[2024] KETAT 144 (KLR)

Harley’s Limited v Commissioner of Customs & Border Control (Tax Appeal E034 of 2023) [2024] KETAT 144 (KLR) (9 February 2024) (Judgment)

Neutral citation: [2024] KETAT 144 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E034 of 2023

Grace Mukuha, Chair, Jephthah Njagi, E Komolo, G Ogaga & T Vikiru, Members

February 9, 2024

Between

Harley’S Limited

Appellant

and

Commissioner of Customs & Border Control

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and is a manufacturer and deals with sales, marketing and distribution of healthcare products, pharmaceuticals, surgical equipment, medical equipment, ophthalmic equipment, theatre equipment and OTC products.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 of the laws of Kenya. The Authority is a Government agency established for the purposes of assessing, collecting and accounting for tax revenues.

3. The dispute arose when the Respondent conducted a desk audit on the Appellant for the period starting November 2017 to September 2022 pursuant to the provisions of Section 236 of the East African Community Custom Management Act 2004 (EACCMA).

4. On 4th October 2022, the Respondent's Post Clearance Audit team conducted a desk review of import transactions of the Appellant for the period October 2017 to September 2022 pursuant to Sections 235 and 236 of the EACCMA.

5. The examination as per the Respondent revealed that the Appellant had been misclassifying food supplements under Heading 3004 instead of 2106 while some of the medical equipment's had been classified under Heading 9021 instead of either 6212, 6307 or 9401.

6. After the examination of the Appellant's import entries a demand for uncollected taxes of Kshs. 174,835,029. 00 was sent to the Appellant on 9th November 2022.

7. Upon receipt of the demand of additional taxes, the Appellant applied on 6th December 2022 for a Commissioner's review pursuant to Section 229 of EACCMA.

8. The Respondent upon review on 5th November 2022 upheld the amount as demanded thus leading the Appellant to file the Appeal and which it did on 10th February 2023.

The Appeal 9. The Appeal is premised on the Memorandum of Appeal dated 8th February 2023 and filed on 10th February 2023 setting out the grounds hereunder:a.That the impugned tax decision is illegal as the Respondent erred in failing to appreciate that the impugned decision disclaims its own tariff rulings issued to the Appellant for its products.b.That the Respondent erred in law and in fact in failing to appreciate the principles in taxation to the effect that tax legislation must be interpreted strictly and any ambiguity in tax ought to be interpreted in favour of the taxpayer.c.That the Respondent erred in law by purporting to impose additional taxes upon the Appellant without justification contrary to the law and in breach of the Appellant's legitimate expectation.d.That the impugned tax decision is arbitrary and erroneous, and the Respondent lacks legal or factual basis as the Appellant has duly paid all taxes due in the period under review.e.That by issuing the impugned demand notice as well as the impugned decision, the Respondent has acted arbitrarily, unreasonably and illegally by failing to take into account proper considerations on tariff classification and reclassification of HS Codes of the food supplements and other products under review.f.That the impugned tax decision and impugned demand notice are a malicious and deliberate attempt by the Respondent to frustrate the Appellant by reclassifying the H.S Code for the products under review years after they had been imported and sold leaving no recourse for the Appellant to recover the demanded sum.g.That the impugned tax decision and impugned demand notice fail to appreciate that the Respondent has for years verified and approved the Appellant’s H.S Codes before such goods could be allowed to leave the Port of entry.h.That the impugned tax decision and impugned demand notice do not demonstrate any evidence in support of any reclassification of the Appellant's food supplements and other products under review based on any incomplete, incorrect, false or misleading information.i.That the Respondent has been guilty of inordinate delay in carrying out the desk audit.j.That in issuing the impugned demand notice as well as the impugned decision, the Respondent acted ultra vires its mandate under the Kenya Revenue Authority Act.k.That the impugned tax decision and impugned demand notice violates the Appellant's Constitutional right to transparency, accountability, legitimate expectation, fair administrative action in tax administration, right to protection of law all contrary to Articles 10, 47 and 48 of the Constitution of Kenya.

The Appelants Case 10. The Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal:a.The Statement of Facts dated 8th February 2023 and filed on 10th February 2023. b.The Appellant’s Written Submissions filed on 16th November 2023.

11. The Appellant averred that as a result of the alleged tariff misclassification, the Respondent purported that there was a short levy of import duty, Excise duty and VAT and issued a demand notice of Kshs. 174,835,029. 00.

12. That the Respondent also annexed a schedule of workings to the demand notice on the alleged misclassification of the supplements and other products and from the schedule of workings for the food supplements the Respondent indicated that the declared HS Code by the Appellant was 3004. 50. 00 while the assessed HS Code was 2106. 90. 91.

13. That from the schedule of workings for other products, the Respondent indicated that the declared HS Code by the Appellant was 9021. 10. 00 while the assessed HS Code varies depending on the products as follows:-No Product Assesses HS Code

1) Back rest 9404. 90. 00

2) Coccyx Cushion Seat 9401. 80. 00

3) Elbow Support 6307. 90. 00

4) Hernia Belt 6212. 90. 00

5) Knee Cap Comfeel 6307. 90. 00

6) Pregnancy Back Support 6212. 90. 00

7) Scrotal Support 6212. 90. 00

8) Shoulder Support 6307. 90. 00

14. That the Commissioner issued a review decision on 5th January 2023 wherein he averred that reclassifying the products imported by the Appellant was legal as per the General Rules for the Interpretation of the Harmonized System as contained in the East African Community Common External Tariff and relied on Rule 6 that states:“For legal purposes, the classification of goods in the subheadings of a heading shall be determined according to the terms of those subheadings and any related Subheading Notes and, mutatis mutandis, to the above Rules, on the understanding that only subheadings at the same level are comparable. For the purposes of this Rule the relative Section and Chapter Notes also apply, unless the context otherwise requires.”

15. That the said Rule relied on by the Commissioner does not accord him the mandate to reclassify goods and the Commissioner's decision did not explain the reasons for departure from the tariff rulings issued to the Appellant on diverse dates in 2017 classifying food supplements under HS Code 3004. 50. 00 and other products under HS Code 9021. 10. 00.

16. That it is on the strength of the foregoing tariff rulings and as per the laboratory analysis conducted by the Respondent at the time that caused the Appellant to declare HS Code 3004. 50. 00 for food supplements and HS Code 9021. 10. 00 for other products.

17. That the Respondent's tariff rulings are clear that they do not absolve the importer from liability that may arise at the time of the importation, customs verification and clearance of goods. That the Respondent did not reserve the right to depart from the ruling after goods have been cleared from the point of entry into the Country.

18. That as a result of the foregoing, there is no legal basis for the Respondent to claim any taxes from the Appellant having verified and cleared the goods at the point of entry and any attempt to demand more taxes is contrary to the doctrine of legitimate expectation.

19. The Appellant submitted that the Respondent in arriving at the said tax decision has failed to consider that the Appellant has no recourse to shift the burden to the consumer as the goods imported in the period under review have already been sold.

20. That the Respondent's impugned demand notice and impugned tax decision is a malicious and deliberate attempt to cripple the Appellant's business in demanding the colossal sum of Kshs. 174,835,029. 00 in extra taxes contrary to the Appellant's right to transparency.

21. The Appellant argued that despite the attempt by the Respondent to issue new tariff rulings in the year 2022, there is no evidence to support the reclassification of the H.S Codes in the form of a laboratory analysis. That there is no evidence that the previous rulings issued on diverse dates in 2017 were based on any incomplete, incorrect, false or misleading information to warrant the Respondent to depart from them.

22. The Appellant submitted that the impugned demand notice stated that the Respondent was guided by the General Interpretation Rules for classification of goods as contained in the East Africa Community Common External Tariff which prompted the reclassification. That the impugned review decision further admitted that the General Interpretation Rules (GIR) apply sequentially but the Respondent relies on GIR 6 which states that;“the classification of goods in the subheadings of a heading shall be determined according to the terms of those subheadings and any related subheading notes and to the above rules”.

23. That in essence before the interpretation in GIR 6 can be applied the Respondent has to ascertain that GIR 1-5 have been satisfied.

24. The first rule of the GIR is clear that interpretation shall be in accordance to the terms of the heading or any relative heading or chapter notes. That the chapter notes on the current assessed HS Codes by the Respondent is as follows:No. Product Assessed HS Codes Chapter Notes/terms of heading

1) Back Rest 9404. 90. 00 Articles of bedding and similar furnishings (except mattresses and sleeping bags), fitted or stuffed etc. Including quilts, pillows and cushions.

2) Coccyx Cushion Seat 9401. 80. 00 Other Seats

3) Elbow Support 6307. 90. 00 Other made up articles, including dress patterns

4) Hernia Belt 6212. 90. 00 Brassieres, girdles, corsets, braces, suspenders, garters and similar articles and parts thereof, whether or not knitted or crocheted.

5) Knee Comfeel 6307. 90. 00 Other made up articles, including dress patterns

6) Pregnancy Back Support 6212. 90. 00 Brassieres, girdles, corsets, braces, suspenders, garters and similar articles and parts thereof, whether or not knitted or crocheted

7) Scrotal Support 6212. 90. 00 Brassieres, girdles, corsets, braces, suspenders, garters and similar articles and parts thereof, whether knitted or crocheted

8) Shoulder Support 6307. 90. 00 Other made up articles, including dress patterns

25. That it is clear that the HS Code used by the Respondent offends Rule 3(1) of the GIR which requires that:“The heading which provides the most specific description shall be preferred to headings providing a more general description.”

26. That the Headings used by the Respondent are general whereas the Heading under HS Code 9021. 10. 00 used by the Appellant is specific to the product where the terms of the Heading are as follows:“Orthopedic appliances, including crutches, surgical belts and trusses; splints and other fracture appliances; artificial parts of the body: hearing aids and other appliances which are worn or carried, or implanted in the body, to compensate for a defect or disability.”

27. The Appellant averred that on the application of Rule 6 and Rule 3 then Rule 3 of the GIR would take dominance as the Rules are applied sequentially. That with reference to HS Code 3004. 90. 00 for medicaments and 2106. 90. 91 on food supplements, the two-chapter heads are as follows:“3004- Medicaments (excluding goods of heading 30. 02, 30. 05 or 30. 06) consisting of mixed or unmixed products for therapeutic or prophylactic uses, put up in measured doses (including those in the form of transdermal administration systems) or in forms or packings for retail sale.”

28. The Appellant argued that the proposed HS Code by the Respondent with reference to items used in food preparation and that the Appellant is a company that deals in medicines as part of its business and no evidence in the form of a laboratory analysis had been tendered by the Respondent or the Pharmacy and Poisons Board to prove that the Appellant’s products do not have any ingredients that have therapeutic or prophylactic use.

29. That the Respondent has not only acted ultra vires in its classification but gravely failed to apply the Rules of Interpretation as per the EAC CET.

30. That without prejudice to the foregoing, the Appellant submitted that it is not legally plausible for the Respondent to on one hand adopt one tariff ruling and classify its products under one HS Code and then resile from the ruling without any evidence, legal justification and explanation; and with this place an additional tax burden on the Appellant.

31. That the doctrine of precedent is binding on the Respondent as an administrative decision-making entity just as it does a judicial authority for the simple and straightforward reason that there must be predictability in taxation.

32. The Appellant also stated that it was not involved in any decision on the change in the HS Code classification and that the Respondent’s witness indicated there was an investigation but the same was not availed for the Appellant to make a case against it. The Appellant therefore urges the Tribunal to find that the actions of the Respondent were in contravention to the Appellant’s right to fair administrative action and legitimate expectation.

33. The Appellant in support of its case relied on the holdings in the following authorities: Krish Commodities Ltd v KRA [2018] Eklr, Export Trading Co. v KRA Eklr [2018] and Keroche Industries v KRA & 5 Others [2007] amongst others

Appellant’s prayers. 34. The Appellant prayed for:a.The Appeal to be allowed.b.The annulment of the impugned decision as well as the impugned demand noticec.Costs of the Appeal

Respondent’s Case 35. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:a.The Respondent’s Statement of Facts dated 10th March, 2023 and filed on 15th March 2023. b.The Respondent’s witness statement of Cecilia Njatha dated 12th June 2023 and filed on 15th June 2023 and that was admitted in evidence under oath by the Tribunal on 6th September 2023. c.The Respondent’s Written Submissions dated 31st October, 2023 and filed on 2nd November 2023

36. The Respondent averred that the instant dispute arose following intelligence/analysis received from the Respondent's ISO Department, which was also analysed by PAU (Pre-Audit Unit) within PCA. That from the intelligence, it was established that the Appellant imports various types of consignments which are supplements as they have no therapeutic or prophylactic uses but are meant for nutritive value.

37. On 4th October 2022, the Respondent's Post Clearance Audit team conducted a desk review of import transactions of the Appellant for the period October 2017 to September 2022 pursuant to Sections 235 and 236 of the East African Customs Management Act 2004 (EACCMA).

38. That an examination of the entries revealed that the Appellant had been misclassifying food supplements under Heading 3004 instead of 2106 while some of the equipment have been classified under Heading 9021 instead of either 6212, 6307 or 9401.

39. That after the examination of the Appellant's import entries a demand for uncollected taxes of Kshs. 174,835,029. 00 was sent on 9th November 2022.

40. The Respondent reiterated that the products of Heading 2106 are meant to maintain general health and wellbeing.

41. The Respondent averred that apart from the supplements, the desk audit revealed that the Appellant imported medical products such as back rest, coccyx cushion seat elbow support, hernia belt, knee cap Comfeel, pregnancy back support, scrotal support and shoulder support under Heading 9021. That Tariff rulings had been issued for these products by the tariff section and this is the basis that an assessment was done.

42. The Respondent also averred that Chapter Note 6 to Chapter 90 states that: for purposes of Heading 9021 the expression of orthopaedic appliances means appliances for:a.preventing or correcting bodily deformities orb.Supporting or holding parts of body following an illness, operation or injury

43. That Chapter Note 1 (b) to Chapter 90 excludes supporting belts or other support articles of textile whose intended effect on the organ to be supported or held derives solely from their elasticity e.g. maternity belts, thoracic support bandages, abdominal support bandages, supports for joints or muscles.

44. The Respondent in response to grounds 1, 2, 3 and 7 of the Appeal reiterated that Section 135 empowers the Commissioner to recover customs taxes found to have been short levied even after clearance.

45. That Section 235 defines the audit period of up to five years from the date of importation or exportation of goods while Section 236 empowers the Commissioner to check for accuracy of declarations even where customs clearance of goods has been undertaken.

46. The Respondent maintained that the period of 5 years going backwards was its mandate for short levied taxes.

47. That at all material times, the Appellant did a self-assessment and self-declared the items under impugned tariffs until the Appellant was advised by the Respondent on the correct Heading,

48. The Respondent in response to grounds 4, 5, 6, 8, 10 and 11 of the Appeal refuted the same and averred that such issues are a preserve for the Judicial Review Court and the Tribunal is devoid of jurisdiction to entertain such.

Respondent’s prayers 49. The Respondent prayed that the Tribunal finds that:a.The Respondent’s impugned decision be upheld.b.The Appeal be dismissed with costs.

Issue for Determination 50. After studying the submissions and documents tendered by both parties, the Tribunal determined that the issue for determination was one as stated here below.Whether the Respondent was justified in reclassifying the Appellant’s imports

Analysis and Determination 51. The Appellant is the importer of various items and it received a demand notice from the Respondent for uncollected taxes amounting to Kshs. 174,835,029. 00 on 9th November 2022. The demand covered the period November 2017 to September 2022 and was arrived at on the basis of reclassification of the Appellant’s imports done by the Respondent.

52. The Appellant did an application for review on 6th December 2022 and the Commissioner determined the same on 5th January 2023 reiterating its earlier position that the taxes were due and payable.

53. The items on which the dispute is hinged are of two categories classified as food supplements (Becoactin, Bioferon, Cardioace, Feroglobin, Immunace, Jointace, Liveril, Menopace, Ologare, Osteogare, Ovacare, Perfectil, Pregnacare, Tres Orix, Ultra-plant Sterols, Wellbaby, Wellkid Immune, Wellman and Zedcal) and Other products (Shoulder Support (Neoprene), Hernia Belt, Scrotal Support, Pregnancy back support, Back Rest, Coccyx Cushion Seat, Knee cap Comfeel, and Elbow Support). The Appellant had declared the former under HS Code 3004. 50. 00 while the Respondent reclassified them under HS Code 2106. 90. 91.

54. The “Other products” had been declared by the Appellant under Heading 9021 but the Respondent argued that the same ought to be classified under either 6212, 6307 or 9401 and reclassified them under the same.

55. The Appellant argued that the Respondent in reclassifying the imports departed from the tariff rulings issued to the Appellant on diverse dates in 2017 classifying food supplements at HS Code 3004. 50. 00 and the other products at HS Code 9021. 10. 00.

56. The Appellant argued that it was on the strength of the Respondent’s tariff rulings and the laboratory analysis conducted by the Respondent at the time the tariff Rulings were made that caused the Appellant to declare the imports under the particular HS Codes. That the new tariff classifications issued in 2022 had not been supported by any evidence in the form of laboratory analysis and that there is no evidence to show why the earlier tariffs ought to be departed from.

57. The Tribunal noted that the parties are in agreement that tariff Rulings had been made on various dates in the year 2017 in respect of the imports of the Appellant and which are the subject matter of the Appeal and that the Respondent had not notified the Appellant of any decision to depart from the same.

58. The Tribunal observed that the Appellant in its first ground of Appeal argued that:-“the impugned decision is illegal as the Respondent erred in failing to appreciate that the impugned decision disclaims its own tariff decisions issued to the Appellant for its products.”

59. The Appellant in its application for review had also argued that the Commissioner had acted capriciously and without legal justification in purporting to disclaim its own tariff classifications issued and wrongly reclassifying the Appellant’s products.

60. The response of the Respondent to the Appellant’s arguments that the Respondent was acting illegally in disclaiming its own tariffs was that the Appellant had not presented the tariff rulings when applying for review.

61. The Appellant has included some of the tariff rulings in its Statement of Facts, and the Respondent had not denied that the same existed. The Tribunal also took judicial notice of the fact that the Respondent having issued the same, then it must be having the Rulings in its custody.

62. The tariff rulings as per the Appellant’s averments, and which averments have not been rebutted by the Respondent, were issued on the basis of the laboratory analysis done then. The Respondent averred that the new classification was based on its investigations on the Appellant’s imports. The Respondent did not produce any report from the aforesaid investigations or any laboratory analysis to back its new classification.

63. The Tribunal also noted that in the past, it has been determined by precedent that Tariff rulings can only be departed from with good reasons taking into consideration such things as new laboratory analysis results exhibiting new characteristics of the imports in issue. The evidence of the Respondent’s witness was to the effect that no laboratory analysis was done by the Respondent at the time of reclassifying the goods and therefore there was no such evidence of character change of the imports. The Appellant was also not involved in the exercise of the reclassification.

64. In reference to the issue of past tariff ruling being binding on the Respondent unless for good reason the same has to be departed from the Tribunal takes into consideration the holding in the case of R V Inland Revenue Commissioner, Ex-Parte Uniliver P/C [1996] Stc P 681 at page 690 in these words:“The categories of unfairness are not closed, and precedent should act as a guide and not as a cage.”This court is well aware of its limitations and would not interfere with the Respondent’s ability to change their taxation general policy from time and as it deems it fit. Indeed, this is why it exists. The court must take cognizance of the fact that the Respondents must have the flexibility in articulating and implementing that policy. It would be unreasonable for instance to expect the Respondents to be wedded to the same tariff policy forever, but they must be held to their bargain in adhering to consistency where the chemistry of the product has not changed at all. They cannot unilaterally rule that the tariff of a product which has not changed, and which has over the years been allocated a particular tariff should move to another different tariff. Such a change is arbitrary, oppressive and Wednesbury unreasonable. In the case in question the Respondent plucked from the air a tax liability of 1. 1 billion and placed on the shoulders of a company which on the evidence had paid taxes lawfully due under the applicable tariff during the relevant period.By rejecting the applicant’s decision to change the tariff as proposed, the court will be sending out a clear signal that legitimate expectation is based not only on ensuring that legitimate expectations by the parties are not thwarted, but on a higher public interest beneficial to all including the Respondents, which is, the value or the need of holding authorities to promises and practices they have made and acted on and by so doing upholding responsible public administration. This in turn enables people affected to plan their lives with a sense of certainty, trust, reasonableness, and reasonable expectation.An abrupt change as was intended in this case, targeted at a particular company or industry is certainly abuse of power. Stated simply legitimate expectation arises for example where a member of the public as a result of a promise or other conduct expects that he will be treated in one way and the public body wishes to treat him or her in a different way. In this case the applicant did not expect an abrupt change of tariff where the process of manufacture or its products had not changed. Public authorities must be held to their practices and promises by the courts and the only exception is where a public authority has a sufficient overriding interest to justify a departure from what has been previously promised.”

65. The Tribunal also relied on the dictum of the High Court of Kenya in Republic v Kenya Revenue Authority Ex Parte MKopa Kenya Limited [2018] eKLR wherein the Court expounded on the principle of legitimate expectation as was appreciated in Keroche Industries Limited vs Kenya Revenue Authority & 5 Others Nairobi HCMA No. 743 of 2006 [2007] KLR 240. that had held as follows:“...legitimate expectation is based not only on ensuring that legitimate expectations by the parties are not thwarted, but on a higher public interest beneficial to all including the respondents, which is, the value or the need of holding authorities to promises and practices they have made and acted on and by so doing upholding responsible public administration. This in turn enables people affected to plan their lives with a sense of certainty, trust, reasonableness, and reasonable expectation. An abrupt change as was intended in this case, targeted at a particular company or industry is certainly abuse of power. Stated simply legitimate expectation arises for example where a member of the public as a result of a promise or other conduct expects that he will be treated in one way and the public body wishes to treat him or her in a different way... Public authorities must be held to their practices and promises by the courts and the only exception is where a public authority has a sufficient overriding interest to justify a departure from what has been previously promised...In order to ascertain whether or not the respondents decision and the intended action is an abuse of power the court has taken a fairly broad view of the major factors such as the abruptness, arbitrariness, oppressiveness and the quantum of the amount of tax imposed retrospectively and its potential to irretrievably ruin the applicant. All these are traits of abuse of power. Thus, I hold that the frustration of the applicants' legitimate expectation based on the application of tariff amounts to abuse of power."

66. The Tribunal taking into consideration the fact of the existence of the tariff rulings which the Respondent had departed from unprocedurally comes to the conclusion that the reclassification of the Appellant’s imports was unjustified and determined to do away with the same.

Final Decision 67. The Tribunal after analyzing the facts of this dispute as presented by the parties determines that the Appeal has merits and therefore succeeds. The Orders that recommend themselves consequently are:-a.The Appeal be and is hereby allowed.b.The review decision made by the Respondent on 5th November 2022 be and is hereby set aside.c.Each party to bear its own costs.

68. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF FEBRUARY, 2024GRACE MUKUHA CHAIRPERSONJEPHTHAH NJAGI - MEMBERDR.ERICK KOMOLO - MEMBERGLORIA A. OGAGA - MEMBERTIMOTHY VIKIRU - MEMBER