[2024] KETAT 1244 (KLR)

Capwell Industries Limited v Commissioner of Customs and Border Control (Tax Appeal E424 of 2023) [2024] KETAT 1244 (KLR) (9 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1244 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E424 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, T Vikiru & AK Kiprotich, Members

August 9, 2024

Between

Capwell Industries Limited

Appellant

and

Commissioner of Customs and Border Control

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya whose principal activity is manufacturing of high quality maize flour, pulses, rice, porridge and wheat flour.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and 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. Pursuant to a post clearance audit, the Respondent issued a management letter dated 19th January 2023. The Respondent further vide a letter dated 19th April 2023 raised a demand notice for taxes amounting to Kshs 145,185,298. 00.

4. The Appellant objected to the demand vide a letter dated 19th May 2023. The Respondent subsequently issued its review decision vide a letter dated 16th June 2023 confirming tax assessments amounting to Kshs 140,830,343. 86 being Import duty, Import VAT, IDF and RDL.

5. Following the Respondent's decision, the Appellant filed a Notice of Appeal at the Tribunal on 14th July, 2023.

The Appeal 6. From the Appellant’s Memorandum of Appeal dated 31st July, 2023 the Tribunal discerned the grounds to be as follows:-a.The Respondent has based its review decision, solely, on the variance between the aggregate CIF declared during the year 2021 and 2022 and the total bank debits highlighted by the Respondent as relating to the payments made to the Appellant's exporters.b.That the Appellant provided complete reconciliation showing an entry to entry comparison of amount invoiced and amount paid to the said suppliers.c.That the Respondent availed the Appellant with detailed workings of what guided the Respondent to the conclusion that Kshs 145,185,298. 00 was the incremental tax on under declared imports.d.That the Appellant declared its goods in the foreign currency as invoiced to them and paid the suppliers of those goods in the equivalent foreign currency value invoiced, from their respective Kenyan bank accounts.e.That in the Appellant's application for review, it requested for a breakdown of the import entries the Respondent claims were under declared, in order to enable the Applicant substantiate the amount of taxes in question.

Appellant’s Case 7. The Appellant’s case is premised on the following documents filed before the Tribunal;a.Its Statement of Facts dated and filed on 31st July 2023 together with the documents attached thereto.b.Its written submissions dated 12th June 2024.

8. The Appellant stated that it was seeking to completely object to the audit test used on the basis that it was flawed and did not reflect the spirit of the Fourth Schedule of the EACCMA. That duties, taxes and any relevant levies are charged on customs value relating to a specific transaction. That as evidenced in it's review application, this audit test will inadvertently include payments to foreign suppliers that don't relate to purchase of goods or payment in foreign currency and payments made to local suppliers of goods and services. That in addition, depending on the contract terms and business relationship, payment terms in international business are mostly; partly in advance and partly after the imported goods have arrived at the country of importation.

9. That the Respondent had also failed to pinpoint the exact import entry whose transaction value was under-declared for the purpose of calculating duty and taxes. That an entry to entry comparison would have shed more light on if, an offence was committed in the valuation of imports by the Appellant.

10. That the Appellant had availed information of the import entries, the bank debits the Respondent picked that were used to settle and eliminated some payments that did not relate to items that would form part of the customs value. That its expectation was that the Respondent, should then have made a comparison of apples and apples but conversely, the Respondent stuck to its guns in the review decision and went on to add other bank debits not earlier used as a basis of establishing the transaction value in the demand letter, and adjusted the demand downward to Kshs.140,830,343.

11. That this does not provide enough reason to uplift the value of the Appellant's imports. It averred that all adjustments to the transaction value were made in line with Paragraph 9 of the Fourth Schedule of EACCMA and reflect the true price actually paid for the imported goods.

12. The Appellant stated that it provided excel schedule indicating payment of the amount invoiced by showing the following information;a.CIF value declared per entry.b.Amount paid to supplier per entry, relating to every import entryc.Date the amounts were paid to the suppliers as per the bank statement.d.Remitting bank of the payment to the said exporters.e.Entries relating to free of charge goods, which payment would not be due to the suppliers.

13. That it was based on the detailed workings provided by the Respondent, that the Appellant prepared a comprehensive defence and fully discharged its burden of proving that the earlier demand should not stand, and that using the audit test, after evidence adduced, would create an impression that the Appellant actually over declared the value of imported goods for the assessed years.

14. That the Respondent agreed to its claim and conversely, introduced new bank debit entries to adjust the demanded amount downwards to Ksh 140,830,343. 86 instead of vacating the full amount as premised by the Appellant's application for review. The Appellant submitted that the wheels of justice started rolling immediately the customs demand and workings, that brought about the demanded amount were issued.

15. That introducing new evidence contradicts Article 47 of the Constitution and its client's right to fair administrative action. That the KRA is prevented from re-calibrating the fundamental basis of the demand letter dated 19th April 2023. That the new workings and demanded amount would require a resetting of the clock; hence a new demand letter having those new issues should be issued by the Respondent.

16. That the demanded amount should therefore be reviewed downward to Nil/zero in line with the demand and corresponding application to review the demand. That this is buttressed by the High Court in Commissioner of Domestic Taxes vs Bank of Africa Limited. That having new workings which were not part of the demand, amounts to an attempt to unfairly tip the scales of justice in the Respondent’s favour.

17. The Appellant submitted that a comparison of the currency value declared vis-a-vis the currency value in the commercial invoice, and bank debits asserts the position that the foreign currency value invoiced equals the amount paid and declared.

18. That Article 9 of the WTO agreement on customs valuation states that; lf conversion of currency is necessary for the determination of customs value, the rate of exchange to be used shall be that duly published by the competent authorities of the country of importation concerned. That Section 122 (7) of EACCMA states that “The rate of exchange to be used for determining the equivalent of a Partner State currency of any foreign currency shall be the selling rate last notified by the Central Bank of the respective Partner State when an entry is presented to and accepted by the proper officer.”

19. That considering some payments were done in advance for imports, the exchange rate at the time of declaration, time advance payment was made and time the final payment was made for the same import will inherently be different and this would inadvertently affect the amount, in local currency, that will be paid to the suppliers and declared. That a comparison of USD to USD would assert that the Appellant did not undervalue its imports for customs purposes.

20. That a legitimate expectation was therefore created by the KRA in its ICMS or SIMBA 2014, that the exchange rate at the time of declaration that would then yield the customs value in local currency and taxes to be paid will not be adjusted in a later PCA. That the only reason for the adjustment should be if the PAPP in foreign currency differs from the foreign currency declared as a transaction value in the customs system.

21. The Appellant stated that the Respondent, conducted a Post Clearance Audit ("PCA") of it's customs operations for the period January 2018 to December 2022. That thereafter some issues were raised relating to customs valuation for the period 2021 and 2022 through a management letter and demand notice dated 19th January 2023 and 19th April 2023 respectively.

22. That the Respondent through the management letter, provided the following reasons for its allegations of undervaluation which inadvertently led to the uplifted duty, levies and taxes;a.A variance was found after comparing all payments made to the Appellant's suppliers through its USD bank accounts and CIF declarations made in the customs system and used as basis of calculating duty. That the variance amounted to Ksh 104,574,719. 36 and Ksh 207,651,726. 57 for the year 2021 and 2022 respectively.b.That the aforementioned variance was then treated as under-declaration of the aggregate transaction value of imports for the year 2021 and 2022 hence the demand notice dated 19th April 2023 for the uplifted duty and taxes.

23. That the Respondent's demand related to customs duty, VAT, IDF and RDL, and amounted to Ksh 145,185,298 exclusive of penalty as shown in the table below;Details (KES)

Customs Duty 78,056,611. 48

Value Added Tax 49,956,231. 35

IDF 10,927,925. 61

RDL 6,244,528. 92

Total 145,185,297. 36

24. That the Appellant made an application to the Respondent to review the decision to demand Kshs 145,185,297. 36, on 19th May 2023.

25. That the Appellant's application was premised on the following grounds:a.That the Respondent has erred in fact by alluding that the 2021 and 2022 variances, all relate to payments made to Appellant's suppliers from abroad.b.That the Respondent has contradicted itself in law by erroneously including certain costs as part of the CIF valuation; By including costs incurred in cargo handling and transport, after the goods arrive at the port of Mombasa which would form part of the customs value for purposes of calculating taxes. This was asserted by invoices relating to some of the bank debits that made up the demanded amount.c.That the Commissioner has misapplied itself in law and fact by the method used in adjusting the transaction value of Appellant's imports in 2021 and 2022. d.That the Appellant complied with all customs laws in its declarations and all foreign currency payments match the foreign currency invoiced and declared to customs.

26. The Appellant submitted that the Respondent averred that it was led to believe, that all bank payments used to establish if the correct transaction value was declared in both years, related to actual payments to foreign suppliers for imports made during the years. That the demand notice was hence premised on the information received from the Appellant.

27. That the Respondent reviewed the amount demanded downwards from Ksh 145,185,298 to Ksh 140,830,343. 86.

28. The Appellant stated that the Respondent in working out the reviewed amount, introduced new bank debit entries and used the new totals as a yardstick of establishing the correctness of the declared transaction value in the year 2021 and 2022.

29. That the Appellant prayed that the Respondent be authorized to set aside the review decision in light of the Memorandum of Appeal.

Appellant’s Prayers 30. The Appellant made the prayers that;a.The review decision dated 16th June 2023 be annulled and set aside in its entirety.b.The Appeal be allowed.c.Any other remedies that the Tribunal deems just and reasonable.

The Respondent’s Case 31. The Respondent’s case is premised on the hereunder filed documents before the Tribunal: -a.The Respondent’s Statement of Facts dated and filed on 31st August, 2023. b.The Respondent’s written submissions filed on 11th June 2024.

32. The Respondent stated that the dispute arose as a result of it's decision to uphold the demand notice on the basis of undervaluation. That the Appellant failed to prove the price actually paid or payable as per the provisions of Section 122 of the Fourth Schedule of EACCMA 2004.

33. That upon the conclusion of the audit, it was revealed that there was undervaluation of imported goods for the years 2021 and 2022. It averred that this was due to differences in the aggregate amount of Cost Insurance and Freight (CIF) declared for the goods and the total remittances to the suppliers as captured below:Year Bank Remittances CIF Differences

2021 1,437,892,750. 37 1,333,318,031. 08 104,574,719. 36

2021 2,099,084,418. 65 1,887,097,692. 08 207,651,726. 57

34. It submitted that the bank remittances were then sent to the Appellant for reconciliation. That they were then reconciled and remarked with the supplier's name and indicated as imports.

35. The Respondent submitted that in the Appellant's objection a contrary opinion was provided and some of the remittances marked as imports were reneged as cost. That the Respondent however adjusted the payments in relation to the Appellant's averments.

36. That the Appellant therefore having been trusted to provide truthful and accurate information to the Respondent, failed and provided misleading information and misrepresented the facts.

37. That Section 122(1) of the EACCMA 2004 provides that where imported goods are liable to import duty ad valorem then the value of such goods shall be determined in accordance with the Fourth Schedule and import duty shall be paid on that value.

38. That the transaction value is defined in Paragraph 2 of the Fourth Schedule as the price actually paid or payable for the goods when sold for export to the partner state adjusted in accordance with the provisions of paragraph 9.

39. It added that Article VII of the General Agreement on Tariffs and Trade lays down the General Principles for an International System of Valuation.

40. That it stipulates that the value for Customs purposes of imported merchandise should be based on the actual value of the imported merchandise on which duty is assessed.

41. That the actual value must be the price at which the goods are sold. That it therefore requires that the total payments made to the suppliers of goods have to be faithfully declared as the customs value for the goods imported.

42. The Respondent submitted that the Appellant failed to reconcile and account for all the entries under audit. That it could not link all the entries to the bank remittances. That from the reconciled USD Guardian Bank account for both 2021 and 2022 it was noted that the Appellant only accounted for 82 entries out of 139 entries.

43. That the CIF for 2021 and 2022 were forwarded to the Appellant's email address on 27th March 2023 and it would therefore have been expected of the Appellant to account for remittances vis a vis the CIF which the Appellant failed.

44. That from the onset of the audit the issue under contention was undervaluation of imported goods for the years 2021 and 2022.

45. The Respondent stated that it audited the books of accounts of the Appellant and issued a letter dated 19th January 2023 showing anomalies in the importations and declarations and the undervalued taxes.

46. The Respondent averred that in its letter it called for payment of taxes assessed at Kshs.145,185,297. 36. That the Appellant did not respond to these findings or payment of these taxes.

47. That consequently, the Respondent on 19th April 2023 issued a demand notice for the taxes.

48. The Respondent submitted that it relied on the following provisions of the law;a.Sections 135, 229, 235, 236, 249 and the Fifth Schedule of the EACCMA 2004. b.Sections 235 and 236 that gives the Commissioner powers to call for documents and conduct a PCA on the import and export operations of a taxpayer within a period of five years from the date of importation or exportation.c.Where the PCA reveals that taxes were short levied, or erroneously refunded, Section 135 and 249(1) empowers the Commissioner to recover any such amount short levied or erroneously refunded with interest at a rate of two percent per month for the period the taxes remain unpaid.d.Section 229 that provides for application for review by any person affected by the decision or omission of the Commissioner on matters relating to Customs and provides the statutory timelines to be observed.

49. On the reason for its decision the Respondent stated that it is mandated to collect and record accurate traded statistics and to assess and account for import taxes.

Respondent’s Prayers 50. The Respondent prayed that the Tribunal considers the case and find that;a.That the Appeal herein be dismissed with cost to the Respondent.b.The Respondents decision be allowed.

Issue For Determination 51. The Tribunal upon due consideration of the pleadings and the written submissions of the parties was of the considered view that the Appeal raises a single issue for its determination being:-Whether the Respondent’s review decision was justified

Analysis And Determination 52. The Tribunal having ascertained the issue for determination as set out above proceeds to deal with the same as hereunder

53. This dispute arose following the Respondent’s review decision dated 16th June 2023 wherein it confirmed duties relating to the Appellant’s imports amounting to Kshs 140,830,343. 86 on the basis that the Appellant had undervalued the same at the time of importation.

54. Under the EACCMA the transaction value method is the primary method of valuation which provides as follows regarding the transaction value of goods at Paragraph 2(1) of the Fourth Schedule:“The customs value of imported goods shall be the transaction value, which is the price actually paid or payable for the goods when sold for export to the Partner State adjusted in accordance with the provisions of Paragraph 9, but where—(a)there are no restrictions as to the disposition or use of the goods by the buyer other than restrictions which:(i)are imposed or required by law or by the public authorities in the Partner State;(ii)limit the geographical area in which the goods may be resold; or(iii)do not substantially affect the value of the goods;(b)the sale or price is not subject to some condition or consideration for which a value cannot be determined with respect to the goods being valued;(c)no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions of Paragraph 9; and(d)the buyer and seller are not related, or where the buyer and seller are related, that the transaction value is acceptable for customs purposes under the provisions of subparagraph (2).”

55. In the instant case, the Appellant averred that duties, taxes and any relevant levies are charged on customs value relating to a specific transaction. That as evidenced in its review application, the Respondent’s audit test would inadvertently include payments to foreign suppliers that don't relate to purchase of goods or payment, payments in foreign currency made to local suppliers of goods and services. That in addition, depending on the contract terms and business relationship, payment terms in international business are mostly; partly in advance and partly after the imported goods have arrived at the country of importation.

56. That the Respondent had also failed to pinpoint the exact import entry whose transaction value was under-declared for the purpose of calculating duty and taxes. That an entry to entry comparison would have shed more light on if, an offence was committed in the valuation of imports by the Appellant.

57. That the Appellant had availed information of the import entries, the bank debits the Respondent picked that were used to settle and eliminated some payments that did not relate to items that would form part of the customs value. That its expectation was that the Respondent, should then make a comparison of apples and apples but conversely, the Respondent stuck to its guns in the review decision and went on to add other bank debits not earlier used as a basis of establishing the transaction value in the demand letter, and adjusted the demand downward to Ksh 140,830,343.

58. In reply the Respondent averred that the Appellant failed to prove the price actually paid or payable as per the provisions of Section 122 of the Fourth Schedule of EACCMA 2004.

59. The Respondent submitted that the Appellant failed to reconcile and account for all the entries under audit. That it could not link all the entries to the bank remittances. That from the reconciled USD Guardian Bank account for both 2021 and 2022 it was noted that the Appellant only accounted for 82 entries out of 139 entries.

60. That the CIF for 2021 and 2022 were forwarded to the Appellant's email address on 27th March 2023 and it would therefore have been expected of the Appellant to account for remittances vis a vis the CIF which the Appellant failed.

61. Section 122(1) of EACCMA provides as follows regarding determination of the value of imported goods liable for ad valorem import duty;“Where imported goods are liable to import duty ad valorem, then the value of such goods shall be determined in accordance with the Fourth Schedule and import duty shall be paid on that value.”

62. The Tribunal has reviewed the documents provided by the parties and the pleadings and notes that the method of valuation was not in contention by the parties. The only issue that was raised by the Respondent in the review decision was that the evidence adduced by the Appellant did not demonstrate the actual amounts paid for the goods imported as required under Section 122 of EACCMA.

63. In particular, the Tribunal has noted that the Respondent in its review decision stated in part as follows;“…It was your submission in paragraph 2 and 3 that, there were some payments which do not relate to importation of goods. The Bank remittances were sent to your representative as indicated above reconciled and remarked with supplier’s name and indicated as imports (see annexure marked A). in your objection a contrary opinion was provided on some of the remittances marked as imports, this is not only misleading but misrepresentation of facts to the Commissioner. Be it as it may, the Commissioner has adjusted the payments in relation to your averments and your bank reconciliation.From the reconciled USD Guardian Bank account for both 2021 to 2022 it was noted that you only accounted for 46 entries out of 67 and 36 entries out of 72 respectively leaving other entries unaccounted for. The entries and CIF for 2021 and 2022 were forwarded to your email address on 27th March 2023 for reconciliation. It would therefore be expected of you to merge and account for the entries and remittances to your supplier for the years under audit.From the onset of this audit the issue under contention is undervaluation of imported goods for the years 2021 and 2022. Having gone through the USD and Kshs. Guardian Bank for the years 2021 and 2022 the variance between CIF and bank remittances depict undervaluation. Extra taxes calculated on the variance as follows.…”

64. From the above extract of the Respondent decision and pleadings, the Appellant had failed to reconcile and account for 82 out of 139 import entries that were under audit after the Respondent had requested it do the same. Although the Appellant had averred that it had prepared a comprehensive defence and fully discharged its burden in proving that the demand should not stand, it did not directly address this specific issue of entries not accounted for in its pleadings. The Tribunal further notes that the Respondent made adjustment to the final assessment in the review decision where the payments had been clarified in the bank reconciliation by the Appellant.

65. The Tribunal is guided by Section 30 of the Tax Appeals Tribunal Act in determining the party that bears the burden of proof under this particular circumstance. The Section provides as follows:-“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; orb)In any other case that the tax decision should not have been made or should have been made differently.”

66. Further, Section 235(1) of EACCMA provides as follows regarding production of documents;“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 transhipment of the goods, as the proper officer may deem fit.”

67. In this particular Appeal the Appellant had the burden to discharge in demonstrating to the Tribunal that it indeed provided verifiable information and documents to the Respondent at the objection stage that would have proved that the assessment was excessive or the decision should have been made differently. From the foregoing analysis the information and documents presented by the Appellant did not address the specific issues raised by the Respondent in the review decision and therefore has failed to discharge this burden.

68. The Tribunal reiterates the finding by the High Court wherein it agreed with the conclusion of the Tribunal in Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) (Commercial and Tax) when it stated as thus;“A presumption of correctness arises from the Commissioner’s determination/assessment. The presumption remains until the taxpayer produces competent and relevant evidence to support his/her position.…”

69. In the circumstances, the Tribunal finds that the Appellant did not discharge the burden of proof placed on it and consequently the Respondent’s decision was justified.

Final Decision 70. In view of the foregoing analysis, the Tribunal finds that the Appeal lacks merit and accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby dismissed.b.The Respondent’s review decision dated 16th June, 2023 is hereby upheld.c.Each Party to bear its own costs.

71. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF AUGUST, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH- MEMBERDR. TIMOTHY B. VIKIRU - MEMBERABRAHAM K. KIPROTICH- MEMBER