[2024] KETAT 1322 (KLR)

Doshi and Company Hardware Limited v Commissioner Customs and Border Control (Tax Appeal E402 of 2023) [2024] KETAT 1322 (KLR) (23 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1322 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E402 of 2023

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

August 23, 2024

Between

Doshi and Company Hardware Limited

Appellant

and

Commissioner Customs and Border Control

Respondent

Judgment

1. The Appellant is a private limited company incorporated in Kenya whose principal activity is the importation, manufacturing, trading and distribution of various building and construction materials but not limited to steel channels.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of the Laws of Kenya. 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 post clearance audit of the Appellant’s imported consignments for the January 2018 to December 2022 period and issued the Appellant with a comprehensive demand notice dated 27th March 2023, arising from the post clearance audit therein demanding tax amounting to Kshs. 206,075,743. 00 emanating from the classification of Hot Rolled U-Channels and steel consignment imported by the Appellant in the January, March and May 2018 period.

4. On 24th April 2023, the Appellant issued its notice of objection objecting to the amount demanded in its entirety. On 23rd May 2023, the Respondent issued the Appellant with a review decision reviewing the tax demanded to Kshs. 137,733,508. 00 being both import duty and value added tax (VAT) in relation to SPHT1/S355JRB Steel Grade and SS400 Steel Grade (Kshs. 134,069,615. 00 and Kshs.3,663,893. 00 respectively).

5. The Appellant being dissatisfied with the Respondent’s review decision, filed a notice of appeal dated 7th July 2023 at the Tribunal.

6. The Appellant appealed against the decision demanding tax amounting to Kshs.134,069,615. 00 for SPHT/S355JRB Steel Grade.

The Appeal 7. The Appellant filed its Memorandum of Appeal dated and filed on 21st July 2023 and set out the following grounds of Appeal;a.That the Respondent erred in fact and law by confirming its assessment amounting to Kshs.134,069,615. 00 in relation to 2018 consignments of steel grade SPHT1/S355JRB from Rizhao Steel for the period January, March and May 2018. b.That the Respondent erred in law and fact in alleging that the Appellant had blanked out columns of either Boron or Chromium elements in the Mill Test Certificates (MTCs) for the steel consignments imported, which if included would have changed the classification of the steel.c.That the Respondent erred in law and fact by claiming that MTCs should not bear blank columns. If an element was not tested, there is usually no need to include a blank column for it. The Respondent further erred by substantiating this position through a review of other exporters of steel from different regions.d.That the Respondent erred in law and fact by failing to appreciate that as per the Japanese Industrial Standards for steel grades, the mandatory elements for steel under grade SPHT1 are Carbon, Silicon, Manganese, Phosphorous & Sulphur. Any element other than those listed in the chemical composition table may be added as needed.e.That the Respondent erred in fact by failing to appreciate that, the MTC's are issued by the Respondent's supplier (Rizhao Steel) were in the standard format of Steel Grade SPHT1/S355JRB, and the elements indicated in the said MTCs were the only mandatory elements tested for this particular grade of steel.f.That the Respondent erred in law and in fact in failing to appreciate that there was no requirement or need to establish the presence of Boron or Chromium in the MTCs, as the standards had been amended to provide that additional elements may be tested as required.g.That the tax demand was therefore unlawful and was based on questionable facts rather the facts of the law and should therefore be annulled.

The Appellant’s Case 8. The Appellant set out its case in the Statement of Facts dated 21st July 2023.

9. The Appellant averred that the Respondent conducted a post clearance audit on the Appellant’s operations for the period January 2018 to December 2022, consequently issuing a demand notice dated 27th March 2023 stipulating a liability of Kshs. 206. 075,935. 00.

10. The Appellant stated that the Respondent submitted that the audit had established instances of non-compliance in relation to: misclassification of Hot Rolled Channels (u-Sections), misclassification of alloy steel as non-alloy under Grade SPHT and SS400 from Rizhao Steel based in China and the 2018 consignments of steel Grade SPHT1/S355JRB from Rizhao Steel.

11. That in relation to the misclassification of Hot Rolled u-Channels, the Appellant stated that the Respondent alleged that the Appellant had wrongly classified Hot Rolled Channels of a height more than 100mm under HS Code 7216. 31. 90 instead of HS Code 7216. 69. 00. The Appellant refuted the basis for the classification and pointed out that the Appellant had appealed the Respondent’s decision on the tariff classification in relation this matter.

12. The Appellant alleged that the matter was currently active at the Tax Appeals Tribunal under TAT No. 169 of 2019 as the appeal had since been reinstated vide Miscellaneous Application 169 of 2019 by the Tribunal.

13. In relation to the misclassification of alloy steel as non-alloy; the Appellant averred that the Respondent claimed that it conducted a review of the Mill Test Certificates (MTCs) in relation to related steel grade and the observations indicated that the MTC for entry number 2018MSA6850584 showed that the imported steel was an alloy as one of the elements, Chromium (Cr) exceeded the non-alloy limit of 0. 3%, hence demanding tax amounting to Kshs. 3,663,893. 00. The Appellant contended that there was no Chromium elements in the MTCs as alleged and the elements present in the MTC were below the limits outlined under note 1(f) to chapter 72 and thus correctly classified as non-alloy.

14. The Appellant averred that after deliberations with the Respondent, it agreed to pay the demanded tax amount of Kshs.3,663,893. 00 not in dispute.

15. In relation to the 2018 consignments of Steel Grade SPHT1/S355JRB, the Appellant stated that the Respondent alleged that a review of the Appellant’s MTCs showed blanked out columns of either Boron or Chromium elements.

16. The Appellant further averred that according to the Respondent, the mandatory elements of under Grade SPHT1 produced under JISG 3131 are Carbon, Silicon, Manganese, Phosphorous and Sulphur and Others tested for this steel grade include Aluminum and Boron.

17. The Appellant contested the Respondent’s allegation that the assessed consignments for the periods of January, March and May 2018 showed blanked out columns of either Boron or Chromium, while according to the Respondent, MTCs should not bear blank columns and if an element was not tested, there is usually no need to include a blank column for it, comparing with MTCs from other steel exporters from other regions, consequently, demanding tax amounting to Kshs. 134,069,615. 00.

18. The Appellant strongly objected to the allegation that its MTCs were blanked out and contested the Respondent’s assertions in relation to the 2018 consignment wherein the Respondent implied that the Appellant committed document fraud involving the use of false, altered, or counterfeit documents with the intention of misleading the Respondent.

19. The Appellant stated that the Respondent ought to appreciate that the MTC's were issued by the Appellant’s supplier (Rizhao Steel) in the standard format of Steel Grade SPHT1/S355JRB, and the elements indicated in the said MTCs were the only mandatory elements tested for this particular grade of steel.

20. The Appellant averred that in the interest of clarity steel grade SPHTI was found under the Japanese Industrial Standards (JIS) classification for steel grades which is widely used in Japan to designate various types and grades of steel.

21. The Appellant averred that under this system, each steel grade was identified by a unique alphanumeric code. For example, JI5G3132 SPHT1 was a common structural steel grade designated by JIS. The 'G3132' indicates the standard number and 'SPHTI' the specific steel grade within that standard.

22. The Appellant averred that it was crucial to note that the Japanese Industrial Standards were periodically revised by the Minister of Economy, Trade and Industry through deliberations at the Japanese Industrial Standards Committee. That this ensures new technologies, research findings, industry requirements and international harmonization efforts are incorporated. Changes made to standards can include revisions to technical specifications, testing methods, terminology, and other aspects to improve accuracy, variety and alignments with global practices. Hence, prior to the JIS G 3132;2018. the applicable standard war JIS G 3132:2011.

23. The Appellant stated that taking the above into consideration and understanding that the Respondent's claim of blanked out columns omitting elements namely Boron and Chromium was made on the premise that the MTCs for the periods January, March and May 2018 had blanked out columns of either Boron or Chromium elements while the rest of the months in 2018 contained Boron and Chromium. Further, the Appellant stated that it should be noted that the Respondent was considering two different steel grades.

24. The Appellant further averred that despite its pleas for clarification, the Respondent has since not specified which steel grade bore the blanked-out columns yet SPHT1 grade required the testing of only five elements under the 2018 standards, which was what the Appellant did. The Appellant averred that the Respondent should adduce the MTCs in relation to steel grade SPHT1 where Boron and Chromium were present.

25. The Appellant averred that the confusion by the Respondent can be dispelled by appreciating that the standards employed for steel grades change periodically for instance, while the 2011 standards typically required six mandatory elements to be tested, the 2018 standards required only five elements to be captured. The Appellant averred that in addition to the mandatorily stated elements under the chemical composition, any other element may be added as required.

26. The Appellant claimed that for the SPHT1 under the 2018 standards, where any elements are added in addition to those prescribed in the standards, the test would indicate the threshold. That under the 2018 standards, the Respondent failed to appreciate that there was no requirement or need to establish the presence of Boron or Chromium as the standards had been amended to provide that additional elements may be tested as required.

27. The Appellant stated that it was crucial for the Tribunal to appreciate that the Appellant had established the presence of the elements prescribed in the standards, no other onus was placed upon it to test for any additional elements hence the blank columns in the mill certificates. Moreover, the presence of a blank column was not empirical evidence for the existence of Boron or Chromium in the steel imported by the Appellant as implied by the Respondent.

28. The Appellant insisted that it cannot be overstated that the Respondent was arguing that since there was a blank column, the Appellant has undoubtedly blanked out columns bearing Boron or Chromium. Notably, the Respondent was making such assertions without having tested for the same.

29. The Appellant further pointed out that note 1 (I) to Chapter 72 of the EAC/CET outlines a number of elements for which if the thresholds are exceeded, steel is considered to be alloy, yet the Respondent had chosen to fixate itself on Boron and Chromium and insist that these are the blanked-out elements in the MTC's.

30. The Appellant wished to know if the Respondent indeed tested the steel imported by the Appellant and established the presence of both Boron and Chromium as the blanked-out elements or rather the Respondent merely intended the presence of Boron and Chromium which are not requirements under the 2018 standards to justify the reclassification for purposes of tax collection. That if that was the case, the burden of proof shifted to the Respondent to provide laboratory results confirming that they indeed tested and established the presence of both Boron and Chromium in the Appellant’s steel importations for the January, March and May 2018 period. That in the absence of laboratory tests, it was not possible for the Respondent to determine that the Appellant had blanked out its MTCs.

31. The Appellant made the following prayers to the Tribunal:a.That this Appeal be allowed.b.That the Respondent’s demand notice dated 27th March 2023 and subsequent review decision dated 23rd May 2023 be set aside.c.That the Respondent be restrained from taking any enforcement mechanisms with respect to the demand for taxes in the years of contention pending the determination of this matter.

The Respondent’s Case 32. The Respondent set out its case on the Statement of Facts dated 21st August 2023 and filed on 24th August 2023.

33. The Respondent reiterated its position as stated in the review decision communicated to the Appellant and refuted every allegation in the Appellant's Memorandum of Appeal and Statement of Facts.The Respondent averred that the main contention in this Appeal was the reclassification of imported steel grade SPHT1 produced under JIS G 3132 for the year 2018 from the supplier, Rizhao Steel based in China, where MTCs availed by the Appellant during the audit were deemed unreliable.

34. On grounds one to four of the Appeal, the Respondent stated that for the period between July 2017 to June 2018, Kenya was allowed to stay application of the East Africa Community Common External Tariff (hereinafter “EACCET”) rate and apply a duty rate of 10% or USD 250/MT, whichever was higher for tariff code 7225. 30. 00 and 35% or USD 275/MT for tariff code 7225. 99. 00. From July 2018 to 6th December 2018, the rate was revised to an advalorem rate of 10% for tariff code 7225. 30. 00 instead of the composite taxation, while the 7225. 99. 00 remained unaltered.

35. The Respondent averred that the Appellant's consignments were found to have unreliable MTCs for the period January, March and May 2018. The Respondent relied on the General Interpretative Rules (GIRs) as cited in the EACCET that govern the classification of goods in the nomenclature and states as follows:“According to GIR1, classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes."

36. The Respondent stated that all other subsequent consignments from Rizhao by the Appellant imported between the period mid-December to the date of filing this statement, have a column provision of an extra element tested besides the standard tested elements and that this element has been consistently tested as majorly Boron, Aluminum among other elements, which have in all cases exceeded the percentage threshold as provided for under the provisions of Chapter note (f) to chapter 72 to reclassify as a non-alloy.

37. With this in mind, the Respondent stated that it conducted an audit and established those subsequent consignments from Rizhao after 2018 had Boron element in excess of 0. 0008% to qualify as a non-alloy and it was therefore correctly classified by the Respondent. The Respondent stated that it demonstrated to the Appellant various MTCs of Steel Grade SPHT1 by Rizhao Holding Group based in China that showed that they test for the five mandatory elements which are Carbon, Silicon. Manganese, Phosphorus & Sulphur.

38. The demonstration issued to the Appellant by the Respondent was as follows; MTC No.190227H00213/4/5 dated 27th February 2019 for entry 2019MSA7192550 classified under tariff code 7225. 30. 00.

MTC No. 190316H00407/8/ dated 16th March 2019 under entry 2019MSA7202277 entry classified under tariff code 7225. 30. 00.

MTC No. 190316H00407 dated 16th March 2019 under entry 2019MSA7202277.

39. The Respondent stated that a further review of sampled MTCs from Rizhao Steel Holding Group based in China showed that they sometimes also test for other elements which included Aluminum and Boron, thus making a provision for additional column(s) for either of these elements and that a review of Appellant's January, March and May 2018 MTCs showed blanked out columns of either Boron or Chromium elements. Further, that MTCs should not bear blank columns and in any case if an element was not tested, there is usually no need to include a blank column for it.

40. The Respondent stated that some MTCs had blanked columns between elements and that the Respondent analyzed all the Appellant’s steel imports from Rizhao in the period 2018 and those with blank columns were included with their classification of steel changing to either 7225. 30. 00 or 7225. 99. 00 with the total additional tax assessed being Kshs. 134,069,615. 00.

41. The Respondent averred that its assessment followed the provisions of the EAC Gazette notice on stay of duty application for the periods between July 2017 and 6th December 2018 and it was the Appellant who failed to sufficiently explain in their notice of objection why only their consignment for the period 2018 from Rizhao Steel contained a blank after being issued with an assessment following the Respondent’s audit related to ten (10) declarations.

42. The Respondent stated that all other consignments from the same supplier had been uniformly presented without a single blank column similar to identical importers from Rizhao within the same period under review.

43. The Respondent averred that the mandatory elements did not have any contentions with the Respondent as they were all confirmed in each MTC and reiterated the importance of the chemical elements in determining the HS Code for tax purposes and asserted that by checking any MTC from Rizhao Steel from the Appellant, the Respondent indicated that they all had Boron element and none had a blank column.

44. The Respondent contended that it was not mandatory to test for other elements besides the mandatory, however, if a manufacturer or supplier has not tested for an additional element, there is usually no column provision for the untested element implying that the presence of a blank column was evidence that the inclusion of its contents would otherwise result in reclassification.

45. The Respondent made the following prayers to the Tribunal:a.That the Tribunal finds that the Respondent’s review decision dated 23rd May 2023 was proper and in conformity with the provisions of the law and upholds the same.b.The Tribunal finds that the instant Appeal was devoid of merit and ought to be dismissed with costs to the Respondent.

Respondent’s Witness Statement 46. The Tribunal on 27th March 2024, admitted as evidence in chief the witness statement of Ms. JaneKaren Kigoro an officer attached to the Respondent’s Post Clearance Audit Unit as at the time of the dispute. The witness statement was a reiteration of the Respondent’s Statement of Facts and shall not be rehashed by the Tribunal.

Parties Written Submissions 47. The Tribunal on 27th March 2024 directed the parties to file and serve on each other their written submissions by 10th April 2024. Neither of the parties complied with the Tribunal’s directions. Accordingly, the filed submissions will not be considered by the Tribunal.

Issues for Determination 48. Based on the parties’ pleadings and Respondent’s witness statement the Tribunal has framed a single issue for determination thus:Whether the Respondent’s reclassification of the Appellant’s consignment under HS Code 7225. 30. 00 to 7225. 99. 00 was justified.

Analysis and Findings 49. The Tribunal will proceed to analyse the single issue for determination that it has identified as outlined hereinunder:Whether the Respondent’s reclassification of the Appellant’s consignment under HS Code 7225. 30. 00 to 7225. 99. 00 was justified.

50. The Tribunal notes that this is the primary issue of contention in this Appeal wherein the Respondent claimed that the Appellant had blanked out columns of either Boron or Chromium elements in the Mill Test Certificates that were presented by the Appellant from Rizhao Steel in China.

51. The Tribunal notes that the Appellant asserted that the Mill Test Certificates indicated the mandatory elements which were required to be tested under the Steel Grade SPHT1/S355 JRB. The mandatory elements required in the MTC as at 2018 were Carbon, Silicon, Manganese, Phosphorous and Sulphur which both parties agreed it was complied with.

52. The Tribunal notes that on one hand, the Appellant stated that these were the only elements whose maximum thresholds were required to be tested and testing the maximum amounts of Boron or Chromium was not mandatory. Therefore, rightly classifying the steel under HS Code 7208. 30. 90 and 7208. 39. 00 attracting a duty rate of 0%.

53. On the other hand, the Respondent stated that the MTCs from Rizhao Steel China for the period December 2018 to the year 2022 did not have blank columns and each of the MTCs indicated the testing of an extra chemical element, Boron, which was in excess of 0. 0008% and that the Appellant was not able to explain the existence of blank columns. That as a result, the Respondent arrived at the conclusion that the blank columns must have contained elements that would have resulted in higher tax implications, otherwise there would not have been blank columns unless it was for tax avoidance purposes.

54. The Respondent therefore classified the steel under HS Code 7225. 30. 00 or 7225. 99. 00 attracting a duty rate of 10% and 35% respectively, and assessed additional taxes totaling to 134,069,615. 00.

55. The Tribunal notes that the Appellant contended the presence of blank columns as not being empirical evidence to show the presence of Boron or Chromium and these assertions by the Respondent were without testing for the same since the Respondent refused to provide the test results showing the presence of these two elements.

56. The Tribunal reiterates that in determining the tax liability of the Appellant, the Respondent was required to exercise its best judgement based on the evidence and documentation available from the Appellant. The Tribunal notes that the issue of best judgement has been handled in various cases including Family Signature Ltd v. The Commissioner of Investigations & Enforcement Nairobi TAT No. 25 of 2016 where the Tribunal held that;“When the Respondent is prompted to resort to an alternative method of determining the income and in assessing the tax liability of a taxpayer, it has the onerous responsibility to act reasonably by exercising best judgement informed by pragmatic and reasonable considerations that do not in any manner result in a ridiculously high-income margin."

57. Borrowing from the case above, the Tribunal notes that the Respondent based its judgment on the following matters:

58. The Respondent had undertaken a comparative analysis of the MTCs from the same supplier against identical importers from the same supplier and established that MTCs never have blank columns for elements not tested and that if an element was not tested there was no provision for that element column. The blank columns were therefore unreliable. Furthermore, the blank columns were during the period when tax rates for alloy steel were high thus providing the rationale for blanking out the alloying components.

59. The Respondent has also demonstrated to the Tribunal that all subsequent consignments from the supplier imported between the period mid-December to the time of the assessment have a column provision of an extra element tested besides the standard tested elements.

60. The Tribunal notes that the Respondent had stated that the element that has been consistently tested has been majorly boron and aluminum which have exceeded the percentage threshold as provided for under the provisions of Chapter Note (f) to Chapter 72 to reclassify as a non-alloy.

61. The Tribunal has also seen that the Respondent’s approach was collaborated by identical importers from Rizhao during the same period that established those additional elements such as Boron in excess of the threshold to note f to Chapter 72 to reclassify as alloys.

62. The Respondent demonstrated at paragraph 37 of its Statement of Facts two mill tests for the same years showing the correct one with the test results for all columns and the one by the Appellant with a blanked-out column for boron and stated that this altered the classification since chemical composition of steel products is a critical factor in determining the applicable HS Code for tax purposes and these chemical compositions/ elements are contained in the mill test certificates (MTCs).

63. The Tribunal is therefore convinced that whereas it is not mandatory to test for other elements besides the mandatory ones, the presence of blank columns is sufficient evidence that the inclusion of the blanked out elements would result in reclassification of the product.

64. The Tribunal finds that the Respondent acted well within its best judgment to reclassify the products and that the onus was on the Appellant to prove its assertion that the supplier had intentionally left the impugned columns blank by adducing evidence from the supplier to this effect.

65. Accordingly, the Tribunal finds that the Respondent’s reclassification of the Appellant’s consignment under HS Code 7225. 30. 00 to 7225. 99. 00 was justified.

Final Decision 66. The upshot of the foregoing is that the Appeal is without merit and accordingly the Tribunal proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s review decision dated 23rd May 2023 be and is hereby upheld.c.Each party to bear its own cost.

67. It is so Ordered.

DATED AND DELIVERED AT NAIROBI THIS 23RD DAY OF AUGUST, 2024. ……………………………………………CHRISTINE A. MUGA - CHAIRPERSON……………………………………………BONIFACE K. TERER - MEMBER……………………………………………DELILAH K. NGALA - MEMBER……………………………………………GEORGE KASHINDI - MEMBER……………………………………………OLOLCHIKE S. SANKALE - MEMBER