[2025] KETAT 38 (KLR)

Grain Industries Limited v Commissioner of Customs and Border Control (Tax Appeal E533 of 2024) [2025] KETAT 38 (KLR) (17 January 2025) (Judgment)

Neutral citation: [2025] KETAT 38 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E533 of 2024

RO Oluoch, Chair, Cynthia B. Mayaka, G Ogaga & AK Kiprotich, Members

January 17, 2025

Between

Grain Industries Limited

Appellant

and

Commissioner of Customs and Border Control

Respondent

Judgment

Background 1. The Appellant is a limited liability company registered under the Companies Act Cap 486 of the laws of Kenya. It is based in Mombasa and is involved in the business of flour milling and packaging.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to 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 carried out a Post Clearance Audit on the operations of the Appellant for the period August 2018 to July 2023 pursuant to the provisions of Sections 235 and 236 of the East African Community Customs Management Act, (EACCMA) 2004 leading to the issuance of a notice of demand on 31st January 2024.

4. The Appellant thereafter lodged an application for review dated 27th February 2024 and received on 28th February 2024 requesting a review of the Commissioner's decision.

5. Upon review of the Objection application, the Respondent reviewed the assessment to Kshs 147,263,369. 00 and communicated the same to the Appellant vide a letter dated 27th March 2024.

6. Being dissatisfied with the Respondent’s review decision, the Appellant filed a Notice of Appeal dated 9th May 2024.

The Appeal 7. The Appellant filed a Memorandum of Appeal dated 21st May 2024 and filed on 22nd May 2024 raising the following grounds of Appeal(sic):a.The Respondent having approved inventory of the milling plant under additional note 2 of Section XVI of the Customs nomenclature and physically verified compliance against conditions of the import authority under Section 41 of the EACCMA should not be allowed to turn around more than four years after installation of the plant and purport to find non-compliance of the imports in a plant state under the guise of sections 235 and 236 of the same.b.That the Respondent failed to appreciate that the automation and computer system came as part and parcel of the plant's packing and storage silos system, in both functional and engineering alignment and invoicing, and was duly approved and released by it as such for delivery for installation and operation of the mill.c.In the case of the rack system, the Respondent appears to be denying the fact that the milling plant as a machine is made up of different machines including the packing line to which the rack system was installed as a critical tail-end product delivery equipment that performed auxiliary function to it but was bound to be classified with it under General Note VI of the Explanatory Notes to Section XVl of the Customs Nomenclature. The auxiliary function was to the packing line but together with the packing line, it formed a single machine that was and is still a major component of the plant.d.The rack system having been sourced and imported as part of the conveying and packing line together formed an integral part of the milling plant that cannot be wished away as not having been part of the plant. The fact that an engineering review of the milling operation set it aside for a better alternative did not and cannot change its original purpose and vital function to the plant.e.The Respondent failed to recognize that the 'owner' of cargo under Section 2 of the EACCMA is with reference to goods still subject to Customs control and identifiable by bills of lading or parcels listed under Regulation 11 sub-regulation (2) of the East African Community Customs Management Regulations, and not duty paid goods legally bought and taken possession of by a third party from a public auction under the Auctioneers Act.f.The Respondent's idea of describing the Appellant as owners of the cargo under Section 2 of the East African Community Customs Management Act who should therefore be liable for payment of Customs Warehouse rent if any on the goods, is therefore baffling. There is no evidence of a change of ownership of the goods under Section 24 of the East African Community Customs Management Act from the consignee of the goods to the Appellant.g.The Respondent's action is an abuse and misuse of authority; unreasonable irrational; procedurally unfair and unjustified.h.It is in the interest of justice, transparency, accountability and preservation of the need for efficiency envisaged under Section 5 of the EACCMA that the Respondent is compelled to adhere to the aspirations of the law guiding fair and reasonable conduct of tax affairs.

The Appellant’s Case 8. In support of the Appeal, the Appellant relied on its Statement of Facts dated 21st May 2024 and filed on 22nd May 2024. The Appellant also relied on its written submissions filed on 29th September 2024.

9. The Appellant’s case is that vide letter dated 29th May 2018 it requested the Respondent to grant it permission to import two completely new wheat mills and one complete maize mill against IDF NO. E1804825424 and IDF NO. E1804825411, respectively. The two wheat mills were to be imported against Proforma Invoice number 3018506110 while the maize mill was to be imported under Proforma Invoice number 3018506111 both dated 6th April 2018.

10. In response to the Appellant's request, the Respondent in its letter dated 5th June 2018 declined the request but advised the Appellant to make separate applications for each mill and attach the following documents:i.Contract of supplyii.Commercial/Proforma Invoicesiii.A clear manual/diagram pictorial of the machinery showing the process flowiv.Import Declaration Formsv.Detailed Packing listvi.An inventory containing an indication of the characteristics and approximate quantities of the constituent parts making up the machinery.

11. The Appellant with reference to the Respondent's letter of 5th June 2018 vide its letter dated 11th June 2018 requested the Respondent to permit it to import a complete wheat mill in partial or different consignments against Proforma Invoice Number 3018506110 of 6th April 2018.

12. In response to the Appellant's request of 11th June 2018, the Respondent in its letter of 10th July 2018 declined the request and ordered that the machinery components for each consignment be classified under their individual separate HS Codes, and not under one HS Code for the complete plant.

13. The Appellant in its letter of 3rd August 2018 once again applied to the Respondent to grant it authority to import machinery and equipment for a new conveyor and packing line incorporating storage silos in different consignments, in accordance with additional Note 2 to Section XVI of the Customs Nomenclature, which allows a machine to be imported in different consignments for convenience of transport but all the components upon importation classified as the complete machine under a single Customs Tariff (HS CODE).

14. The Appellant averred that the conveyor and packing line were to be imported against IDF NO. E1807901318 while the silos were to be imported against IDF NO. E1807899832.

15. In response to the Appellant's application of 3rd August 2018, the Respondent in its letter dated 17th August 2018 allowed the importation of the conveyor and packing system as well as the storage silos in different consignments under tariff heading (Hs Code) numbers 8428. 33. 00 and 8437. 80. 00, respectively.

16. It alleged that the supply of the conveyor and packing line and storage silos system included electrical equipment in the form of an automation and computer system, not as a separate item, but as part and parcel of the system in terms of functional and engineering alignment and invoicing notwithstanding the fact that the latter had a separate contract of supply whose cost was however included in the cost of the conveyor, packing line and storage silos.

17. According to the Appellant, the supply of the conveyor, packing line and storage silos system, which included the supply of automation and the computer system was done by Gerico of France while the supply of the two wheat mills and the one maize meal was done by Buhler of Switzerland.

18. The Appellant stated that Gerico of France was responsible for the pre-importation design and overall initial installation and supervision of the plant.

19. In its letter of 17th September 2018, the Appellant applied to the Respondent for authority to import wheat and maize mills in different consignments against IDF Nos. E1804825424 and E1804825411, and Proforma invoices Nos. 3018506110 and 3018506111, respectively. The Appellant stated that the reference of the letter to a new wheat mill and a new maize mill actually meant two wheat mills and one maize mill. The Appellant alleged that this was an inadvertent typing error.

20. In its letter dated 15th October 2018, the Appellant in reference to its letter of 17th September 2018 alleged that it provided a copy of the sales contract for the mills and sought the Respondent's indulgence for the concession of delay of part of the inventory which it promised to avail in the course of importation.

21. According to the Appellant, the three mills and related machinery and equipment constituted one single functional flour mill unit under General Note VIll of the Explanatory Notes to the Customs Nomenclature. It alleged that in its letter of 16th October 2018, it provided further information on the imports including a copy of the sales contract.

22. The Appellant stated that in its letter of 17th October 2018 the Respondent allowed the importation of the mills in different consignments and classified both the mills under HS Code No. 8437. 80. 00.

23. Upon securing permission to import the machinery and equipment for the milling plant comprising of the three mills, the conveyor packing line and storage silos system, the Appellant upon arrival of the same declared them to the Respondent against the following Customs entry numbers and presented the same to it for purposes of approval and clearance through custom entries: 2018MSA7040845; 2018MSA7090822; 2019MSA7121527; 2019MSA7121535; 2019MSA7122350; 2019MIA6883; 2019MSA7172645; 2019MSA7199098; 2019MSA7142429; 2019MSA7158781; 2019MSA7197670; 2019MSA7210904; 2018MSA7099887; 2018MSA7099913; 2019MSA7175795; 2019MSA7183176; 2019MSA7229796; 2019MSA7237269; 2019MSA7246560; 2019MSA7244582; 2019MSA7246529; 2018JKA4039993; 2018MSA7094160; 2018MSA7103405; 2018MSA7103446; 2018MSA7108057; 2019MSA7175608; 2019MSA7196590; 2019MSA7229087; 2019MSA7220861; 2019MSA7220934; 2019MSA7236701; 2019MSA7245682; 2019MSA7252563; 2019MSA7270584; 2019MSA7270308; 2019MSA7256239; 2019MSA7271086; 2019MSA7277063; 2018JKA4039987; 2019MSA7162714; 2019MSA7198743; 2019MSA7237203 and 2019MSA7237110.

24. The Appellant stated that Customs declaration of all the consignments was reviewed, approved and goods verified and released by the Respondent as declared, was a thumbs-up approval of compliance with import conditions, upon which the Appellant took delivery of the same and exclusively used them for installation of the plant.

25. According to the Appellant, one of the conditions of the two import authorities was that the Respondent would conduct random audits during and after the importation period to monitor compliance with requirements outlined in the authority letters.

26. That the said random audit and monitoring of compliance with import conditions was fully accomplished when the goods arrived within Kenya and were verified by the Respondent against the import conditions, and subsequently released for installation of the plant under its regular informal and unrecorded compliance monitoring.

27. In its letter of 8th August 2023, the Respondent issued a notice of intention to audit the imports long after the installation of the plant for imports that were effected between 2018 and 2019,

28. The Appellant asserted that the Respondent indeed conducted the belated audit and subsequently raised the demand of additional duty of Kshs 193,734,048. 00 on allegations of non-import compliance in various areas through its demand notice of 31st January 2024.

29. That interpretation of Section Note 4 of Section XVI to East African Community Common External tariff, which states that; "for purposes of this notes the expression 'machine' means any machine, machinery, plant, equipment, apparatus or compliance cited in headings of chapter 84 or 85," the Appellant submitted that each of the major items or components imported by the Appellant represented a machine on its own right.

30. In this regard, the Appellant submitted that the machine includes; the three mills; the silos; the conveyor and packing lines, which together with the silos incorporated the Electrical Equipment - Automation and Computer System, and the Dynamic Rack System, which is a handling system with inclined rails and rollers to make packages slide effortlessly towards picking and loading areas.

31. The Appellant also submitted that the machines or components were imported as part of an overall single functional unit machine, which is the flour milling plant. That they were bound to be classified with under General Note Vll of the Explanatory Notes to Section XVI of the Customs Nomenclature.

32. In response to paragraphs 16 to 18 of Respondent’s submissions, the Appellant submitted that first, customs entry number 2019MSA7246560 of 4th June 2019 for the importation of the 6 silos was well supported by documentary evidence. Secondly, the Appellant submitted that a detailed list of parts of goods in international trade is not necessarily found in an invoice but in the list on the contract of supply or packing list accompanying the goods. It submitted that this is the conventional practice in international trade, and not what the Respondent is alluding to.

Appellant’s Prayers 33. The Appellant urged the Tribunal to set aside the Respondent’s objection decision contained in a letter dated 27th March 2024.

The Respondent’s Case 34. In response to the Appeal, the Respondent lodged a Statement of Facts dated 20th June 2023 and the Written Submissions filed on 9th September 2024.

35. The Respondent stated that a Post Clearance Audit (PCA) was carried out on the operations of the Appellant for the period 2018 to July 2023 pursuant to Sections 235 and 236 of the EACCMA. That a management notice of demand was then issued to the Appellant vide a letter dated 31st January 2024.

36. The Appellant filed an objection vide a letter dated 27th February 2024 and received on 28th February 2024 requesting a review of the Commissioner's decision. That upon review of the objection, the Respondent issued the review decision dated 27th March 2024.

37. The Respondent averred that the Appellant failed to disclose to the Respondent, the specific items imported under proforma invoice PI80710A for the supply of electrical equipment for the automation and computer system therein vaguely referred to as Equipment Supply - Complete silo systems for milling machinery.

38. The Respondent contended that the General Interpretation Rules (GIR) as cited in the East Africa Community Common External Tariff (CET) govern the classification of goods.

39. That according to GIR I, classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes and, provided the headings or notes do not require otherwise, according to GRI 2 through to 6. That the Harmonized Commodity Description and Coding System Explanatory Notes (ENS) constitute the official interpretation of the Common External Tariff and provide the scope of each tariff heading under the CET.

40. It stated that Additional Note 2 to Section XVI of the East African Community Common External Tariff (EACCET) allows the Commissioner to authorize the shipment of unassembled or disassembled machinery in several consignments over a period of time. It stated further that the same note is conditional, and it may only be accepted in fulfilment of a contract for the supply of a complete machine.

41. According to the Respondent, the customs declaration for each consignment must contain descriptions of both the part or parts making up the consignment and the complete machine.

42. It contended that the Proforma Invoice number PI80710A dated 10th July 2018 from the French Supplier Gerico which was presented to the Respondent during the application for partial shipment had a CFR value of EUR. 2,845,200. 00. That the description of the items to be imported was Equipment Supply-Ex works value for 6 complete silo systems for milling machinery.

43. That the Respondent established that the Appellant contravened the provisions of Additional Note 2 for their failure to lucidly describe the specific constituent parts making up the subsequent consignments for the complete machine during customs declaration.

44. According to the Respondent, the Appellant failed to provide the customs entries and the customs transaction documents that were used to import the subject items and instead referred to the application and authorization for partial shipment in their email dated 19th March 2024.

45. It also stated that the contract for the supply of electrical equipment - automation and computer system dated 26th March 2018, which the Respondent's audit team later established was never presented to the Respondent, had a different CFR value of EUR. 2,421,000. 00.

46. The Respondent asserted that the value and description of the subject items as listed in the supply contract related to the automation and computer system was not presented during the application for partial shipment in order for the Respondent to objectively guide the Appellant on the Tariff Code to use during importation.

47. The Respondent argued that it laid down the conditions to mitigate this vague gap as presented by the Appellant, that upon importation, an audit review will be conducted, and any non-compliance will be aligned with the law and procedures of customs clearance hence the tariff reclassification after the audit review of the unpresented contract of supply.

48. The Respondent opposed the Appellant's averment that it had complied with all the requirements and conditions of partial shipment and it stated as follows, that:a.Whereas the signed contract of supply had a CFR value of EUR. 2,421,000. 00, proforma invoice number PI80710A dated 10th July 2018 had a CFR value of EUR. 2,845,200. 00. This leaves an unaccounted variance of EUR. 424,200. 00. The Respondent stated that it had established that there was no subsequent contract to explain this variation from the signed one.b.Whereas the contract of supply listed the specific items to be imported under the agreement, the Appellant failed to fully disclose this to the Respondent as well as the customs clearance proper officers of the Customs and Border Control.c.Whereas the contract of supply was clearly titled "Contract of Supply of Electrical Equipment - Automation and Computer System", the proforma invoice presented during the application for authorization was titled "Equipment Supply - Ex works value for 6 complete silo systems for milling machinery", to give the impression that these items were silos when in actual sense they were not.d.Despite the Respondent seeking this clarification during the audit and during the application for review vide email, the Appellant failed to support their allegations that the contract was presented to the Respondent during the application. That the authority granted was in view of the documents presented to the Respondent during the application stage.e.The Appellant attached a diagram of the machinery, a general inventory containing an indication of the characteristics and approximate weights of the subject parts with reference to the IDF number E1807901318 & E1807899832 and a proforma invoices during the application for partial shipment by the Appellant. That there was no contract for the supply of electrical equipment for the automation and computer system attached to this application.f.The contents of the contract of supply do not mention any silos systems as averred by the Appellant. That this is supported by the description under the contract dated 26th March 2018 in comparison with proforma invoice No.PI80710A and their distinct differences in value and description.g.The contract for the supply of silos, handling equipment and utilities dated 6th April 2018 was contracted separately and on a different date from the contract for the electrical equipment for the automation and computer system. That the subject silos were listed and imported under this contract and not the automation and computer system contract that the Appellant would like the Tribunal to believe.h.The authorization letter allowed the Respondent to conduct an audit after the importation period to monitor compliance and detect any non-compliance. That this was in line with Sections 135, 234, 235 and 236 of the EACCMA, 2004.

49. It is the Respondent's view that there was no legitimate expectation on the Respondent to correct the tariff non-compliance committed by the Appellant during importation.

50. The Respondent alleged that it gave the Appellant the qualifying conditions for importation. Under conditions numbers 10 &11, the Respondent stated that there will be a follow-up audit on the machinery to be imported to ensure compliance with customs laws and procedures and that any non-compliance detected will lead to the appropriate action being taken by the Respondent.

51. In light of the above, the Respondent sttaed that it sought to reclassify the Tariff Codes of the electrical parts upon detailed analysis and review of the master list in the contract for the supply of the electrical equipment for the automation and computer system. That the master list included cables, cable trays, electric cabinets, junction boxes, distribution boards, computer equipment and accessories etc.

52. The Respondent further stated that it was guided by Section Note 2 and General Note ll to Section XVI and General Explanatory Note to Chapter 84 because the Appellant contravened the provisions of Additional Note 2 to Section XVI with the failure to present the subject contract of supply for the electrical equipment for the automation and computer system during application.

53. The Respondent noted that Section Note 2 read together with General Note Il to Section XVl confirms that the rule of classifying parts solely suitable or principally designed for a particular machine in the same heading as the machine does not apply to parts in which themselves constitute an article covered by a Section of this heading: that these are in all cases classified in their appropriate heading even if specifically designed to work as part of a specific machine.

54. The Respondent argued that this applies to electrical: motors, transformers, capacitors, boards, panels, consoles, desks, cabinets, apparatus for switching and protecting electrical circuits, and insulators of any material.

55. The Respondent noted that the General Explanatory Note to Chapter 84 read together with Section Note 2 of Section XVl which provides that separately presented electrical parts fall in one of the Headings of Chapter 85. In this regard, the Respondent upheld the assessment of Kshs. 87,710,119. 00 attributable to the tariff misdeclaration of electrical equipment for automation and computer systems.

Tariff Reclassification of the Dynamic Rack for pallet storage (DRS) 56. According to the Respondent, the DRS is a steel structure. It does not fall under the tenets of Section Note 5 to Section XVI of the EAC CET 2017 as noted in its authorization letter.

57. The Respondent argued that the defined function of the DRS was to temporarily store packed finished or manufactured products before dispatching them. This function is not the defined function envisaged under General Note VII. That it is an auxiliary function over and above the clearly defined function of the milling and packing plant. The Respondent asserted that the fact that the items were consigned together with the machines does not take away this fact.

58. It submitted that under the context of Section Note 4 and General Note Vll of Section XV of the EAC CET 2017, the clearly defined functions of the milling plant and the packing lines are milling and packing respectively.

59. The Respondent maintained that all the machines or combinations of machines essential to the performance of this function, specific to the functional unit, fall to be classified under Tariff Codes 8437. 80. 00 and 8428. 33. 00 as authorized by the Respondent in the letter dated 17th August 2018.

60. It is the Respondent’s case that whereas the Appellant averred that the DRS was integral to the plant, the Appellant admittedly noted that it was replaced for a better alternative. The Respondent confirmed that it did not see the alternative machinery referred to during the factory visit. That it instead saw the DRS warehoused away from the plant which was not integral to the plant because the plant could function without it.

61. The Respondent averred that General Note VIl states that the expression "intended to contribute together to a clearly defined function" covers only machines and combination of machines essential to the performance of the function specific to the functional unit as a whole and excludes machines or appliances fulfilling auxiliary functions and which do not contribute to the function of the whole.

62. The Respondent noted that inventory that does not directly contribute to the milling and packing function is excluded by this Note. Therefore, the Respondent was of the view that DRS does not directly contribute to this defined function of the plant.

63. The Respondent also argued that the DRS is excluded because both defined functions (milling & packing) have already been completed by the time the storage is being done.

64. The Respondent averred that auxiliary appliances such as the DRS ought to have been classified in their own appropriate heading as explained above.

65. Further, the Respondent cited Section Note 4 to Section XVI of the EAC CET 2017 which states that:“Where a machine (including a combination of machines) consists of individual components (whether separate or interconnected by piping by transmission devices, by electric cables or by other devices) intended to contribute together to a clearly defined function covered by one of the headings in Chapter 84 or Chapter 85, then the whole falls to be classified in the heading appropriate to that function ".

66. The Respondent noted that the DRS function is the storage of finished goods and not the clearly defined function of milling and packing. Subsequently, all machines or appliances, performing auxiliary functions such as storage of finished goods, should be classified in their respective tariff subheadings. That the correct Tariff Subheading for the DRS was therefore 7308. 90. 99 chargeable at 35% import duty and 16% VAT.

67. Consequently, the Respondent upheld the Assessment of Kshs. 4,431,334. 00 attributable to the tariff misdeclaration of the DRS.

Tariff Reclassification of auxiliary parts of the Wheat Mills and Maize Mill plant 68. According to the Respondent, General Note V to Section XVl elucidates how unassembled machines should be classified. It however relates to items that have been presented together at the border as envisaged under GIR 2 a.

69. The Respondent averred that Section Note 4 read together with General Note VIl to Section XVl which is more appropriate in this case distinguishes what is auxiliary and what is not by function.

70. The Respondent stated that condition 3 in the authorization letter stated that any item that was not a component of the machinery for the wheat and maize mill plants was to be classified under its respective HS Code.

71. It averred that the items reclassified did not meet the tenets of the conditions of the authorization letter and other items did not meet the tenets of Section Note 4, Section Note 5 and General Note VIl.

72. Further, the Respondent relied on Section Note 5 to Section XVI which describes what a machine is. The said Section provides as follows:“..For the purposes of these Notes, the expression "machine" means any machine, machinery, plant, equipment, apparatus, or appliance cited in the headings of Chapter 84 or 85. "

73. It reiterated that cables, cable trays, installation materials, controls, and safety switches are electrical ancillaries or parts and ought to be classified as per Section Note 2 and General Note II of Section XVI.

74. The Respondent emphasised that they are not components forming the machinery for the plants such as the blowers, motors, chain conveyors, filters, and aspirators among others. It argued that they perform auxiliary functions in the plants.

75. Consequently, the Respondent maintained that taxes amounting to Kshs 41,299,031. 00 and Kshs 13,822,866. 00 attributable to Wheat Mills B&C and Maize Mill D, respectively, remain due and payable.

Customs Warehouse Rent (CWR) 76. The Respondent confirmed that this item was never assessed. The Appellant was however notified of this risk in both the Management letter and the Commissioner's review decision dated 31st January 2024 and 27th March 2024, respectively.

77. The Respondent also stated that the Appellant alleged that the matter was in court, and it would have been premature for the Respondent to issue an assessment on a matter that had yet to be determined.

78. The Respondent averred that the certificate of sale by Beyond Auctioneers dated 19th June 2017 confirmed that the 4,000MT of grain imported by Atta Kenya Limited was sold to the Appellant as the highest bidder who was declared the buyer thereof. It also confirmed that the Appellant settled the price of USD 2,111,410. 208. 00 in full, pursuant to the Uncollected Goods Act, Cap 38 of the Laws of Kenya but never paid for the CWR.

79. The Respondent relied on Section 2 of the EACCMA, 2004 to define who the owner in respect of goods is. That the Section provides that, any person other than an officer acting in his or her official capacity being or holding himself out to be the owner, importer, exporter, consignee, agent or the person in possession of, or beneficially interested in, or having control of, or power of disposition over the goods is the owner.

80. The Respondent maintained that there are outstanding charges and incidental costs that were collected, but customs warehouse rent was not. It alleged that this was in contravention of Section 42 (4) of the EACCMA, 2004 which provides for the sequential application of the proceeds of sale of the cargo in contention.

81. The Respondent noted that the Appellant submitted that the cargo is still in the custody of Bulkstream Limited and that the ownership has not been transferred despite settlement as per the certificate of sale.

82. The Respondent contended that the Appellant having a beneficial interest in the goods qualifies as an owner as stipulated under Section 2 of the EACCMA, 2004. In this regard, the Respondent communicated to the Appellant that customs warehouse rent will continue to accrue until such a time it is paid or an application for waiver is made and approved.

83. The Respondent also stated that CWR is due from the owner of the goods as per the law and it was never assessed in this case.

84. The Respondent cited several laws to support its position including Sections 135, 229, 235 and 236 of the EACCMA 2004, East Africa Community Common External Tariff (EAC CET) 2017, The General Interpretation Rules (GIR) as cited in the (EAC CET), Section Note 2 and 4 to Section XVI of the EAC CET, Section Note 5 of Section XVl and Additional Note 2 of Section XVl of the EAC CET and the WCO Explanatory Notes (ENS) of the Harmonized Commodity, Description and Coding System: Explanatory General Note Il & Explanatory General Note Vll on Functional Units and General Explanatory Note C to Chapter 84.

85. The Respondent also cited Sections 234, 235 and 236 of EACCMA which give 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.

86. According to the Respondent, where the PCA reveals that taxes were short levied, or erroneously refunded, Section 135 empowers the Commissioner to recover any such amount short levied or erroneously refunded by means of a demand notice.

87. The Respondent also relied on Section 229 of EACCMA which 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.

88. The Respondent relied on the provisions of the Evidence Act, Section 107 which states as follows:“(1)Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.(2)When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person.”

89. The Respondent asserted that in any Tax Court, the taxpayer must show the Commissioner's determination to be incorrect. That if he succeeds, then the Commissioner must go forward and prove the correct tax liability by a preponderance of the evidence. The Respondent argued that this is frequently expressed as a presumption of the correctness of the Commissioner's determination, with the taxpayer having the burden of proving it incorrect. In this regard, the Respondent relied on the case of Leah Njeri Njiru v Commissioner of Investigations and Enforcement Kenya Revenue Authority & Another [2021] eKLR.

90. The Respondent argued that the Appellant, in applying for approval for importation of the equipment in parts, did not provide the necessary documentation needed to obtain such approval.

91. Further, the Respondent noted that the contract for the supply of electrical equipment - automation and computer system dated 26th March 2018, which the Respondent's audit team later established was never presented to the Respondent, had a different CFR value of EUR. 2,421,000. 00.

92. The Respondent noted that the value and description of the subject items as listed in the supply contract related to the automation and computer system was not presented to it during the application for partial shipment in order for the Respondent to objectively guide the Appellant on the tariff code to use during importation.

93. The Respondent argued that the Appellant's averment that it complied with all the requirements and conditions of partial shipment is not supported.

94. In light of the above, the Respondent reclassified the tariff codes of the electrical parts upon detailed analysis and review of the master list in the contract for the supply of the electrical equipment for the automation and computer system. The master list included cables, cable trays, electric cabinets, junction boxes, distribution boards, computer equipment and accessories among others.

Respondent’s prayers 95. The Respondent prayed that this Honourable Tribunal be pleased to uphold the Respondent's review decision and the Appeal be dismissed with costs to the Respondent as the same is devoid of any merit.

Issues For Determination 96. Having examined the Memorandum of Appeal, the parties’ Statements of Facts, and submissions, the Tribunal is of the view that the issue that falls for its determination is whether the Respondent was justified to demand short-levied duties taxes arising from the Appellant’s importation of various disassembled machine and equipment for the installation of a milling plant comprising three mills, the conveyor packing line and storage silo system(the milling plant).

Analysis And Findings 97. The main contention between the parties herein is whether the Appellant imported products beyond what it was allowed to import in the Respondent’s letters dated 17th August 2018 and 17th October 2018.

98. The Appellant contended that it obtained clearance for its imports and that it did not import anything outside the approval it was given by the Respondent in its approvals.

99. The Respondent on its part argued that the assessed machineries and equipment were not an integral part of the milling plant. That if they were part of the plant then they were not included in the master list of what was to be imported to install the milling plant.

Regarding Electrical Equipment for automation and Computer Systems 100. The relevant part of the said approvals provided thus:a.The Appellant was allowed to import various machines in disassembled parts.b.The machines were to include any machine, machinery, plant equipment, apparatus or appliances that were classifiable under Chapter 84. c.The list of parts making the complete plant was each partial importation.d.The imported parts were to be used in the installation of the product.e.The Respondent was to conduct random audits on-site to ensure compliance.

101. The customs entry documents indicate that the last import was received on the 17th June 2019.

102. It is clear from the onset that the items imported by the Appellant were reviewed by the Respondent against the master list and thereafter released to the Appellant to proceed with the installation of the milling plant.

103. Considering that the Respondent has not pleaded that any equipment that it cleared for release to the Appellant was not misdirected from its intended use, it is curious that the Respondent now asserts that the automation and computer system which was found to be part of the milling plant was no part of the machinery and equipment approved to be used for the installation of the said milling plant.

104. Whereas the Appellant is clear that these were part of the machinery that it was allowed to import, the Respondent is not clear on why it has held the view that this was not part of the machinery and equipment it had approved.

105. It has not for example averred that the said machines and equipment that were used to import electrical automation and computer systems for the milling plant were imported separately and duty was not paid on them. It instead implicitly agrees that indeed these items were imported together with the other machinery and equipment that were cleared by its officers and that the Appellant indeed used these machinery and equipment to install the electrical automation and computer system computer on its milling plant.

106. What then is the dispute here? Indeed, this is a case where the Respondent has allowed the Appellant to import disassembled items to set up a milling plant, the said disassembled parts were inspected by the Respondent to ensure that they complied with the letter of approval before they were released, and the Appellant then applied all its imports to the installation of the milling plant and when the machine is ready for use the Respondent wakes up after about 4 years when the machine is up and running to aver that the electrical automation and computer system that controls the machine was not part of the machinery and equipment it had approved for importation.

107. The reality is that the machine could not operate without the main frame which was made up and was imported as part of the electrical automation and computer system. It would thus be futile to allow or for the Appellant to apply to install a machine that would cost it millions of shillings so that it can become a white elephant that is not operational at its premises.

108. The decision by the Respondent that the electrical automation and computer system computer was not part of the approved imported machinery and equipment is hence illogical and not consistent with the approval that it had given the Appellant to import disassembled parts that would eventually be installed into a working three mills, silo and packaging lines. The Tribunal also takes judicial notice of the fact that most machines including even cars that are imported in today's world are digitalised to increase efficiency and minimise cost. It was thus inescapable that the Appellant’s final installed machine would have a digital component as its integral part.

109. This conclusion of the Tribunal is supported by Section Note 4 of Section Notes to Section XVI to the EAC Common External Tariff which provides thus:-“Where a machine (including a combination of machines) consists of individual components (whether separate or interconnected by piping, by transmission devices, by electric cables or by other devices) intended to contribute together to a clearly defined function covered by one of the headings in Chapter 84 or Chapter 85, then the whole falls to be classified in the heading appropriate to that function.”

110. General Note VII to Section XVI states as follows on the classification of machines and combinations essential to the performance of the final assembled equipment:“for this Note, the expression ‘intended to contribute together to a clearly defined function’ covers only machines and combinations of machines essential to the performance of the function specific to the functional unit as a whole and thus excludes machines or appliances fulfilling auxiliary functions and which do not contribute to the function of the whole”

111. The above citations make it clear that a component of a machine cannot be classified differently from the main machine if the said component, like it is in this case, contributes towards the function of the machine. In other words, a part that is integral to the whole function of a machine cannot be excluded or classified differently from the machine on which it is attached and supported.

112. The intention of and importance of Section Note 4 to Section XVI and General Note VII to Section XVI was to ensure that the integral parts of imported machinery which constitute its parts fall under the same sub-tariff heading as the assembled machine provided that duty was paid on those parts.

113. The Appellant provided evidence that it imported these items vide customs entry number 2019MAS7246560 on 4th June 2019 and that the details of what was contained in the said shipment were contained in the contract and packaging list accompanying the shipment.

114. The Appellant discharged its burden of proof with the production of the customs documents and the contract containing what was shipped in that cargo. The burden thus shifted to the Respondent to show that the items indicated in the contract were not contained in the container that the items that made up the automation and computer system were not cleared for their import or that they were not contained in the said shipment. This pendulum shift of the burden of proof was elucidated in the case of judgment – TAT No. 435 Of 2022 Abyssina Iron And Steel Ltd vs. Commissioner of Customs and Border Control where the Tribunal stated thus:“it is apparent that the appellant was required to present a minimum amount of information necessary to support its position. This safety valve seems to place the burden of proof on the Appellant without completely relieving the Respondent of its fair share of the burden of proof. The bottom line is that once the Appellant has provided evidence that the Respondent‘s assessment was wrong, then the Respondent must push back and show that its assessment was not arbitrary, capricious or imagined. The onus will then shift back to the Appellant once the Respondent has discharged its burden on a balance of convenience to discharge the prima facie case that has been presented by the Respondent.”

115. This fact that the burden of proof in tax cases is not stationary was explained in Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) (Commercial and Tax) (8 July 2022) (Judgment) where Justice Majanja stated as thus:-“I agree with the Tribunal‘s holding that the burden of proof in tax matters is not stationary but is like a pendulum swinging between the taxpayer and taxman at different points but more times than not swings towards the taxpayer.”

116. The Appellant’s failure to discharge the burden that had shifted to it means that the Appellant’s assertion that it had imported the disassembled parts of the equipment which formed part of the automation and computer systems of the plant stood proven. The Respondent’s assessment of duty on the Appellant’s electrical equipment for automation and the computer system was thus erroneous.

Regarding the Dynamic Rack system 117. The dynamic rack system is a rail that rolls or handles equipment coming out of the machine at the tail end of the whole milling process.

118. The Respondent held the view that it was not part of the milling plant. It however did not dipsute the fact that it was part of the items that it had approved for importation and which were to be part of the said milling plant.

119. It is the finding of the Tribunal that just like the automation and computer system, the dynamic rack system is also an integral part of the Appellant’s installed machinery and it cannot be separated and taxed differently from the milling plant which it supports to perform its function. The fact that it is at the tail end of the production line and is also detachable doesn’t take way its integral relation and the core function that it performs towards the wholesome operation of the milling plant.

120. The Respondent thus erred in its assessment of this equipment for which duty had been paid upon its importation in disassembled parts.

Assessment of mills and maize plant parts 121. The letters of approval allowed the Appellant to import the parts making up the complete plant. There is no evidence on record to show that the Appellant imported parts that exceeded what was required to install the plant. This assessment thus stood on stilts and is hence unsustainable.

122. Flowing from the above analysis the Tribunal finds and holds that the Appellant has presented sufficient evidence before it to show that the Respondent erred in its assessment of short levied duties of Kshs 147,263,369. 00

Final Decision 123. The upshot to the foregoing analysis is that the Tribunal finds and holds that the Appeal is meritorious and makes the following Orders:-a.The Appeal be and is hereby allowed;b.The Respondent’s review decision dated 27th March 2024 be and is hereby set aside.c.Each party to bear its own costs.

124. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF JANUARY, 2025DR. RODNEY O. OLUOCH - CHAIRPERSONCYNTHIA B. MAYAKA - MEMBERGLORIA A. OGAGA - MEMBERABRAHAM K. KIPROTICH - MEMBER