[2024] KETAT 887 (KLR)

Bedi Investments Limited v Commissioner of Customs and Border Control (Tax Appeal E176 of 2023) [2024] KETAT 887 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 887 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E176 of 2023

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

June 28, 2024

Between

Bedi Investments Limited

Appellant

and

Commissioner Of Customs And Border Control

Respondent

Judgment

Background 1. The Appellant is a private limited company incorporated in Kenya whose principal activity is manufacturing of textiles and garments.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act concerning the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent conducted a desk audit for 1st January 2022 to February 2023 period against the Appellant’s customs transactions arising from the importation of products from a supplier, Reggiani Machine Spa, based in Italy.

4. Vide letter dated 7th February 2023, the Respondent issued the Appellant with a demand notice of Kshs. 4,311,996. 00.

5. On 9th February 2023 the Appellant lodged an application for review with the Respondent.

6. On 17th February 2023, the Respondent issued a review decision reclassifying Appellant’s imported product.

7. Aggrieved with the reclassification contained in the review decision, the Appellant lodged an Appeal with the Tribunal on 27th April 2023.

The Appeal 8. The Appellant filed its Memorandum of Appeal dated 27th April 2023 and set out a single ground of Appeal that the Appellant being dissatisfied with the demand notice of Kshs. 4,311,996. 00 raised by the Respondent vide letter dated 7th February 2023 reference KRA/CBC/RMD/PCA/25/23 appeals to the Tax Appeal Tribunal pursuant to the provisions of the Tax Appeals Tribunal Act 2015.

The Appellant’s Case 9. The Appellant has set out its case in the Statement of Facts dated 27th April 2023 and filed on even date.

10. The Appellant stated that it purchased a textile printing machine from a supplier, Reggiani Machine Spa, based in Italy as per the documents attached to the Memorandum of Appeal.

11. The Appellant stated that the shipment of the machine was made in two containers with Bill of Lading number HLCUGOA2111BAMT9 dated 29th December 2021 vessel Ningbo Express which arrived in Mombasa on 27th January 2022 and Bill of Lading number HLCUGOA220113028 dated 21st January 2021 vessel APL Antwerp that arrived in Mombasa on 22nd February 2022.

12. The Appellant averred that upon arrival of the first container, the Appellant lodged import entry no. 22EMIM400265574 dated 26th February 2022 and paid relevant taxes totaling to Kshs. 5,690,459. 00 under HS Code 8443. 91. 00. However, the Respondent’s customs cluster manager disputed the HS Code 8443. 91. 00 on entry and proposed HS Code 8443. 99. 00 under the Heading Other Printers which attracts a 10% import duty. The Appellant objected this decision since this was a complete machine which had been disassembled to fit into the shipping containers and these were not parts of a machine.

13. The Appellant stated that there was a protracted dispute which ended on 11th April 2022 when the Respondent opted to release the container and instead refer the matter to post clearance audit. As this was happening, the Appellant lodged the second container under HS Code 8443. 91. 00 and paid taxes totaling to Kshs. 2,373,599. 00. The second container was released without any dispute.

14. The Appellant stated that an engineer was brought in from the machine supplier and the machine was erected and commissioned in August 2022.

15. The Appellant stated that it was surprised to receive a demand of Kshs. 4,311,996. 00 dated 7th February 2023 demanding import duty on both import entries as per the tabulation attached to the letter which alleged that the Respondent’s demand was based on a desk audit which was contrary to the condition of release of the goods which clearly stated that the Respondent would carry out a post clearance audit to verify and confirm the Appellant’s correct declaration of the imported goods as complete textile printing machine.

16. The Appellant stated that it objected to this demand vide letter dated 9th February 2023 on the basis that the imported goods were a complete machine that had been disassembled to fit into the shipping container and was erected in the Appellant’s factory premises.

17. The Appellant stated that this being a capital good for manufacturing textiles which were zero-rated for import duty, the Respondent could not demand import duty on the same. That this was confirmed in the Respondent’s letter dated 17th February 2023 declining the Appellant’s objection and maintaining the import duty demand.

Appellant’s Prayers 18. The Appellant made the following prayers to the Tribunal:(a)That the demand notice be struck out in its entirety as the goods imported was a textile printing machine.(b)That the East African Customs Management Act which captures the ‘spirit and essence’ of the law and the East African Community Common External Tariffs 2017 states all CAPEX and Raw Materials are import duty zero-rated.

The Respondent’s Case 19. The Respondent set out its case on the Statement of Facts dated 22nd May 2023.

20. The Respondent contested the instant Appeal as not having been lodged within the statutory timelines stipulated under section 230(2) of the East African Community Customs Management Act, 2004 (hereinafter “EACCMA”) which holds that an Appeal ought to be lodged forty-five days after being served with a decision.

21. The Respondent stated that after it issued its review decision on 17th February 2023, the Appellant had up to 3rd April 2023 to lodge the Appeal yet the instant appeal was lodged on 27th April 2023 without any application at the Tax Appeals Tribunal seeking extension of time within which to file the Appeal. That as a result, the instant Appeal was fatally defective, time barred and ought to be struck out for want of compliance.

22. The Respondent stated that its demand notices were legally justified as the conduct of post clearance audits was hinged on Sections 235 and 236 of the EACCMA. Further, that it was on the basis of the foregoing provisions of the law that a post clearance audit of custom transactions was conducted against the Appellant's importation of parts of Reggiani Terra Digital Printer.

23. The Respondent averred that the post clearance audit established that the Appellant herein had mis-declared the importation of Reggiani Terra Digital Printer by classifying the same under HS Code 8443. 91. 00 instead of HS Code 8443. 99. 00. Consequently, the Respondent vide the letter dated 7th February, 2023 issued the Appellant with a demand of Kshs. 4,311,996. 00 being payment for 10% import duty.

24. The Respondent declared that the demand was issued pursuant to the provisions of Section 135 of the EACCMA which provides as follows:“Where any duty has been short levied or erroneously refunded, then the person who should have paid the amount short levied or to whom the refund has erroneously been made shall, on demand by the proper officer, pay the amount short levied or repay the amount erroneously refunded, as the case may be; and any such amount may be recovered as if it were duty to which the goods in relation to which the amount was short levied or erroneously refunded, as the case may be, were liable.”

25. The Respondent stated that the Appellant in an email of 6th April 2022 sought a tariff classification of the imported textile printing machine which the Appellant stated had been lodged using two different bill of ladings as the machine had been imported using two containers.

26. The Respondent in its response dated 8th April 2022 stated as follows:“17. 1. that note 2 section XVI of the EACCET provides thus:

17. 1.1. A machine in a disassembled or unassembled state may be imported in several consignments over a period of time this is necessary for convenience of trade or transport. In order to be able to declare the different constituent parts under the same tariff heading or subheading as the assembled machine, the declarant must make a request in writing to the customs post not later than the first consignment and attach;

17. 1.1. 1.a manual, a diagram, or if necessary several diagrams showing the serial numbers of the most important constituent parts.”

27. The Respondent averred that in the instant case, the Appellant ought to have made a request in writing to customs not later than the first consignment which it failed to do.

28. The Respondent averred that whereas the Appellant contended that the importation was for a complete machine, which had been disassembled to fit into the shipping containers, and were not parts of a machine, the Respondent’s verification confirmed that the items under dispute were parts of a Reggiani Terra Digital Printers which uses printing heads for direct printing on fabric.

29. The Respondent further averred that products under HS codes were classified depending on product's composition, its form and its function. The printing mechanism of Reggiani Terra Digital Printer was by use of heads which defined its functionality which was aptly covered by heading 84. 43 machinery used for printing by means of plates, cylinders and other printing components of heading 84. 42, other printers, copying machines and facsimile machines, whether or not combined, parts and accessories.

30. The Respondent asserted that since tariff code 8443. 91. 00 covers parts and accessories of printing machinery used for printing by means of plates, cylinders and other printing components of heading 84. 42, it was not applicable in the instant case since the subject matter's printing mechanism was by use of printing heads and not plates. That instead the appropriate tariff code was 8443. 99. 00 which implied printers that use other mechanism other than plates and cylinders were classifiable under this subheading.

31. In a nutshell, the Respondent averred that Reggiani Terra Digital Printer uses heads for direct printing therefore classifiable under tariff code 8443. 99. 00 which provides for parts and accessories of other printers, copying machines and facsimile machines as guided by General Interpretative Rules (hereinafter “GIR”) 1 and 6.

32. Based on the foregoing, the Respondent averred that they acted in compliance with the law in issuing a further demand to the Appellant and the same ought to be upheld.

33. The Respondent stated that even if the Appellant had declared tariff and paid VAT, the VAT paid was deducted from the tabulation and the demand was therefore proper and considering the interest chargeable under Section 249 of the EACCMA.

Respondent’s Prayers 34. The Respondent made the following prayers to the Tribunal:(a)That this Tribunal upholds the Respondent’s review decision dated 17th February 2023; and(b)The Appeal be dismissed with costs.

Parties Submissions 35. The Appellant’s written submissions dated 7th February 2024 were filed on 12th February 2024 wherein the Appellant submitted on the following issue for determination:Whether the consignment imported was a complete machinery item or parts of machinery

36. The Appellant submitted that classification of goods was under the EACCET and that the EACCMA captured the ‘spirit and essence’ of the law and that the EACCET provided all CAPEX and raw materials were import duty zero-rated.

37. The Appellant therefore submitted that the demand be struck out in its entirety as the goods imported was a textile printing machine.

Respondent’s Submissions 38. The Respondent’s written submissions were dated and filed on 15th February 2024 wherein the Respondent submitted on the following issues for determination:

i. On whether the appeal is valid. 39. The Respondent submitted that the instant appeal was fatally defective and time barred as it had been lodged outside the statutorily prescribed timelines stipulated under Section 230(2) of the EACCMA which provides as follows:“A person intending to lodge an appeal under this section shall lodge the appeal within forty-five days after being served with the decision, and shall serve a copy of the appeal on the Commissioner."

40. The Respondent further cited Section 231 of EACCMA which provides as follows:“Subject to any law in force in the Partner States with respect to tax appeals, each Partner State shall establish a tax appeals tribunal for the purposes of hearing appeals against the decisions of the Commissioner made under section 229. ”

41. The Respondent submitted that it can assess taxpayers’ liability using any information available and was not bound by the tax returns of the Appellant as prescribed under section 24(2) of the Tax Procedures Act, CAP 469B of Kenya’s Laws (hereinafter “TPA”).

42. That in the instant case, the Respondent issued the review decision on 17th February 2023 however, the Appellant lodged its Appeal on the 27th April 2023 seventy (70) days later, which was manifestly outside the time provided under EACCMA. The Appellant ought to have lodged their Appeal by 3rd April 2023.

43. That despite this delay, the Appellant herein never lodged any application at the Tax Appeals Tribunal seeking extension of time within which to file an Appeal. In buttressing this position, the Respondent relied on the case of Commissioner of Customs And Border Patrol v Lachlan Kenya Limited (Income Tax Appeal E054 Of 2021) [2022] KEHC 12109 (Klr) where the Learned Judge, Mabeya J faced with similar facts held as follows:“The forgoing provisions are clear on the required timelines. An appeal to the Tribunal ought to be lodged within 45 days after the Commissioner had rendered his decision on any matter in dispute.”

44. The Respondent averred that this appeal was fatally defective, time barred and ought to be struck out for contravention of express provisions of the statute.

ii. On whether the demand notices issued by the Respondent were legally justified. 45. The Respondent submitted that conduct of post clearance audit was hinged on Section 235 and 236 of EACCMA both of which provide as follows;“Section 235 The proper officer may, within five years of the date of importation, exportation or transfer or manufacture of any goods, require the owner of the goods or any person who is in possession of any documents relating to the goods-(a)to produce all books, records and documents relating in any way to the goods; and(b)to answer any question in relation to the goods; and(c)to make declaration with respect to the weight, number, measure, strength, value, cost, selling price, origin, destination or place of transshipment of the goods, as the proper officer may deem fit.Section 236 The Commissioner shall have the powers to- Inspection or audit.(a)verify the accuracy of the entry of goods or documents through examination of books, records, computer stored Information, business systems and all relevant customs documents, commercial documents and other data related to the goods;(b)question any person involved directly or indirectly in the business, or any person in the possession of documents and data relevant to the goods or entry;(c)Inspect the premises of the owner of the goods or any other place of the person directly or indirectly involved in the operations; and(d)examine the goods where possible for the goods to be produced.”

46. The Respondent submitted that it was on the basis of the foregoing provisions of the law that a post clearance audit was conducted for custom transactions of Appellant's importation of parts for Reggiani Terra Digital Printer. That the audit established that the Appellant herein had mis-declared the importation of Reggiani Terra Digital Printer by classifying the same under HS Code 8443. 91. 00 (attracting Import duty of 0% and VAT 0%) instead of HS Code 8443. 99. 00 (attracting Import duty of 10% and VAT 16%). Consequently, the Respondent issued the Appellant with a demand of Kshs. 4,311,996. 00 vide its letter dated 7th February, 2023 pursuant to the provisions of Section 135 of the EACCMA which provides as follows:“Where any duty has been short levied or erroneously refunded, then the person who should have paid the amount short levied or to whom the refund has erroneously been made shall, on demand by the proper officer, pay the amount short levied or repay the amount erroneously refunded, as the case may be; and any such amount may be recovered as if it were duty to which the goods in relation to which the amount was short levied or erroneously refunded, as the case may be, were liable.”

47. That based on the foregoing, the Respondent submitted that there was a legal justification for the demand notice and that the same was not issued arbitrarily or capriciously.

iii. On whether the Respondent’s tariff ruling classifying Regianni Terra Digital printer under HS Code 8443. 99. 00 was just and proper in law. 48. That after the Appellant in an electronic mail dated 6th April 2022 sought a tariff classification from the Respondent based on the following facts:(a)That they had imported the textile printing machine in two different containers using two different bill of ladings.(b)That the two containers were not loaded on the same vessel. That in the circumstances, the initial bill of lading got split into two as follows:i.Bill of Lading No. HCLUGOA2111BAMT9 dated 29th December 2021, vessel Ningbo Express which arrived on 27th January 2022; andii.Bill of Lading No. HCLUGOA220113028 dated 21st January 2022. vessel APL Antwerp which arrived on 22nd February 2022.

49. The Respondent vide a tariff ruling dated 8th April 2022 responded as follows;“17. 1. That note 2 of section XVI of the EAC Custom External Tariff 2017 provides thus:

17. 1.1. A machine in a disassembled or unassembled state may be imported in several consignments over a period of time if this is necessary for convenience of trade or transport. In order to be able to declare the different constituent parts under the same tariff heading or subheading as the assembled machine, the declarant must make a request in writing to the customs post not later than the first consignment and attach:

17. 1. 1.1. a manual, diagram or, if necessary several diagrams, of the machine showing the serial numbers of the most important constituent parts;”

50. The Respondent submitted that in the instant case, the Appellant ought to have made a request in writing to customs not later than the first consignment. The Respondent noted that the Appellant did not comply with the above-mentioned provisions to warrant a declaration as constituent parts under the same tariff heading or subheading as the assembled machine.

51. The Respondent submitted that the Appellant herein failed to attach their request in writing for the Tribunal's perusal which request ought to attach a manual diagram of the machine showing the serial numbers of the most important constituent parts.

52. The Respondent did not dispute that the importation was for a complete machine, which had been disassembled to fit into the shipping containers, and were not parts of a machine but asserted that the Appellant ought to have made this request in writing as contemplated above. As such, it was evident that the Appellant acted in contravention of the tariff ruling dated 8th April 2022 in importing the product. It was the Respondent's submission that had the Appellant complied by making a request in writing, this dispute could have been avoided.

53. The Respondent submitted that the custom verification confirmed that the items were parts of a Reggiani Terra Digital Printers which uses printing heads for direct printing on fabric. Further, the Respondent submitted that products under HS Codes were classified depending on product's composition, its form and its function. The printing mechanism of Reggiani Terra Digital Printer was by use of printing heads which defined its functionality.

54. The Respondent submitted that heading 84. 43 covers machinery used for printing by means of plates, cylinders and other printing components of heading 84. 42, other printers, copying machines and facsimile machines, whether or not combined, parts and accessories. Additionally, the Respondent submitted that this heading only covers printers that use plates, cylinders and other printing components of heading 84. 42 and was therefore not applicable in the instant case since the subject matter's printing mechanism is by use of printing heads and not plates.

55. The Respondent submitted that tariff code 8443. 99. 00 covers (Other). This implies that printers that use other mechanism other than plates and cylinders were classifiable under this subheading. The Respondent submitted that Reggiani Terra Digital Printer uses printing heads for direct printing therefore classifiable under tariff code 8443. 99. 00 which provides for parts and accessories of other printers, copying machines and facsimile machines as guided by GIR 1 and 6.

iv. On whether Appellant paid any taxes in respect to the product. 56. The Respondent submitted that the Appellant attached payment slips which were alleged proof that they paid VAT taxes for Kshs. 2,376,599. 00 and Kshs. 5,690,459. 00 respectively. However, the Respondent contended that the payment slip was like a PRN and was not a conclusive proof that duty had been paid. Moreover, the payment slip provided at the bottom means by which the taxes could be paid. As such, the Appellant ought to attach a receipt instead.

57. The Respondent therefore computed duty payable as itemized in the schedule on page 10 of the annexed documents to the Respondent's Statement of Facts, with import duty being Kshs. 3,717. 241. 15. 00 and VAT being Kshs. 594,754. 00 totaling to Kshs. 4,311,995. 56.

Issues For Determination 58. Based on the parties’ pleadings and submissions on record, the Tribunal has identified the following two issues for determination:i.Whether the appeal was properly before the Tribunal.ii.Whether the demand notices issued by the Respondent were justified

Analysis And Findings 59. The Tribunal having established two issues to determination proceeds to analyze the issues as hereunder:

i. Whether the appeal was properly before the Tribunal 60. The Respondent in its submissions opined that the instant Appeal was not valid as it was filed out of the required timelines.

61. The Tribunal notes that correspondences between the Appellant and the Respondent provided by the Appellant show that on 26th April 2023 the Respondent emailed the Appellant’s agent informing them that the matter was still pending, and the Respondent had not received any Appeal from the Appellant in line with Sections 230(1) and (2) of the EACCMA. In the email, the Appellant was required to make amendments implying that the demanded taxes were therefore due and payable.

62. The Tribunal notes that Sections 230(1) and (2) of the EACCMA provides as follows:“1. Subject to any law in force in the Partner States with respect to tax appeals, each Partner State shall establish a tax appeals tribunal for the purposes of hearing appeals against the decisions of the Commissioner made under section 229.

2. A person intending to lodge an appeal under this section shall lodge the appeal within forty-five days after being served with the decision, and shall serve a copy of the appeal on the Commissioner.”

63. The Tribunal notes that the Appellant had 45 days from the receipt of the review decision by the Respondent to lodge its appeal at the Tax Appeals Tribunal. The Appellant has not provided evidence that it sought extension of time to file its Appeal out of time. The issue of extension of time was discussed in the case of Nicholas Kiptoo Arap Korir Salat v IEBC & 7 others SC Application no.16 of 2014 where it was held as follows:“a.Extension of time is not a right of a party. It is an equitable remedy that is only available to a deserving party at the discretion of the court.b.The party who seeks for extension of time has the burden of laying a basis to the satisfaction of the court……….…….f. The application should be brought without undue delay.”

64. The Respondent’s review decision was issued to the Appellant on 17th February 2023 while the Appellant’s Appeal was lodged on 27th April 2023 which was outside the 45-day timeline. The Appellant ought to have lodged an application seeking extension of time from the Tribunal laying the basis for extension of time and bringing the application without undue delay as stated in Nicholas Kiptoo Arap Korir Salat (supra) above.

65. Having considered the facts above and the law, the Tribunal finds that the Appellant’s appeal herein was improperly before it having been lodged out of time.

ii. Whether the demand notices issued by the Respondent were justified. 66. Having found that the Appeal was lodged out of time without leave of the Tribunal, the second issue for determination is rendered moot and the Tribunal will not delve into it.

Final Decision 67. In view of the foregoing, the Tribunal finds that this Appeal is unmerited and accordingly proceeds to make the following Orders:(a)The Appeal be and is hereby struck out.(b)Each party to bear its own cost.

68. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 28TH DAY OF JUNE, 2024CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERDELILAH K. NGALA - MEMBERGEORGE KASHINDI - MEMBEROLOLCHIKE S. SPENCER - MEMBER