of various other elements with yeast (Saccharomyces cerevisiae) as one of them. This yeast only contributes to 0. 2% of the total make up. Saying therefore that because the product contains 0. 2% of yeast, then the product is yeast is akin to saying that air which contains a percentage of oxygen, is all of it oxygen.

17. The Appellant further argues that its products fall under Chapter 23 in EAC Tariff Book as “Residues and waste from the food industry prepared for animal products” and specifically Chapter 23. 09 described in EAC Tariff Book as “preparations of a kind used in animal feeding”. In earlier communication, the Appellant shared with the Respondent all the details regarding its customersand the businesses they do and none of them is in the business of baking bread or beer.

18. Following the ruling that feed grade “yeast culture” falls under Chapter 21, the Appellant submitted a sample of feed grade “yeast culture” to SGS Kenya Ltd which is an independent, international laboratory to analyse and confirm the composition of feed grade “yeast culture” and it confirmed that the same contains a very small percentage of yeast.

19. The Appellant also submits that the Respondent has always issued and approved Customs Entries for feed grade “yeast culture” since the Appellant started trading in 2017 with duty being levied at 10% according to HS CODE 23 which it has always used and has never informed the Appellant that it was using the wrong code.

20. The Appellant also argues that Chapter 21 does not require import permits from VMD, DVS or a KEBS inspection report as the edible preparations can be imported by anyone by simply obtaining an import declaration form (IDF).

21. The Appellant’s product contains Saccharomyces cerevisiae and other ingredients and requires thorough scrutiny by VMD, DVS and KEBS before an import permit is issued.

APPELLANT’S PRAYERS 22. On the basis of the above submissions, the Appellant prays for the Respondent’s objection decision to be set aside and annulled with costs to the Respondent.

RESPONDENT’S CASE 23. The Respondent’s case is premised on the following:a.The Respondent’s Statement of Facts dated 23rd September 2021 and filed on 24th September 2021 together with the documents attached thereto;b.The evidence of Benard Odhiambo Oyucho as per his statement dated 20th June 2022, filed on 27th June 2022 and admitted in evidence on oath on 12th October, 2022. c.The Respondent’s written submissions dated 25th October 2022 and filed on 26th October, 2022

24. The Respondent argues that the information gathered from the verification exercise was that the Appellant sells yeast culture to manufacturers of animal feeds.

25. That the initial tariff findings identified the sample provided to be an organic vegetative material containing bioactive micro organisms used as an additive in animal feed diets. Yeast culture was found to be an animal feed supplement specifically developed to stimulate growth by increasing growth efficiency and enhancing immune system in livestock.

26. That heading 2309 covers preparations of a kind used in animal feeding. Note 1 to Chapter 23 states that the heading includes products of a kind used in animal feeding, not elsewhere specified or included, obtained by processing vegetable or animal materials to such an extent that they have lost the essential characteristics of the original material, other than vegetable waste, vegetable residues and by-products of such processing.

27. That heading 2102 covers the classification of Yeasts (active or inactive); other single cell micro-organisms, dead (but not including vaccines of heading 30. 02); prepared baking powders. Note 1(f)of the Chapter excludes yeast put up as a medicament or other products of heading 3003 or 3004.

28. That this heading includes classification of active yeast generally used to provoke fermentation. They consist essentially of certain microorganisms (almost exclusively of the genus saccharomyces) which multiply during alcoholic fermentation.

29. That the laboratory test results confirmed the following results:

TESTS RESULTS

Physical appearance Brown free flowing plant material

Crude protein content 25. 09˚/ow/w

Fermentation activity Positive

Qualitative inorganic analysis P, S, Ca, and Fe

Ignition residue at 850˚C 4,950/OW/W

Composition (as specified) Yeast culture: Over 1. 0×(10^7) cfu

Indications (as specified) To stimulate growth, increase feed efficiency, stabilise normal colonies in viscera, enhance immune system in livestock, ease symptoms of diarrhea, inhibit harmful bacteria by lowering intestinal PH with rich organic acids, increase the body weight and productivity of livestock, and supply various nutrients such as vitamins, UGF, organic acids.

Administration (as specified) Cattle & swine: 2kgs per tonne of feeds, poultry: 12kgs per tonne of feeds 30. That classification is guided by the General Rules of Interpretation (GIRs) that are applied sequentially. That GIR 1 provides that classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes. That, further, under GIR 3(a), goods/items shall be classified as if they consisted of the material or component which gives them their essential character, in so far as this criterion is applicable.

31. That GIR 3(b) states that, “Mixtures, composite goods consisting of different materials made or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3(a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable”.

32. The Respondent avers that classification decisions are guided by the General Rules of Interpretation (GIRS) of the Harmonised Systems (HS) of Customs classification that are applied sequentially on the goods presented at the release point, verification reports and information provided.

33. The Respondent submits that based on GIRs, the technical information provided concerning the goods imported, the description of the goods as yeast culture and the laboratory findings on samples analysed, the goods imported by the Appellant described as the “yeast culture” is classifiable in EACCET HS Code 2102. 10. 00.

RESPONDENT’S PRAYERS 34. The Respondent prays for the:a.Upholding of the Respondent’s decision to classify the Appellant’s product as EACCET HS Code 2102. 10. 00b.Dismissal of the Appeal with costs.

ISSUE FOR DETERMINATION 35. After careful consideration of the pleadings, the facts of the matter and the submissions of the Respondent, the Tribunal was of the view that the only issue for determination in this dispute was;Whether the Respondent erred in classifying the Appellant’s imported Yeast Culture under tariff head 2102. 10. 00.

ANALYSIS AND DETERMINATION 36. Having identified the issue for determination, the Tribunal proceeded to deal with the same as hereunder.

37. The genesis of the dispute was the Respondent’s desk audit on the Appellant’s imports of “animal feed additive/Yeast Culture” which it had been declaring under tariff code 2309. 90. 90 which attracts import duty at 10%. Vide a tariff ruling dated 7th September 2020, the Respondent classified the Appellant’s imported product under tariff code 2102. 10. 00 which attracts duty at 25% leading to the dispute. Subsequently, the Respondent issued a demand for the resultant additional taxes amounting to Kshs. 11,982,068. 00.

38. It was the Respondent’s submission that it subjected the Appellant’s consignment to a laboratory analysis and tariff determination following suspicion of the animal feed additives misclassification and found it to be classifiable under tariff code 2102. 10. 00.

39. The Appellant on the other hand objected to the Respondent’s findings giving reasons for the same arguing that yeast culture should be covered under HS Code 2309. 90. 90, based on the GIRs of the HS that is replicated in the EACCET.

40. The Appellant argued that the Respondent did not consider Explanatory Notes (ENs) to Chapter 21 that justify classification of the imported product under the heading. That the Appellant since 2017 had been importing the product in issue at the rate under HS code 2309. 90. 90 without any hitches from the Respondent until the aforesaid assessment date. That the contents/ingredients of the imported consignment had not changed.

41. The Appellant added that the product specification sheets obtained from the supplier indicate the product to be an animal feed additive which is not edible and not fit for human consumption. This is in contrast to what is covered in Chapter 21 of the EAC Tariff Book used by the Respondent in its arguments, which covers products that fall under category of “Miscellaneous Edible Preparations”. That the products covered here are edible.

42. The Appellant submitted that it does not deal in any edible products. That the yeast used is not edible, has a foul smell and is repulsive to human beings. That the Appellant is also registered as an importer and distributor of veterinary medicines and animal feed additives.

43. The Tribunal noted that from the EACCET 2017, Chapter 21 covers miscellaneous edible preparations. Under heading 2102 it covers: Yeasts (active or inactive); other single cell micro-organisms, dead (but not including vaccines of heading 30. 02) prepared baking powders. The following are the detailed tariff codes from this heading.21. 02 Yeasts (active or inactive); other single-cell microorganisms, dead (but not including vaccines of heading 30. 02); prepared baking powders.2102. 10. 00 - Active yeasts.2102. 20. 00 - Inactive yeasts; other single-cell micro-organisms, dead2102. 30. 00 - Prepared baking powders.

44. On the other hand, Chapter 23 covers: Residues and wastes from the food industries; prepared animal fodder.Tariff code 23. 09 covers preparations of a kind used in animal feeding. The following are the details under this tariff code.2309. 10. 00 - Dog or cat food, put up for retail sale- Other:2309. 90. 10 --- Premixes used in the manufacture of animal and poultry feeds 2309. 90. 90 --- Other

45. The Tribunal reviewed the ENs for heading 2102 and found that active yeasts are described as yeasts that “generally provoke fermentation”. They consist essentially of certain micro-organisms (almost exclusively of the genus Saccharomyces), which multiply during alcoholic fermentation. Yeasts may also be produced by partial or total prevention of fermentation, according to the aeration process. According to the notes the active yeasts include, Brewery yeast, Distillery yeast, Bakers' yeast, Culture yeast and Seed yeast.

46. The Tribunal further looked at the ENs for heading 23. 09 titled –“Preparations of a kind used in animal feeding.The details under the EN are as follows:-“2309. 10 - Dog or cat food, put up for retail sale 2309. 90 - OtherThis heading covers sweetened forage and prepared animal feeding stuffs consisting of a mixture of several nutrients designed: 1. to provide the animal with a rational and balanced daily diet (complete feed);

2. to achieve a suitable daily diet by supplementing the basic farm- produced feed with organic or inorganic substances (supplementary feed); or

3. for use in making complete or supplementary feeds.The heading includes products of a kind used in animal feeding, obtained by processing vegetable or animal materials to such an extent that they have lost the essential characteristics of the original material, for example, in the case of products obtained from vegetable materials, those which have been treated to such an extent that the characteristic cellular structure of the original vegetable material is no longer recognizable under a microscope.”

47. Additionally, the Tribunal scrutinised part C of the Explanatory notes to heading 2309 whose title is “PREPARATIONS FOR USE IN MAKING THE COMPLETE FEEDS OR SUPPLEMENTARY FEEDS.”“The notes explain that “These preparations, known in trade as " premixes ", are, generally speaking, compound compositions consisting of a number of substances (sometimes called additives) the nature and proportions of which vary according to the animal production required. These substances are of three types: 1. Those which improve digestion and, more generally, ensure that the animal makes good use of the feeds and safeguard its health: vitamins or provitamins, amino-acids, antibiotics, coccidiostats, trace elements, emulsifiers, flavourings and appetisers, etc.

2. Those designed to preserve the feeding stuffs (particularly the fatty components) until consumption by the animal: stabilisers, anti- oxidants, etc.

3. Those which serve as carriers and which may consist either of one or more organic nutritive substances (manioc or soya flour or meal, middlings, yeast, various residues of the food industries, etc.) or of inorganic substances (e.g., magnesite, chalk, kaolin, salt, phosphates).The concentration of the substances described in (1) above and the nature of the carrier are determined so as to ensure, in particular, homogeneous dispersion and mixing of these substances in the compound feeds to which the preparations are added. Provided they are of a kind used in animal feeding, this group also includes:a.Preparations consisting of several mineral substances.b.Preparations consisting of an active substance of the type described in (1) above with a carrier, for example products of the antibiotics manufacturing process obtained by simply drying the mass, i.e. the entire contents of the fermentation vessel (essentially mycelium, the culture medium and the antibiotic). The resulting dry substance, whether or not standardised by adding organic or inorganic substances, has an antibiotic content ranging generally between 8 % and 16 % and is used as basic material in preparing, in particular, "premixes ".The preparations of this group should not, however, be confused with certain preparations for veterinary uses. The latter are generally identifiable by the medicinal nature and much higher concentration of the active substance, and are often put up in a different way.” (Emphasis added).

48. From the pleadings the Tribunal noted that it is not in dispute that the Appellant was in the business of importing the product and selling it to manufacturers of animal feeds. That the Appellant had shared with the Respondent all the details regarding its customers and their operations and none of them is in the business of baking bread or beer brewing.

49. The Tribunal further noted that the Appellant submitted that the yeast culture is not pure yeast as it contains feed grade yeast and several other ingredients that are useful for the performance of poultry, dairy and swine. That this yeast only contributes 0. 20% of the total make up of the product. That the rest of the percentage (hence 99. 8%) is made up of important nutrients for the good performance of the animals. The same has not been rebutted by the Respondent.

50. Additionally, the Tribunal studied the inputs of various regulatory bodies including the Ministry of Agriculture, Livestock, Fisheries and Co-operatives as per their letter dated 18th January 2021 in which the Ministry stated categorically that the Tariff classification by the Respondent indicating that the yeast culture is classifiable under HS code 2102. 10. 00 is erroneous and without any basis. The letter from the Ministry to the Respondent stated in part as follows:-“The complaints refer to tariff classification conflict from the indicated (2309. 90. 90), to suggested tariff 2102. 10. 00) for Yeast Culture supplied by MK Bioscience, Korea.-----When an analyst finds Saccharomyces cerevisiae and jumps into conclusion that consignment is meant for brewing alcohol is making fool of all the institutions aforementioned and puts the government to ridicule in the eyes of the international community, in this case KOREA.”

51. The Tribunal established that this information was made available to the Respondent and was never taken into consideration because the Respondent never changed its position. The letter also indicated clearly the usage of the product in issue which is a supplementary feeding to increase feed intake and conversion efficiency and also to promote growth, reduce stress and enhance immunity.

52. The Tribunal relied on the General Interpretative Rules (GIRs) in determining the applicable tariff classification of the Appellant’s product. Specifically, the Tribunal looked at Rules 1, 2b and 3(a), to the extent that the product being classified consists of a mixture of ingredients.

53. The Rules state as follows:-“1. The titles of Sections, Chapters and sub-Chapters are provided for ease of reference only; for legal purposes, classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes and, provided such headings or Notes do not otherwise require, according to the following provisions:2(b) Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances. Any reference to goods of a given material or substance shall be taken to include a reference to goods consisting wholly or partly of such material or substance. The classification of goods consisting of more than one material or substance shall be according to the principles of Rule 3. 3.When by application of Rule 2 (b) or for any other reason, goods are, prima facie, classifiable under two or more headings, classification shall be effected as follows:a.The heading which provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods.” (emphasis added)’

54. In this regard the Tribunal is of the view that although yeast is found in heading 2102 and in heading 2309 of the Harmonised System, heading 2309 provides a more specific description of the product compared to heading 2102.

55. It is therefore the Tribunal’s considered view that the yeast culture imported by the Appellant is classifiable under heading 2309.

56. The Tribunal reiterates its explanation in TAT 124 of 2021 Bidco Africa Limited vs. Commissioner Customs and Border Control where it stated that;“65. The criteria for classifying products according to intended purpose is used to classify over 60 products copiously spread across the EAC nomenclature for example: Plasters specially calcined or finely ground for use in dentistry (Heading 25. 20)

Preparations with a basis of plaster for use in dentistry (Heading 34. 07).

Preparations for use on the hair (Heading 33 05).

Shapes, sections, tubes and the like, prepared for use in structures, of iron or steel (Heading 73 08).

The intended use is indeed one of “the terms of the headings”envisaged in GIR 1 which provides as follows;“The titles of Sections, Chapters and sub-Chapters are provided for ease of reference only; for legal purposes, classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes and, provided such headings or Notes do not otherwise require, according to the following provisions:” (emphasis added)

57. Further, the Tribunal refers to the holding of the Canadian Court in Puratos Canada Inc vs. Canada (Customs and Revenue) where the court stated, inter alia, that:“the General Rules for Interpretation of the Harmonized Systemreferred to in 10 of the Customs Tariff originated in the InternationalConvention on the Harmonized Commodity Description and Coding System. They are structured in cascading form so that, if the classification of the goods cannot be determined in accordance with Rule 1, then regard must be had to Rule 2 and so on….The above legislation requires the Tribunal to follow several steps before arriving at the proper classification of goods on an appeal: first to examine the schedule to see if the goods fit prima facie within the language of a tariff heading; second, to see if there is anything in the chapter or section notes that precludes the goods from classification in the heading; and third, to examine the Classification Options and the Explanatory Notes to confirm classification of the goods in the heading.”

58. The Tribunal further noted that the product imported by the Appellant was to be used as a raw material for the manufacture of animal feeds. In Proctor & Allan (E.A) Limited vs. Commissioner of Income Tax [2014] the Court held that;“It is the conclusion of this court that in light of the Certificate of Analysis that were submitted by both the Appellant and the Respondent, the court had little choice but to look at the intended purpose of the vitamin premix with a view to establishing whether it had been classified under the correct Heading. The court finds that the purpose of the vitamin premix was to fortify or improve the vitaminic characteristics of the unimix. There was no justification or basis which would have required the Respondent to have re-classified the vitamin premix as had been contended by the Appellant. It was irrespective whether or not KRA could analyse and identify vitamins.”

59. In the circumstances, and after considering the Chapter Notes, Explanatory Notes, product description, the intended use of the product and the detailed case laws, the Tribunal determined that the product imported by the Appellant is classifiable under Tariff code 2309. 90. 90.

60. The upshot of the foregoing is that the Tribunal established that the Respondent erred in classifying the yeast culture imported by the Appellant under HS code 2102. 10. 00

FINAL DECISION 61. Based on the foregoing analysis, the Tribunal determined that the Appeal is successful. The Orders that accordingly recommend themselves are as follows:-a.The Appeal be and is hereby allowed.b.The Respondent’s tariff ruling dated 7th September, 2020 be and is hereby revoked.c.The Respondent’s decision dated 11th May, 2021 be and is hereby set aside.d.Each party to bear its own costs.

62. It is so ordered.

DATED and DELIVERED at NAIROBI this 17th day of March, 2023. ..........................……….ERIC N. WAFULA CHAIRMAN….…..….…………………. …………………………. CYNTHIA B. MAYAKA GRACE MUKUHA MEMBER MEMBER……………………….….. ..…………………….……….JEPHTHAH NJAGI ABRAHAM K. KIPROTICH MEMBER MEMBERJUDGEMENT APPEAL NO. 516 OF 2021 ANIMIX LIMITED VS. COMMISSIONER OF CUSTOMS & BORDER CONTROLPage | 1