[2024] KETAT 710 (KLR)

Calbati Limited v Commissioner of Inestigations & Enforcement (Appeal 969 of 2022) [2024] KETAT 710 (KLR) (Commercial and Tax) (24 May 2024) (Judgment)

Neutral citation: [2024] KETAT 710 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Appeal 969 of 2022

RM Mutuma, Chair, EN Njeru, M Makau, AM Diriye & B Gitari, Members

May 24, 2024

Between

Calbati Limited

Appellant

and

Commissioner of Inestigations & Enforcement

Respondent

Judgment

Background 1. The Appellant is a private company incorporated in Kenya and a registered taxpayer whose core business is the importation of timber from various regions including from the Congo for resale in the Kenyan market.

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 the collection and receipt of all revenue.

3. Through a letter dated 11th November 2021, the Appellant was notified of investigations and tax demand regarding its timber importations and tax declarations since 2014.

4. Vide a letter dated 11th November 2021, the Respondent subsequently issued a tax assessment of Kshs. 169,229,720. 00 comprising of customs duties of Kshs. 99,136,291. 00 and Corporation taxes of Kshs. 70,093,429. 00 for the years 2017, 2018,2019, and 2020. This was based on a post clearance audit.

5. Through a letter dated 13th January 2022, the Appellant lodged a notice of objection to the Respondent’s notice of assessment.

6. Vide a letter dated 8th February 2022, the Respondent invalidated the Appellant’s notice of objection and subsequently issued its objection decision dated 28th July 2022 confirming a principal tax liability of Kshs. 169,229,720. 00.

7. Dissatisfied with the Respondent’s objection decision, the Appellant lodged this Appeal on 19th August 2022 and filed on 22nd August 2022.

The Appeal 8. The Appeal as contained in the Memorandum of Appeal filed on 7th September 2022 raised the following grounds of Appeal:i.That the Respondent erred in law and fact in raising a duty uplift on the consignments imported by the Appellant for the period 2017 to 2020. ii.That the Respondent erred in law and fact in basing the duty uplift on a mirror analysis of the Uganda Revenue Authority Asycuda System.iii.That the Respondent erred in law and in fact in using values from two independent systems, which use measurement methods which are fundamentally different to arrive at an unjustified duty uplift.iv.That the Respondent erred in law and fact in failing to appreciate that the URA system is based on actual measurement of the wood as opposed to the Simba system, which is based on estimates arrived at by measuring the truck outline to establish the volume of the wood.v.That the Respondent erred in law and fact by only flagging transactions where the declarations made in Uganda were higher than Kenya which only constituted 20% of the total declarations whilst completely disregarding the 80% where the transactions declared in Kenya were higher than those declared in Uganda.vi.The decision by the Respondent to issue a duty uplift five years after the fact and after a joint verification of the consignments is unreasonable and contrary to fair administrative action as enshrined in Article 10 and Article 47 of the Constitution 2010. vii.The Respondent erred in law and fact in applying arbitrary mark up and subsequent assessment of Corporation tax on the imports alleged to have been under declared which any evidence to substantiate the claims of under declaration.

The Appellant’s Case 9. The Appellant has set out its case on its;i.Statement of Facts filed on 7th September 2022, together with documents annexed thereto; and,ii.Written Submissions dated 27th March 2023 and filed on 28th March 2023.

10. The Appellant averred that the Respondent issued it with a notice of tax investigation and notice of tax demand dated 11th November 2021 in which the Respondent indicated that it had conducted investigations into its imports based on documentations and information available, and established that the consignments for the period 2018 to 2020 were mis-declared.

11. The Appellant asserted that the Respondent alleged that based on the documents and information in its possession made duty adjustments and computed Corporation tax on projected sales, which were marked up at 25%.

12. The Appellant submitted that it engaged the Respondent with a view to understand the basis of the duty uplift and estimated sales giving rise to the demanded tax of Kshs. 169,229,720. 00. The Appellant stated that in the course of its engagements with the Respondent, it availed various documents including the customs entry documents as proof of its imports made in the period under review.

13. The Appellant stated that after it provided the supporting documents, the Respondent confirmed the initial assessment on the basis that;a.It had carried out a mirror analysis on transit timber declarations made in the URA Asycuda systems versus the timber imports declared in the KRA Simba database with an intention to detect value under/over declaration, smuggling, fictitious exports, fraud and for revision of existing valuation database;b.It compared the value, quantity and weights declared by various timber imports including the Appellant, to confirm that the declaration made in Uganda matched declaration made in Kenya;c.There was gross under declaration and smuggling of timber at the Busia-Malaba boarder due to under-declaration of quantity.d.The alleged declaration resulted in under valuation since the customs value of timber is pegged on USD/Cubic Meter.

14. The Appellant averred that the alleged under-declaration by the Respondent is based on the alleged variance between declarations made in the Asycuda System used in Uganda and the Simba System in Kenya and that in arriving at its conclusion, the Respondent neglected to take in account that the two systems used are fundamentally different to arrive at the volume of the logs and subsequently the customs value.

15. The Appellant stated that the Respondent in particular neglected to consider the fact that the values in the Ugandan system are arrived at by offloading the trucks and taking the actual volume of the logs being transported noting that in Kenya, the Respondent’s officers during the joint verification, ordinarily measure the outlines of the trucks on which the timber is loaded to arrive at an estimated weight of the goods. In the first instance, it is reasonable that the measurements taken by the URA after offloading the trucks would be more accurate compared to the method adopted by the Respondent, which is prone to variations.

16. The Appellant stated that in this case there is variations contrary to the position taken by the Respondent and the values entered in URA’s Asycuda System are consistently lower compared to the values in the Simba system. In particular, of the total transactions declared in period 2017 to 2020, only 2% of the declarations made in Kenya were lower compared to declarations in Uganda.

17. The Appellant further asserted that the Respondent failed or neglected to consider the fact that the Appellant in making its declarations bases the volume and actual measurement of the logs as opposed to the truck outline adopted by the Respondent.

18. The Appellant submitted that at the point of joint verification, the Appellant obliges to the Respondent’s mode of measuring the truck outline and is often forced to pay a duty uplift by reason that measurement of the truck outline results in higher values.

19. The Appellant contended that the practise of measuring the truck outline to obtain the volume of goods transported was introduced and has been maintained by the Respondent as the only means of verifying the customs value of good in the nature of timber and or wood.

20. The Appellant averred that along with other timber importers, have been forced to accept Respondent’s method even though it is highly prejudicial and makes the payment of the duty uplifted in order to ensure business continuity.

21. The Appellant stated that it’s within the Respondent’s power to re-classify, re-measure or otherwise decide that the Appellant’s classification is erroneous or is a misdeclaration at the point of entry. However, the Respondent’s decision of assuming that its consignment was mis-declared is based on an alleged bench marking conducted by the Respondent that has not been availed to the Appellant for interrogation nor has the source been disclosed. That any departure from the current mode of estimating duty by the Respondent ought to be founded on solid principles and should not be applied retrospectively to the detriment of the Appellant.

22. The Appellant stated that whereas the Respondent is empowered by Sections 235 and 236 of the East African Community Customs Management Act, 2004 to conduct post clearance audit, it is trite law that the Respondent is bound to exercise such power in a reasonable manner in keeping with principles of fair administrative action.

23. The Appellant submitted that whereas the Respondent is at liberty to issue guidelines and a measurement standard for calculating the density, any such guidelines cannot be applied retrospectively to the detriment of the Appellant.

24. The Appellant further submitted it had a reasonable expectation that the Respondent having made duty adjustments based on the truck measurements was satisfied with the uplift issued in the F147 and at no point prior to this instance did the Respondent query or take issue with the net weight per cubic meter ratio.

25. The Appellant asserted that in any case, and without prejudice to the foregoing, the weight in Kilograms declared by the Appellant in the Simba system is inconsequential to the custom value of the goods because the Appellant bases its duty calculation on the actual volume of the wood.

26. The Appellant averred that the Respondent in choosing to exercise its right to make duty adjustment 5 years after the fact is not only unreasonable but shall also cause the Appellant significant economic loss owing to the fact that it would ordinarily factor in the cost of acquiring the logs including taxes at the final retail price of its products.

27. The Appellant stated that in raising the assessment, the Respondent has failed to provide a basis for the alleged undeclared purchases nor has it provided a basis for the 25% markup applied to arrive at the projected sales. Further, the Respondent has alleged that the Appellant imported extra timber and failed to declare the same for custom purposes, which allegations the Respondent has failed to substantiate.

28. The Appellant averred that it provided an analysis of sales made in the period under review and the income accruing thereon for which Corporation tax was paid.

29. The Appellant stated that a sales estimate based on 25% markup is grossly exaggerated and fails to consider the industry standards and business reality within which the Appellant operates and that any alleged under declaration of duty cannot be assumed to automatically translate to goods for which duty was not paid.

30. The Appellant submitted that the imposition of tax by the Respondent is arbitrary and highly prejudicial to the Appellant and unless this honorable Tribunal intervenes, the Appellant shall suffer irreparable economic loss at the hand of the Respondent.

The Appellant’s Prayers 31. The Appellant prayed that:-a.The Objection decision of the Respondent contained in the letter dated 28th July 2022 be set aside;b.The assessment and demand of Kshs. 99,136,291. 00 and Kshs. 70,093,429. 00 being duty uplift and Corporation tax be set aside;c.The Appeal be allowed with costs to the Appellant; and,d.Any other orders that the Honourable Tribunal may deem fit.

The Respondent’s Case 32. The Respondent has set out its case on its;i.Statement of Facts dated 5th August 2022 and filed on 7th August 2022, together with documents annexed thereto; and,ii.Written Submissions dated 14th April 2023 and filed on even date.

33. The Respondent submitted that the duty uplift on the consignments was clearly explained in its Objection decision dated 28th July 2022 and that the Corporation tax was assessed on the basis of the established undeclared timber purchases which were subjected to a 25% markup. The 25% markup was determined based on industry margins of comparable companies.

34. The Respondent stated that in the Appeal herein, it carried out mirror analysis on transit timber declarations made in the URA Asycuda System versus timber imports declared in the KRA Simba database for the period under review. The Respondent further contended that the objective of the mirror analysis was to establish whether there was an over or under declaration by the Appellant on its consignment. The Respondent added that in the instant Appeal it also used the mirror analysis as a complementary risk management tool for the detection of value under/over declaration, smuggling fictitious exports, fraud and for revision of existing valuation databases.

35. The Respondent averred that from the mirror analysis, it compared the value, quantity and weights declared by major timber importers including the Appellant's to confirm whether the declarations done in the Ugandan side match those done in Kenya.

36. The Respondent submitted that the mirror analysis conducted established a gross under declaration and smuggling of timber at the Busia and Malaba OSBPs due to under declaration of quantity. The under declaration resulted into under valuation since the customs value of timber is pegged on USD/Cubic meter.

37. The Respondent stated it subjected the Appellant to Post Clearance Audit in accordance with the powers granted by Sections 235 and 236 of EACCMA. The Respondent averred that the audit revealed that the Appellant had imported timber through 564 entries, which it established the corresponding CBM had been under-declared, and the same were uplifted accordingly as per its findings. Subsequently and asper Sections 34 and 135 (1) of EACCMA, it demanded for the short-levied taxes from the Appellant vide letter dated 11th November 2021.

38. It was the Respondent’s submission that from international best practice, a trend was observed where for most timber declarations; the declared density (net weight/m3) is 1000kg/m3. The Respondent stated that it found this information to be incorrect since findings from research done by the World Agroforestry Centre established that the recommended density of mahogany ranges between 790 and 820 kg/m. It was these findings, which informed the average density applied by the Respondent of 805 Kg/m3.

39. The Respondent submitted that the General Agreement on Tariffs and Trade (GATT) the Respondent’s Customs Department is allowed to use various methods in making its tax assessment which in this Appeal included the use of the mirror analysis.

40. The Respondent stated that Corporation tax was assessed based on the established undeclared timber purchases, which were subjected to a mark-up of 25% since it was evident that the taxpayer’s self-declarations could not be relied on. The mark-up of 25% was determined based on industry margins of comparable companies engaged in the timber business.

41. The Respondent stated that having noted that the Appellant had grossly under-declared the weight of the timber it recalculated the volume of the timber and noted that the Appellant was liable to pay under declared taxes amounting to Kshs. 99,136,291. 00 being Import duty and Kshs. 70,093,429. 00 being Corporation tax and VAT which was then demanded.

42. The Respondent stated that it therefore properly applied the mirror analysis and therefore its demand for short levied taxes was proper as provided for under Section 135 of EACCMA.

43. The Respondent further stated that the Appellant was under duty to keep records so as to provide the same when the Respondent carry out a post clearing audit.

44. The Respondent asserted that since the Appellant has the burden of proof as per Section 30 Tax Appeals Tribunal Act, it should be put to the strictest standard in proving that the mark-up and additional assessments are arbitrary.

45. In defending its role of conducting PCA, the Respondent relied on the case of R. Mwongo J in Anne Wanjiku Kahwai vs. Kenya Revenue Authority & another (2019) eKLR.

The Respondent’s Prayers 46. The Respondent prayed that this Tribunal finds that: -a.The Respondent's notice of tax investigations & tax demand dated 11th November 2021 demanding for payment of taxes amounting to Kshs. 169,229,720. 00 being Corporation tax, Import duty and VAT be found to be proper and therefore due and owing.b.The Respondent’s decision issued on 18th July 2022 is valid and justified and prays that the Tribunal upholds the same.c.This Appeal be dismissed with costs to the Respondent for lack of merit.

Issue for Determination 47. After perusing through the pleadings and submissions, the Tribunal concludes that there is a single issue that calls for its determination as follows;Whether the Respondents uplift of the Appellant’s consignment is justified.

Analysis and Findings 48. The dispute herein arose after the Respondent made a 25% duty uplift on the consignments, in this case timber imported by the Appellant for the period 2017 to 2020.

49. The Respondent stated that this duty uplift was based on a mirror analysis study it carried out on transit timber declarations made in the URA Asycuda systems (Uganda) versus the timber imports declared in the KRA Simba database (Kenya) for the period under review.

50. It was the Respondent’s submission that the mirror analysis study revealed a gross under declaration and smuggling of timber at the Busia and Malaba boarders due to under-declaration of quantity. The Responded added that this resulted in under valuation since the customs value of timber is pegged on USD/Cubic Meter.

51. The Respondent submitted that a post clearance audit also revealed that the Appellant had imported timber through 564 entries, in which the corresponding CBM had been under-declared, and the same were uplifted according to its findings.

52. The Appellant retorted that the Respondent neglected to take in account that the two systems used, namely, the URA Asycuda systems of Uganda and the KRA Simba database of Kenya are fundamentally different to arrive at the volume of the logs and the subsequent customs value.

53. The Appellant argued that in particular, the values in the Ugandan system are arrived at by offloading the trucks and taking the actual volume of the logs being transported, noting that in Kenya, the Respondent’s officers during joint verifications, ordinarily measure the outlines of the trucks on which the timber is loaded to arrive at an estimated weight of the goods. In the first instance, it is reasonable that the measurements taken by the URA after offloading the trucks would be more accurate compared to the method adopted by the Respondent, which is prone to variations.

54. The Appellant in addition complained that the report of the alleged benchmarking has not been availed to it for interrogation nor has the source been disclosed and therefore cannot be applied retrospectively to its detriment since doing so will be against the principles of fair administrative action.

55. Despite the Appellant arguing that the Respondent did not share the investigations report, the Tribunal notes that there were various engagements between the two parties before the issuance of tax demand and tax investigations and therefore the Appellant was in the know.

56. The Tribunal notes that the Appellant failed to provide sufficient documentation so as to prove that the mark-up and additional assessments were arbitrary as required under Section 23 of the TPA which states;“(1)A person shall—(a)maintain any document required under a tax law, in either of the official languages;(b)maintain any document required under a tax law so as to enable the person’s tax liability to be readily ascertained; and(c)subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.”

57. The Tribunal is guided by the findings in the case of Anne Wanjiku Kahwai vs. Kenya Revenue Authority & another [2019] eKLR, where R. Mwongo J observed:-“in summary, I find that the Respondent were and are entitled to carry out investigations and utilize the information obtained in the fulfilment of their statutory mandates. Further, the Respondent were and are entitled to inform the Petitioners of the outcome of their investigations in so far as such outcome will affect the Petitioners. This would include identifying unpaid or apparently underpaid taxes and requiring the Petitioners, by notice to appear before the 2nd Respondent to produce records and information in respect of the tax liability for any other purposes relating to a tax law”

58. The Tribunal notes that in any tax dispute, the Appellant has the burden of proof to demonstrate to the court’s satisfaction that the assessment was incorrect or excessive in accordance to the provisions of Section 56 (1) of the Tax Procedures Act.

59. In this instant Appeal, the Tribunal notes that the Appellant did not discharge this burden of proof as envisaged under Section 56 (1) of the Tax Procedures Act.

60. Similarly, Section 30 of the Tax Appeals Tribunal Act demands of the Appellant to discharge the burden of proof in tax matters, the Section stipulates;“In a proceeding before the Tribunal, the appellant has the burden of proving—(a)where an appeal relates to an assessment, that the assessment is excessive; or(b)in any other case, that the tax decision should not have been made or should have been made differently.”

61. It is the view of the Tribunal that the Respondent properly applied the mirror analysis and therefore its uplift of the Appellant’s consignment was justified and well within the law as provided for under Section 135 (1) of EACCMA which states;“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.”

62. Consequently, the Tribunal finds that the Respondent’s uplift of the Appellant’s cons ignment was justified.

Final Decision 63. The Tribunal having held that the Appeal is not merited, it accordingly proceeds to make the following Orders:i.The Appeal be and is hereby dismissed.ii.The Respondent’s Objection decision dated 28th July 2022 be and is hereby upheld.iii.Each party to bear its own costs.

64. It’s so ordered.

DATED AND DELIVERED AT NAIROBI THIS 24THMAY, 2024ROBERT M. MUTUMA - CHAIRPERSONELISHAH N. NJERU - MEMBERMUTISO MAKAU - MEMBERMOHAMED A. DIRIYE - MEMBERBERNADETTE M. GITARI - MEMBER