[2023] KETAT 111 (KLR)

Bidcoro Africa Limited v Commissioner of Customs & Border Control (Tribunal Appeal 596 of 2021) [2023] KETAT 111 (KLR) (Civ) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 111 (KLR)

Republic of Kenya

In the Tax Appeals Tribunal

Civil

Tribunal Appeal 596 of 2021

E.N Wafula, Chair, Robert M. Mutuma, Rodney Odhiambo Oluoch & Edwin K. Cheluget, Members

March 17, 2023

Between

Bidcoro Africa Limited

Appellant

and

Commissioner of Customs & Border Control

Respondent

Judgment

1. The appellant is a limited liability company incorporated under the Companies Act laws of Kenya, and is in the business of manufacturing drinkable juice drinks from non-drinkable compounds obtained from fresh fruits.

2. The Respondent is a principal officer appointed under section 13 of the Kenya Revenue Authority Act, 1995. Under section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for collecting and receiving 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 & 2 of the First Schedule to the Act to assess, collect and account for all revenues under those laws.

3. The issue in dispute herein arose out of tariff classification ruling dated 13th July 2021 issued by the Respondent to the Appellant on its products called “Sunquick Mandarin Compound” and “Suntop Orange Compound” arising from a review of its import entry no. 2021ICD293802 for purposes of identification and tariff classification out of targeting of instances of suspected use of wrong tariff classification under heading 2106 instead of heading 2009.

4. The Respondent carried out tests on the sample and issued a tariff classification vide its letter dated 13th July 2021 and classified the product under heading 2009, instead of heading 2106 where the Appellant had classified its product.

5. The Appellant raised an objection to the ruling of 13th July 2021 and invited the Respondent for a fact finding visit to its factory on 11th August 2021, through its letter dated 3rd August 2021.

6. The Appellant through a letter by the manufacturer and through the factory visit demonstrated to the Respondent that the imported “Sunquick Mandarin Compound” and “Suntop Orange Compound” are;- Sunquick Mandarin Compound - an industrial product manufactured from concentrated mandarin juice (53. 875%), colour (2. 550%), mandarin flavourings (4. 713%),water (38. 787%),and preservatives (0. 013%).

Suntop Orange Compound- an industrial product manufactured from concentrated orange juice (67. 357%), water (32. 018%), orange flavour (0. 512%), stabilizer (0. 100%) and colour (0. 013%).

7. The Appellant stated that the said compounds contain high levels of juice concentrates, flavours, oils, colours and other ingredients ideally making it unfit for direct sale to consumers or direct consumption.

8. The Respondent through a letter dated 24th August 2021 rendered its Review Decision and upheld its findings in the ruling dated 13th July 2021.

9. The Appellant being dissatisfied with the Respondent’s decision dated 24th August 2021 filed its Notice of Appeal on 27th September, 2021.

The Appeal 10. The Appellant filed a Memorandum of Appeal dated 23rd September, 2021, on the 27th September, 2021, premised on the following grounds;i.That the Respondent erred in law and fact by wrongly classifying the Sunquick Mandarin Compound and Suntop Orange Compound as concentrated fruit juices which falls under EAC/CET HS code 2009 incurring a tariff rate of 25% instead of EAC/CET HS code 2106:90:20 which incurs a tariff rate of 10% disregarding the fact that the compounds do not have their original character.ii.That the Respondent erred in law and fact by deciding that the Sunquick Mandarin Compound and Suntop Orange Compound falls under the category of concentrate fruit juices without appreciating the manufacturer’s explanation on the composition of the compounds and conducting a full chemical analysis on the sample it collected in order to establish the parameters of the fruit acidity contained.iii.That the Respondent misapprehended the provisions of heading 2009 by erroneously finding that the heading covers intermixtures of juices or fruits or vegetables of the same or different types, yet the Sunquick Mandarin Compound and Suntop Orange Compound had lost their original character.iv.That the Respondent erred in law and fact by failing to appreciate the provisions of the General Interpretation Rules, the Section Notes and Explanatory Notes to the Harmonized System which emphasizes that the fruit or vegetable juices or concentrates provided under heading 2009 should retain their original character and failure to retain that original character, a product’s tariff classification moves from heading 2009 to the next applicable chapter under the HS nomenclature.v.That the Respondent erred in law by failing to consider the heading Note 4 to the heading 2009 which provides that the heading excludes fruit juices in which one of the constituents (citric acid, essential oil extracted from the fruit, etc.) has been added in such quantity that the balance of the different constituents as found in the natural juice is clearly upset in such a case, the product has lost its original character.vi.That the Respondent erred in law and fact by failing to consider the evidence rendered to them by the Appellant in its letters seeking review of the Respondent decision to show that the Sunquick mandarin compound and Suntop Orange Compound does not fall within heading 2009. vii.That the Respondent erred in fact and law by rendering a decision without considering the report of the supplier of the goods that detailed the composition and classification of the Sunquick mandarin compound and Suntop Orange Compound.

The Appellant’s Case 11. The Appellant has grounded its case on the Statement of Facts dated 23rd September, 2021 and filed on 27th September, 2021 with the annexures thereto and the Written Submissions filed on 18th October, 2022.

12. The Appellant stated that it invited the Respondent to its factory on 11th August 2021, and demonstrated that the imported Sunquick Mandarin compound and Suntop Orange Compound are industrial products manufactured from; Sunquick Mandarin Compound - concentrated mandarin juice (53. 875 %), colour (2. 550%), mandarin flavourings (4. 713%), water (38. 787%) and preservatives (0. 075 %).Suntop orange compound- concentrated orange juice (67. 357%), water (32. 018%), orange flavour (0. 512%), stabilizer (0. 100%) and colour (0. 013%).

13. The Appellant stated that the said compounds contain high levels of juice concentrates, flavours, oils, colours, and other ingredients ideally making them unfit for direct sale to consumers or direct consumption by consumers. They are thus not a juice concentrates that can be diluted with water for consumption.

14. The Appellant further averred that as per Note 6 of heading 2009, the fruit and vegetable juices of this heading are generally obtained by mechanically opening or pressing fresh, healthy and ripe fruit or vegetable juices. This may be done by means of mechanical “extractors” operating on the same principle as the household lemon squeezer” or by pressing which may or may not be preceded either by crushing or grinding or by treatment with cold or warm water or with steam.

15. It was therefore the submission of the Appellant that the compounds are not made in any form contemplated in Note 6 of heading 2009. Instead, its constituents are in such quantity that the balance of the different constituents distorted the natural juice, and the end product lost its original character thus the classification under heading 2106:90 is preferred as opposed to heading 2009:89.

16. The Appellant further asserted that all previous consignments of the same product were cleared by the Respondent using the heading 2106:90 and paying all the applicable duty at the rate of 10%.

17. The Appellant submitted that because of the wrong classification by the Respondent, its product has been exposed to excessive tax liability at the ad valorem rate of 25%, instead of the already paid 10%.

18. It was contended by the Appellant that the Respondent failed to examine and take into account the full chemical analysis and the results of the samples taken during the inspection of the Sunquick Mandarin Compound and Suntop Orange Compound, and arrived at a wrong classification of the said product as under heading 2009 instead of heading 2106.

19. It was further the Appellant’s contention that it has continuously paid the respective duty at the rate of 10% on all importation of the Sunquick Blackcurrant compound. The Appellant further asserted that it has always maintained a positive relationship with the Respondent and have always paid the taxes it is obligated to pay.

20. By reasons of the foregoing the Appellant prayed that the Tribunal allows the Appeal and sets aside the Respondent’s decision dated 24th August 2021 classifying the Appellant’s products Sunquick mandarin compound and Suntop Orange Compound under tariff EAC/CET HS Code 2009:89:00, instead of tariff EAC/CET HS Code 2106:90:20.

21. The Appellant relied on the cases of;A.Commissioner of Customs and Border Control -vs – Adula (Tax Appeal No. E003 of 2021) KEHC 248 [KLR]B.Kenya Breweries Ltd -vs- Commissioner of Customs and Border Control [2020] eKLRC. Puratos Canada Inc. -vs- Canada (Customs and Revenue) [2004] CA CITT.

The Respondent’s Case 22. The Respondent has grounded its case on the Statement of facts dated 25th October, 2021 and filed on the 27th October, 2021, the witness statement of Bernard Odhiambo Oyucho filed on 21st January 2022 and admitted in evidence on oath on 28th September, 2022 and the written submissions dated 17th October, 2022 and filed on 18th October 2022.

23. According to the Respondent, the “Sunquick Mandarin Compound” and “Suntop Orange Compound” products intended to be imported by the Appellant and to which the Appellant had requested for a tariff ruling is correctly classified under EAC/CET HS 2009:89:00.

24. The Respondent stated that Chapter 20 of the HS code provides for the classification of, “preparations- of vegetables, fruits, nuts, and other parts of plants”.

25. The Respondent further state that the Explanatory Notes to this chapter at Explanatory Note 29[d] provides that, “this chapter does not cover [d] fruit or vegetable juices of an alcoholic strength by volume exceeding 0. 5 % vol (chapter 22)”. The Respondent therefore asserted that fruit juices or vegetable juices of an alcoholic strength exceeding 0. 5 % per volume is excluded from chapter 20 as provided for under chapter 22.

26. The Respondent also stated that Chapter 21 of the HS code provides for classification of products of “miscellaneous edible preparations” and the subheading which the Appellant seeks its product to classified being HS code 2106:90:20 provides for, “preparations of a kind used in manufacture of beverages” while heading 2106 provides for, “food preparations not elsewhere specified or included.”

27. The Respondent submitted that Explanatory Note 7 to heading 2106, means that the preparations to be classified under Chapter 2106 must firstly not be covered by any other heading. The Respondent further notes that the said Note 7 provides that some of the said products are specially prepared for domestic use, they are also widely used in industry in order to avoid the unnecessary transport of large quantities of water, alcohol etc. The Respondent therefore submitted that the interpretation of this explanatory note means that Chapter 21 is for miscellaneous edible preparations not classified elsewhere.

28. The Respondent stated that the Appellant’s imported products were entered for clearance under HS code 2106:90:00, and the Respondent’s National Targeting Centre targeted the entry for misclassification, and reported for re- classification to HS code 2009:90:00. Samples were also drawn and taken to the Respondent’s National Inspection and Testing Centre for analysis.

29. The Respondent stated that additional information provided by the Appellant confirmed the percentage composition of the compounds as follows;-“Juices - average percentage 60%Water - 10 - 20 %Additives (flavours & preservatives - 10- 20%)”The Respondent averred that the said composition was in agreement with the initial tariff ruling. The Appellant’s product was therefore found to be classifiable under the EAC/CET HS code 2009:89:00.

30. The Respondent further submitted that the Appellant’s declared EAC/CET HS code 2106:90:20 falls under heading 21:06 that classifies food preparations not elsewhere specified or included. The Respondent further asserted that it should be noted that classification in heading 21:06 is only permitted for food preparations that are not classified elsewhere in the nomenclature.

31. The Respondent stated that its tariff classification of the disputed product heading 20:09 classifies fruit juices (including grape must) and vegetable juices, unfermented and not containing added spirit, whether or not containing added sugar or other sweetening matter. They further stated that juices of this heading may contain substances of kind listed;- sugar, sweetening agents, preservatives and standardizing agents and products added to restore constituents destroyed during the manufacturing process (e.g. Vitamins, colouring matter) or to fix the flavor.

32. The Respondent submitted that as per the Explanatory Note to heading 20:09, the juices of this heading may be concentrated (whether or not frozen) or in the form of crystals or powder, provided that in the latter case, they entirely or almost entirely soluble in water. Such products being obtained by processes involving either heat (whether or not in a vacuum) or cold (lyophilization).

33. The Respondent submitted that classification is guided by the General Rules of Interpretation (GIRs) that are applied sequentially.-GIR 1 provides;“classification shall be determined according to the terms of the heading and any relative section or chapter notes.”- GIR 3 (b) states;“Mixtures, composite goods consisting of different materials 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, in so far as this criterion is applicable.”

34. The Respondent therefore submitted that considering the percentage of composition of the juices in the compounds is of the greater percentage than any other constituent, the juice gives the compounds the essential character and thus the GIR 3(b) applies. In view of this, the Respondent asserted that the Appellant’s product is classifiable under EAC/CET HS code 2009:89:00.

35. The Respondent therefore submitted that it has correctly classified the Sunquick mandarin Compound and Suntop Orange Compound under tariff HS code 2009:89:00.

36. By reasons aforesaid the Respondent prays that the Tribunal dismisses the Appeal with costs.

Issue for Determination 37. The Tribunal having carefully considered the pleadings filed and the evidence tendered is of the view that the Appeal herein crystalizes into one issue for determination, as follows;-Whether the Respondent erred in classifying the Appellant’s imported products ”Sunquick Mandarin Compound” and “Suntop Orange Compound” under tariff EAC/CET HS code 2009:89:00 instead of EAC/CET HS code 2106:90:20

38. The dispute herein regards the classification of the Appellant’s imported products “Sunquick mandarin compound” and “Suntop orange compound”, which the Appellant contends are classifiable under the tariff EAC/CET HS code 2106:90:20, while the Respondent contends that the products are classifiable under the tariff EAC/CET HS code 2009:89:00.

39. The Appellant averred that it demonstrated to the Respondent that its product is an industrial product manufactured from concentrated mandarin and orange juices.

40. The Appellant further averred that the said compounds contain high levels of juice concentrates, flavours, oils, colours, and other ingredients ideally making it unfit for direct selling to consumers or direct consumption by consumers. It averred that this compound was not juice concentrate that can be diluted with water for consumption, without undergoing further industrial processing in a factory.

41. The Appellant further averred that as per Note 6 of Heading 2009, the fruit and vegetable juices of this heading are generally obtained by mechanically opening or pressing fresh, healthy and ripe fruit or vegetables, which is done by means of mechanical extractors, “operating on the same principle as the household lemon squeezer’’, or by pressing which may be preceded either by crushing or grinding or by treatment with cold or warm water or with steam.

42. The Appellant therefore submitted that its product is not made in any form as contemplated in Note 6 of Heading 2009, but instead, its constituents are in such quantity that the balance of the different constituents distorted the natural juice, and the end product lost its original character thus the classification under heading 2106:90 is preferred as opposed to heading 2009:89.

43. The Appellant contended that the Respondent failed to examine and take into account the full chemical analysis and the results of the samples taken during the inspection and thus arrived at the wrong classification of the said product under heading 2009 instead of heading 2106. It further asserted that all previous consignments of the same product were declared and cleared by the Respondent using the heading 2106:90 and paying the applicable duty at 10%. It further contended that because of the erroneous classification its product has been potentially exposed to excessive taxation at the ad valorem rate of 25% instead of 10%.

44. The Appellant therefore submitted that the correct classification for its products, “Sunquick mandarin compound” and “Suntop orange compound “is HS code 2106: 90: 20, as opposed to the Respondent’s preferred tariff HS code 2009:89:00.

45. On the other hand, the Respondent submitted that in order to clarify the position on the tariff applicable to the Appellant’s products, a factory verification exercise was conducted at the Appellant’s factory and confirmed the percentage composition of the products, thus;“juice – average 60% Water - 10% - 20%Additives (flavours & preservatives) - 10% - 20%)”

46. The Respondent asserted that the finding on the composition was found to be in agreement with the Respondent’s initial tariff ruling.

47. The Respondent submitted that as per the Explanatory Note to heading 20:09, the juices of this heading may be concentrated (whether or not frozen) or in the form of crystals or powder, provided that in the later case, they are entirely or almost entirely soluble in water, such products being obtained by processes involving either heat (whether or not in vacuum )or cold (lyophilization).

48. The Respondent submitted that classification is guided by the General Interpretation Rules [ GIRs ] that are applied sequentially. GIR 1 provides classification shall be determined according to the terms of the heading and any relative section or chapter notes.

GIR 3(b) states;

“Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified in reference to 3(a) 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.”

49. The Respondent therefore submitted that considering the percentage of composition of the juices in the compound is of greater percentage than any other constituent, the juice gives the compound the essential character and thus GIR 3(b) applies. In this regard, the Respondent asserted that the most appropriate tariff classification would be EAC/CET HS code 2009;89:00.

50. A quick glance of the EAC Common Extern al Tariff, (2017), would confirm that Chapter 20 covers;“preparation of vegetables, fruit, nuts or other parts plants “, while Chapter 21 covers, “miscellaneous edible preparations “

51. In this Chapter under heading 20:09, the items covered are; fruit juices (including grape must) and vegetable juices, unfermented and not containing added spirit, whether or not containing added sugar or other sweetening matter.

52. The Tribunal notes under heading 21:06, chapter 21, the coverage extends to food preparations not elsewhere specified or included and subheading 2106;90;20 extends food preparations of a kind used in the manufacturing of beverages.

53. The Respondent submitted that Explanatory Note 7 to heading 21;06, means that the preparations to be classified under chapter 21 heading 21;06 must firstly not be covered by any other heading. The said note also provides that some of the said products are prepared for domestic use; they are also widely used in industry to in order to avoid unnecessary transport of large quantities of water, alcohol, etc.

54. The Respondent further averred that the two products are fruit base compounds of sunquick and suntop, and looking through the EAC/CET, the products would fall under Chapter 20 that provides for : preparations of vegetables, fruits,nuts, or other parts of plants. It is worth noting that the products are not excluded by Note 1 under chapter 20. The Laboratory tests which preceded the ruling issued by the Respondent, showed that sunquick and suntop products were fruit base concentrates made with fruit juices and containing vitamin c without artificial sweeteners or colours and alcoholic strength.

55. The nature of the imported products therefore is fruit juice with preservatives that would not affect the constituent of the product and the products retained their original character, and would therefore fall under heading 2009 as a juice, the Respondent asserted.

56. The Tribunal having carefully reviewed the two competing chapters, headings, and explanatory notes, is satisfied with the explanation that Chapter 21 is for miscellaneous edible preparations not classified elsewhere.

57. Heading 21:06 reads, “Food preparations not elsewhere specified or included’’.

58. While subheading 2106;90:20 reads,” preparations of a kind used in the manufacture of beverages.’’ Our interpretation of this subheading guided by the explanatory notes and the chapter notes, is that this heading classification is intended for preparations intended to be used in the manufacture of beverages and foods, and certain preparations of this kind are intended for adding to other food preparations.

59. This heading clearly includes fruit juice concentrates used in the manufacture of fruit juices which are more appropriately described in heading 21:06. The concentrate compounds are not concentrated juices which can be consumed by merely diluting say with water without a further manufacturing process, as inferred by the Respondent.

60. In light of the foregoing analysis The Tribunal is satisfied that the Appellant’s product “Sunquick mandarin Compound” and “suntop orange compound “are more appropriately classifiable under the tariff heading EAC/CET HS code 2106:90:20 rather than the tariff heading EAC/CET HS code 2009:89:00.

61. In view of the foregoing reasons, the Tribunal finds that the Respondent erred in classifying the Sunquick mandarin fruit juice compound concentrate and Suntop orange fruit juice compound concentrate under tariff heading HS code 2009:89:00.

62. The Tribunal therefore finds and determines that the correct tariff classification for the Appellant’s products is EAC/CET HS code 2106:90:20

FINAL DECISION 63. The upshot of the foregoing is that the Appeal is merited and the Tribunal accordingly proceeds to make the following Orders.i.The Appeal be and is hereby allowed.ii.The Appellant’s imported products “Sunquick mandarin compound” and “Suntop orange compound” are correctly classified under tariff HS code 2106:90:20. iii.The Respondent’s Review Decision dated 24th August 2021 classifying the Appellant’s product “Sunquick mandarin Compound” and “suntop orange compound” under tariff EAC/CET HS code 2009:89:00 be and is hereby set aside.iv.Each party to bear its own costs.

64. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH 2023. …………………ERIC N. WAFULACHAIRMAN…………………………ROBERT M. MUTUMAMEMBER…………………………RODNEY O. OLUOCHMEMBER…………………………EDWIN K. CHELUGETMEMBER