[2024] KETAT 165 (KLR)

Harleys Limited v The Commissioner of Customs & Border Control (Appeal 244 of 2021) [2024] KETAT 165 (KLR) (9 February 2024) (Judgment)

Neutral citation: [2024] KETAT 165 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 244 of 2021

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

February 9, 2024

Between

Harleys Limited

Appellant

and

The Commissioner of Customs & Border Control

Respondent

Judgment

Background 1. The Appellant is a is a limited liability company engaged as a pharmaceutical and surgical distributor within the Republic of Kenya.

2. The Respondent is a principal officer appointed under Section 13 of the the Kenya Revenue Authority Act, Cap 469 Laws of Kenya. Under Section 5 (1) of the Act, the Respondent is an agency of the Government for the collection and receipt of all revenue. Further, under section 5(2) of the Act with respect to the performance of its function under subsection (1), the Respondent is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 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 Appellant imported Tres Orix Forte and classified it under Harmonised Commodity Description and Coding System Code (hereinafter ‘HS Code’) 3004. 90. 00. However, through a letter dated 11th August 2020, the Respondent issued a tariff ruling reclassifying the Tres Orix Forte under HS Code 2106. 90. 900.

4. In a letter dated 11th September 2020, the Respondent issued a demand for payment of extra taxes due as per the reclassification of the product. The Appellant objected to this demand through a letter dated 6th November 2020.

5. The Respondent issued its objection decision vide a letter dated 27th November 2020.

6. Aggrieved by the Respondent’s decision dated 27th November 2020, the Appellant lodged its Notice of Appeal dated 7th May 2021 on even date.

The Appeal 7. The Appeal as contained in the Memorandum of Appeal dated 19th May 2021 and filed on 24th May, 2021 is premised on the following grounds:

8. That the impugned tax decision is illegal and factually baseless as the Respondent erred in failing to concur that the Appellant correctly declared its imported medicaments under HS Code 3004. 90. 00 as per the tariff rulings and applicable law and paid all duty applicable.

9. That the impugned tax decision is arbitrary and erroneous, and the Respondent lacks legal or factual basis for detaining the Appellant's goods and more particularly:a.Despite the Appellant's objection dated 6th November 2020, no confirmation notice or objection decision was delivered to the Appellant or its representatives. Consequently, the objection was deemed allowed by operation of law; and the Respondent's continuing detention of the Appellant's goods remains legally and factually baseless.b.The Respondent erred in failing to adhere to its own tariff rulings dated 30th September 2016 classifying Tres Orix Forte under HS Code 3004. 90. 00. c.The Respondent failed to exhibit any fresh laboratory analyses to justify its random departure from the tariff ruling earlier issued, and to justify the arbitrary tariff reclassification of the Appellant's imported medicaments.d.The Respondent unjustifiably detained the Appellant's goods as prelude to demand additional taxes, considering no contrary tariff rulings were issued re-classifying the subject goods.e.The Respondent acted capriciously and without legal justification by using this dispute as excuse for detaining other consignments imported by the Appellant.

10. That the Respondent erred in law by:a.Purporting to detain the Appellant's goods in respect of which the Appellant already declared and paid full duty required by law and in full compliance within the tariff rulings aforesaid;b.Purporting to detain the Appellant's goods in respect of which the Appellant's objection was already deemed allowed by operation of law;c.Purporting to impose additional tariffs upon the Appellant's consignments without justification and contrary to law; andd.Purporting to disclaim its own tariff ruling without subjecting the Appellant's goods to fresh laboratory analyses and without demonstrating the basis of its arbitrary re-classification of the goods.

11. That the impugned tax decision is illegal and unlawful as the Respondent failed to heed the binding Judgment of this Tribunal entered on 9th April 2021 in the Appellant's favour, viz TAT 521 of 2019 Harleys Limited v Commissioner of Customs & Border Control & Commissioner of Domestic Taxes; which case decided similar issues to the instant Appeal.

12. That the Respondent breached its legal obligation under the Kenya Revenue Authority Act, Cap 469 of Kenya’s Laws, by purporting to detain the Appellant's goods without any legal justification or proof of tax liability; in order to compel payment of additional taxes under duress.

13. That the impugned tax decision violates the Appellant's Constitutional rights to transparency, accountability and fair administrative action in tax administration, all contrary to Articles 10, 47 and 48 of the Constitution of Kenya 2010 (hereinafter ‘the Constitution).

The Appellant’s Case 14. The Appellant’s case is premised on the following documents and proceedings before the Tribunal:-a.Statement of Facts dated 19th May 2021 and filed on 24th May, 2021,b.The Appellant’s Witness statement of Oscar Mutiso dated 16th January, 2023 and filed on 9th February, 2023 that was admitted in evidence under oath on the 6th September, 2023

15. The Appellant averred that vide its own letter dated 14 October 2020, it appealed against the Respondent’s letter dated 11th August 2020 and the demand of 11th September 2020 and raised the following issues but received no response:-a.That by reason of tariff rulings earlier given dated 3rd March 2011 and 20th September 2016, KRA conducted laboratory analysis and gave tariff rulings classifying Tres Orix Forte under HS Code 3004. 90. 00 which the Appellant used in the IDF and entry lodged for clearing.b.That Tres Orix Forte is fully registered with the Pharmacy and Poisons Board of the Ministry of Health as a medicine under the Pharmacy & Poisons Act, with clinical indications. Moreover, the product is a prescription medicine legally only allowed to be sold by registered pharmacies only.c.That the formulation and clinical indication analysed in detail show that Tres Orix Forte is not a tonic, multivitamin nor is it a food supplement. It has been legally classified as medicine under the Pharmacy and Poisons Act only sold on prescription through pharmacies only.d.That the formulation of Tres Orix Forte shows that it is indicated for treatment of several illnesses including post-infective anorexia, anorexia in adults, unearned baby anorexia, deficiency anorexia, retarded growth and development, immune compromised patients, patients recovering from severe trauma and illnesses, and post-operative patients having undergone major surgery.e.That similar products have been ruled by customs under HS Code 3004. 90. 00.

16. The Appellant averred that it received an objection decision yet the Respondent flagged and detained the Appellant's consignments alleging outstanding tax issues and demanding for payment.

17. The Appellant contended that it never received the objection decision letter from the Respondent and therefore its objection letter dated 6th November 2020 was never responded to, hence was deemed allowed by operation of law, settling the entire underlying dispute in the Appellant's favour with regard to classification of Tres Orix Forte.

18. The Appellant stated that on following up with the Respondent vide the letter dated 14th January 2021 and through routine electronic mail, the Respondent raised the allegation that it had given an objection decision Ref: US/V& T/TARI/APP/045/2020 dated 27th November 2020.

19. The Appellant further contended that the alleged objection decision Ref: CUS/V&T TARI/APP/045/2020 dated 27th November,2020 which the Respondent expressly admitted bears the wrong PIN and postal address was not dispatched or received by the Appellant; meaning no confirmation notice was delivered or served to the Appellant. Its objection dated 6th November, 2020 remains un-responded to, hence was deemed allowed.

20. The Appellant stated that it paid all duties according to law with regard to Tres Orix Forte and that the Respondent has no legal or factual basis for flagging this as an outstanding tax dispute, neither does it have basis for continued detention of the Appellant's goods.

21. The Appellant averred that the Respondent further breached the following statutory and legal provisions and doctrines to the Appellant's detriment:

Breach of Article 27 of the Constitution 22. Every person is equal before the law and has the right to equal protection of the law. Equality includes the enjoyment of all rights and fundamental freedoms.

23. The Respondent has arbitrarily detained the Appellant's goods on account of this issue, without any regard to its rights to procedural fairness and in breach of natural justice.

24. The Respondent discriminated against the Appellant and exposed the Appellant to extreme and unjustified enforcement action by detaining its goods, without issuing any assessment with regard to those goods, and without any regard to the Appellant's rights protected under the Tax Procedures Act No.29 of 2015 (TPA); all with ill-intent to coerce payment out of the Appellant with regard to taxes whose objection was already allowed by operation of law.

Breach of Article 35 of the Constitution 25. The Respondent has elected to harass the Appellant on the basis of an alleged tax liability which is unsupported under the EACCET - and in complete violation and neglect of its own tariff rulings which the Appellant already complied with.

26. The Respondent further breached the Constitution by failing to disclose the basis of detaining the Appellant’s consignment subsequently imported, based on a fictitious tax dispute already settled when the objection was deemed allowed. Thus, the Respondent’s actions are in breach of the Appellant's rights to access information that is required for the protection of its fundamental rights and freedoms.

Breach of Article 40 of the Constitution 27. The direct enforcement action of detaining the Appellant's consignment is unlawful for arbitrarily undermining the Appellant's right to property without any notice. The Respondent failed to exhibit any regard to the Appellant's right to natural justice before the adverse decision was taken to unlawfully detain goods without cause.

28. Likewise, the demand for additional taxes - without demonstrating the legal or factual justification for said demand - violates the Appellant's right to property. Payments of unjustified sums as taxes, especially when forced under coercion through detention of goods, deprive the Appellant of its finances and property.

Breach of Article 41 of the Constitution 29. As a result of the Respondent's unjustified seizure of goods, the Appellant’s businesses are constricted and its distribution outlets are starved of products for sale, by the Respondents without justification. The subsequent extreme financial loss will inevitably affect the Appellant with adverse consequences on its workforce and associated employees.

Breach of Article 47 of the Constitution 30. The Respondent, in insisting on detaining the Appellant's goods on account of alleged taxes - in the face of an objection already allowed by operation of law is offensive and constitutes unfair administrative action in so far as the continued detention of goods remains legally and factually unsubstantiated, and contrary to the Respondent’s mandate to collect revenue strictly in accordance with revenue laws.

31. Moreover, the Respondent's insistence that it delivered its objection decision, is unsustainable, and exhibits lack of accountability especially in the face of the express admission in writing that it used the wrong Personal Identification Number (hereinafter ‘PIN’) and Postal Address.

32. Again, the Respondent's repeat flagging of an already resolved issue – and wanton detention of goods - breaches the legality, rationality and procedural propriety tenets applicable in fair administrative action generally, and in tax administration specifically.

Breach of Doctrines Legitimate Expectation 33. The Respondent also breached the following legal principle relevant to exercise of administrative power generally, and to administration of tax law specifically:

34. The Courts over the years have recognized both procedural and substantive legitimate expectation. A procedural legitimate expectation rests on the presumption that a public authority will follow a certain procedure in advancing a decision being made. Procedural legitimate expectation applies in this case.

35. Beyond being a cardinal right under the tenets of natural justice requiring that no person can be condemned unheard, the Appellant had a legitimate expectation that it will be accorded procedural fairness as prescribed in the TPA which the Respondent failed to adhere to when enforcing the agency notices.

Appellant’s Prayers 36. The Appellant made the following prayers to the Tribunal:-a.That it allows this Appeal;b.That it annuls and sets aside the impugned tax decision and all other decisions grounded thereupon; based on the grounds above as well as the information contained in the Statement of Facts attached;c.That it Orders immediate release of the Appellant's consignment (s) unjustifiably detained by the Respondent; andd.That the costs of this Appeal are awarded to the Appellant.

Respondent’s Case 37. The Respondent’s case is premised on:-a.Its Statement of Facts dated 18th June 2021 and filed on the same date.b.The Written submissions dated 3rd November 2021 and filed with the Tribunal on even date.

38. The Respondent submitted that the product in question which is specified as Tres Orix was declared under import entry 2020MSA7503364 and upon verification, the same was forwarded for tariff determination which classified the product under East Africa Community Common External Tariff, 2017 (hereinafter ‘EACCET’) under HS code 2106. 90. 99 and varied with the declared code by the Appellant. The Respondent claimed that the Appellant did not object to this ruling leading to the Respondent issuing a demand notice for payment of extra taxes due to the wrongful classification.

39. The Respondent averred that the decision to arrive at the ruling was justified and had basis in law adding that the classification of goods is based on EACCET read together with the Explanatory Notes to the Harmonized System and guided by the General Interpretations Rules (hereinafter ‘GIR’).

40. The Respondent averred that the Tres Orix Forte is specified as a dietary appetite stimulant supplement containing cyproheptadine hydrochloride supplement, Vitamin (B1, B6 and B12), 150mg carnitine Chlorhydrate, 150mg lysine Chlorhydrate as the adjective ingredient indicated for use in the management of loss of appetite, post infections anorexia, deficiency anorexia, retardation in growth, habitual vomiting and Constitutional thinness.

41. The Respondent submitted that based on the above, the Tres Orix Forte is not a medicament as it does not cure any ailment, rather it is a supplement hence the classification under Heading 21. 06 of the on EACCET, which covers the classification not elsewhere classified.

42. The Respondent averred that the above heading includes the classification of preparations often referred to as food supplements based on extracts from plants, fruits concentrates, honey, fructose etc and containing added vitamins and sometimes minute quantities of iron compounds.

43. The Respondent submitted that the Appellant has not produced any evidence to support the averments contained in its Statement of Facts. The Responded added that the burden of proof is on the Appellant as provided for under Section 30 of the Tax Appeals Tribunal Act No. 40 of 2013 (hereinafter ‘TAT’) which states:“In a proceeding before the Tribunal, the Appellant has the burden of proving-a.Where an appeal relates to an assessment, that the assessment is excessive; orb.In any other case, that the tax decision should not have been made or should have been made differently.”

44. On the Appellant’s allegations that Appeal No 521 of 2019; Harleys Limited v Commissioner of Customs and Border Control was decided on similar issues, the Respondent averred that this is untrue and stated as follows:-a.That Appeal 521 of 2019 challenged the issuance of agency notices without issuing an assessment.b.That the issue for determination in that Appeal were:i.Whether there was a valid Appeal at the Tribunal.ii.Whether the Tariff Code Rulings issued in 2017 are still binding on the Commissioner?iii.Whether the Respondent erred in issuing agency notices.iv.Whether the Appellant is liable to pay the taxes as demanded by the Respondent.c.That this Tribunal interrogated all the issues and concluded by directing the Respondent to conduct a post clearance audit in accordance with the applicable laws.d.That the issues dealt with in that particular Appeal were not the same as the assessment’s raised by the Respondent in the current Appeal as the previous case was decided on its merits.e.The Respondent averred that this Tribunal should determine this Appeal on its merits and give the correct classification of Tres Orix Forte.

45. The Respondent submitted that it rendered its review decision within the required timelines and that the Appellant knew that fact too well hence moving this Tribunal challenging the same decision.

46. The Respondent further stated that it responded to the Appellant’s application dated 6th November 2020 via letter dated 27th November 2020 whereby the grounds of objections were considered and a decision was rendered that Tres Orix Forte is considered a dietary supplement classifiable as per HS Code 2106. 90. 99.

47. The Responded averred that it rendered its decision on 27th November 2020, which is well within the provisions of Section 229(4) of the East Africa Community Customs Management Act, 2004 (EACCMA) which grants the Respondent 30 days upon receipt of the Appellant’s objection.

48. The Respondent acknowledged that there was a typo when capturing the PIN and the address but the agent’s address and PIN was captured correctly therefore the Appellant cannot base its averments on such a technicality and in any event, it received the objection which forms the basis of this Appeal.

49. The Respondent averred that Section 146 (1) of EACCMA gives an agent authority to act on behalf of the owner. The Section provides that;“Where under the provisions of the customs law the owner of any goods is required or authorized to perform any act then such act, unless the contrary appears may be performed on his behalf an authorized agent.”

50. The Respondent averred that the Appellant purported to classify the product in dispute in the category that would attract 0% duty so as to avoid payment of taxes.

51. The Respondent submitted that the fact that the Appellant was granted an opportunity required by law to object and present its side of the story negates the issue of legitimate expectation, adding that there can be no legitimate expectation against the express provisions of the law.

52. The Respondent averred that the legitimate expectation alleged by the Appellant was not created by the Respondent and from the very onset the Appellant knew it was required to pay taxes due.

Respondent’s Prayers 53. The Respondent prayed that the Tribunal:i.Upholds the Respondent’s decision as proper in law and in conformity with the provisions of the law.ii.That this Appeal be dismissed with costs to the Respondent as the same is devoid of any merit.

Issues For Determination 54. Having analysed the pleadings submissions and evidence admitted by both parties, the Tribunal concludes that there is a single issue that calls for its determination as follows:Whether the Respondent’s tariff ruling re-classifying Tres Orix Forte under HS Code 2106. 90. 00 is just and proper in law.

Analysis And Findings 55. The Tribunal notes that though the Appellant has raised the issue of seizure of its goods, the matter was dealt with and dispensed by a ruling delivered by the Tribunal on 26th May 2021 following an interim application by the Applicant.

56. The dispute before the Tribunal arose after the Respondent issued a demand for payment of extra taxes following its Tariff ruling reclassifying Tres Orix Forte under EACCET 2017 HS Code 2106. 90. 90 while the Appellant declared it under Heading 30. 04.

57. The Respondent submitted that Tres Orix Forte is a dietary appetite stimulant supplement containing cyproheptadine hydrochloride supplement, Vitamin (B1, B6 and B12), 150mg carnitine Chlorhydrate, 150mg lysine Chlorhydrate used for the management of loss of appetite, post infections anorexia, deficiency anorexia, retardation in growth, habitual vomiting and constitutional thinness and not a medicament as it does not cure any ailment hence the classification under Heading 21. 06 of the EACCET, which covers the classification not elsewhere classified.

58. The Appellant’s argument was to the effect that the formulation and clinical indication analysed in detail show that Tres Orix Forte is not a tonic, multivitamin nor is it a food supplement but a prescription only medicine fully registered with the Pharmacy and Poisons Board of the Ministry of Health as a medicine under the Pharmacy & Poisons Act, Cap 244 of the laws of Kenya and indicated for the treatment of several illnesses including post-infective anorexia, anorexia in adults, unearned baby anorexia, deficiency anorexia, retarded growth and development, immune compromised patients, patients recovering from severe trauma and illnesses, and post-operative patients having undergone major surgery and is therefore classifiable under HS Code 3004. 90. 00 in accordance with EACCET.

59. The Tribunal notes that HS Code 2106. 90. 90 attracts an import duty of 25% and a VAT duty of 16% whilst the HS Code 3004. 90. 00 attracts an import duty of 0% and a VAT duty of 0%.

60. The Tribunal also notes that in its Tariff Ruling letters dated 3rd March 2011 and 30th September 2016, the Respondent classified Tres Orix Forte under HS Code 3004. 90. 00 and declared it as a preparation put up in measured doses and intended for use to alleviate all types of anorexia in adults and children. The Tribunal observes that the Respondent has neither rebutted any of these two letters nor has it withdrawn its Tariff ruling. Further the Respondent has not adduced evidence to indicate that there was a change in the composition of the product.

61. The Tribunal further notes that as per the availed letter dated 21st September, 2016 and addressed to the Respondent, the Pharmacy & Poisons Board clarified that Tres Orix is registered and retained as a medicine under the Pharmacy and Poisons Act vide certificate number H2014 /20440/195 and is scheduled as a prescription only medicine.

62. The Tribunal has no option but agree with the Pharmacy & Poisons Board that Tres Orix is recognized as a medicine under the Pharmacy and Poisons Act, Cap 244 of the laws of Kenya.

63. The Tribunal notes that as per the EACCET, medicines are classified under Heading 30. 04 which states:“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.”

64. The Tribunal can only therefore conclude that pursuant with the applicable EACCET, the applicable HS Code for Tres Orix Forte is 3004. 90. 00 and not 2106. 90. 90. As such, based on the foregoing, the Tribunal finds that the Tariff ruling by the Respondent on the re-classification of Tres Orix Forte to HS Code 2106. 90. 00 was not justified.

Final Decision 65. On the basis of the foregoing analysis the Tribunal finds that the Appeal is merited and accordingly proceeds to make the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 27th November 2020 be and is hereby set aside.c.Each party to bear its own costs.

66. It’s so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF FEBRUARY, 2024. ERIC NYONGESA WAFULA - CHAIRMANDELILAH K. NGALA - MEMBERCHRISTINE A. MUGA - MEMBERGEORGE KASHINDI - MEMBERABDULAHI M. DIRIYE - MEMBERSPENCER. S. OLOLCHIKE - MEMBER