[2023] KETAT 1011 (KLR)

Hemwil Investment Limited v Commisioner Customs & Border Control (Tax Appeal 0208 of 2023) [2023] KETAT 1011 (KLR) (8 September 2023) (Judgment)

Neutral citation: [2023] KETAT 1011 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 0208 of 2023

E.N Wafula, Chair, RO Oluoch, AK Kiprotich, Cynthia B. Mayaka, E Ng'ang'a & B Gitari, Members

September 8, 2023

Between

Hemwil Investment Limited

Appellant

and

Commisioner Customs & Border Control

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated under theCompanies Act. Its primary business is the importation of of motor vehicles.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for collecting and receiving all tax revenue. Further, under Section 5(2) of the Act, concerning the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts 1 & 2 of the First Schedule to the Act to assess, collect and account for all revenues under those laws.

3. The issue in dispute herein arose when the Respondent issued a demand notice dated March 27, 2023 demanding Kshs 18,672,921. 00 being extra taxes and interest on the basis that the Appellant had mis-classified its Toyota Hiace vans under subheading 8702. 10. 20 and 8704. 21. 90 instead of 8703. 33. 90.

4. The Appellant objected to the aforesaid demand and requested for a review of tariff classification vide a letter dated 20th March 2023. It sent a further intervention letter dated 31st March 2023 requesting for intervention on the demand notice and for a review of tariff classification on commercial vans and matatus.

5. The Respondent issued its review decision on 14th April 2023 confirming the tax demand of Ksh 18,672,921. 00.

6. The Appellant being aggrieved by the review decision commenced this Appeal by lodging with the Tribunal a Notice of Appeal dated May 7, 2023.

The Appeal 7. The Appellant’s premised its Appeal on the Memorandum of Appeal which was filed on the May 9, 2023. Its grounds of appeal were as follows, that:a.The Respondent erred in law and fact in finding that the Appellant has underpaid excise duty.b.The Respondent erred in law and fact in the construction and application of the law relating to Excise Duty and Value Added Tax.c.The Respondent erred in law and fact in the misclassification of Toyota Hiace after verification and confirmation at the point of importation.d.The Respondent erred in law and fact by applying the wrong classification to wit 8703. 33. 90 instead of 8702. 10. 20 under the East African Community Common External Tariff (CET) HS Code.e.The Respondent erred in law by acting ultra vires by failing to give proper guidance on the deductions in accordance with the interpretive rules (GIR).f.The Alleged claim of underpayment of excise duty by the Respondent is inaccurate as the item in question was lawfully settled by the Respondent.g.The Respondent erred in fact and in law by out rightly contravening the doctrine of legitimate expectation that rests the presumption on the Commissioner to follow certain procedures in arriving at the tax liability and the benefits that accrue from it.

The Appelant's case 8. The Appellant’s case is premised on the following documents and proceedings before the Tribunal:-a.The Appellant’s Statement of Facts dated 3rd May, 2023 and filed on the May 9, 2023;b.The Appellant’s List and Bundle of documents dated July 24, 2023;c.The Appellant’s Witness statement of Mburu Mungai dated July 5, 2023 and filed on the even date that was admitted in evidence on oath on the July 25, 2023; andd.The Appellant’s Written Submissions dated 31st July, 2023 and filed on the same date.

9. The Appellant stated that it wrote a letter dated 8th August 2018 to the Respondent seeking clarification on the excise duty chargeable for its motor vehicle imports. That this was after the Cabinet Secretary for National Treasuryvide the Finance Act2018 amended the Excise Duty Act 2015 and provided for excise duty for motor vehicles at the rate of 20% and 30%.

10. The Appellant contended that it did not get a formal reply to the aforesaid letter but Respondent on the August 10, 2023 instead issued internal guidelines on HS codes classification on commercial vans including matatus placing them under the HS codes which attract Excise Duty at a rate of 20%.

11. Flowing from the above, the Appellant stated that it proceeded to pay duty for 18 motor vehicles and it was informed that it needed to pay extra taxes of Ksh 18,672,921. 00 because the vehicles were private passenger carrying vans and not commercial vans.

12. The Appellant was of the view that Rule Number 4 of the Rules of Interpretation requires the closer tariff to be applied. That as such, the commercial vans and matatus are more proximate toHS codes 87. 03. 90. 90 and 87. 04. 21. 90 than 87. 03. 33. 90.

13. The Appellant also contended that vide its demand notice dated March 27, 2023, the Respondent erred in law and fact by justifying its classification of the vehicles under subheading 8703. 33. 90 because of the design characteristics that ought to be present in vehicles that fall under the said sub-heading. The Appellant averred that the following features identified in the said letter are not found on Toyota Hiace Vans under considerations. The listed missing features are:-a.There are no permanent seats with safety equipment, e.g. safety belts, other than the driver and loader seats.b.There are no comfort features and interior finish and fittings throughout the vehicle interior associated with passenger areas, e.g. floor carpeting and ashtrays.c.The lack of ventilation as the panel windows available are permanently fixed and they only provide lighting.

14. The Appellant also justified its classification on the premise that unlike private vehicles, the vehicles it had imported, just like any other commercial vehicle required mandatory inspection by the NTSA before registration, and an advance tax is paid toKRA depending on the carrying capacity or tonnage.

15. As such the Appellant submitted that commercial vans and matatus ought to be under tariff 87. 02. 10. 22 for vehicles for carriage of ten but not exceeding fifteen passengers, and under tariff 87. 03. 90. 90 for commercial vans for the transport of less than 10 persons and/or tariff 87. 04. 21. 90 for vans without seats for carriage of goods.

16. The Appellant stated that it had a legitimate expectation that the Respondent would abide by the Policy Guidelines issued by the Commissioner of Customs Policy office and dated 10th August 2018 wherein importers were expected to pay 20% on Excise Duty under tariff 87. 02. 10. 22, 87. 03. 90. 90, 87. 04. 21. 90 as opposed to 30% under tariff 87. 03. 33. 90. It was thus its view that the Respondent's demand notice for tariff arrears of Ksh 18,672,921 went against the grain of this policy and also its legitimate expectation.

17. The Appellant averred that at the time of importation, the Respondent conducted a full verification of the motor vehicles and confirmed that the declared tariff was the correct one from where the Appellant proceeded to pay the duty based on the verification which had been done by the Respondent.

18. The Appellant’s witness clarified during his oral testimony that the tax demanded herein related to units that it imported in 2018 and for which the Appellant had settled the duty owed.

19. It was its view that there was no basis in law to demand additional tax as the failure by the Respondent's Officer to execute his duties at the point of verification as provided in law should not be visited on the Appellant.

Appellant's Prayer 20. By reasons of the foregoing grounds, the Appellant prayed for orders against the Respondent that:a.The Respondent’s review decision dated 14th April 2023 for tax amounting to Ksh 18,672,921. 00 be struck out in its entirety.b.The Respondent’s action to demand additional taxes despite being presented with logical and cogent explanation, be declared arbitrary, capricious, unreasonable, unfair and contrary to the administration of justice and legitimate expectation of the Appellant.c.The Respondent, its employees, agents/other persons purporting to act on his behalf be barred and or stopped from demanding or taking any further steps towards enforcement or recovery of principal tax, penalties and interest on the Respondent’s demand as stipulated above.d.The Honourable Tribunal awards the Appellant the costs of this Appeal.e.The Honorable Tribunal awards any other remedies it deems just and reasonable.

Respondent’s Case 21. The Respondent’s case is premised on the hereunder documents and proceedings before the Tribunal:-a.The Respondent’s Statement of Facts dated and filed on the June 8, 2023. b.The Respondent’s Further Statement of Facts dated and filed on the July 21, 2023;c.The Respondent’s witness statement of Bernard Oyucho dated 5th July, 2023 and filed on the 6th July, 2023 that was admitted in evidence on oath on the 25th July, 2023. d.The Respondent’s written submissions dated the 1st August, 2023 and filed on the 4th August, 2023.

22. The Respondent stated that its issued a demand letter for short levied taxes on the 27th March 2023 because the Appellant had classified Toyota Hiace van under HS code 8702. 10. 20 instead of Hs Code 8703. 33. 90. It justified this classification on the premise that:-a.A Toyota van is a motor vehicle principally designed to transport persons. The Passenger capacity ranges from 3 persons to a maximum of 6 persons at the time of importation.b.Heading 87. 02 covers motor vehicles for the transport of ten or more persons including the driver. At the time of importation Toyota Hiace van has a passenger capacity of three to a maximum of six, therefore it cannot be classified under this heading.c.Heading 87. 03 covers classification of motor cars and motor vehicles principally designed for the transport of persons (other than those of heading 87. 02) including station wagons and racing cars. The subheadings under this heading provides for classification of various motor vehicles depending on the engine capacity and mode of propulsion, wherein diesel or semi diesel motor vehicles are classifiable under subheading 8703. 31. 10 to 8703. 33. 90 while petrol powered vehicles are classifiable under 8703. 90. 90. d.Most of the Appellant’s motor vehicle imports are diesel powered therefore classifiable under subheading 8703. 33. 90. e.The Finance Bills/Acts, 2018, 2019 amended the Excise Duty Act 2015 to increase excise duty on motor vehicles subheadings 8703. 90. 90 and 8703. 24. 90 from 20% to 35%.f.There are no words such as commercial vans “or” matatus in the Excise Duty Act 2015 or the EACCET, 2007. Classification of goods requires examination of the schedule to see if the goods fit prima facie within the language of a tariff heading. The language of the heading being motor vehicles or motor cars.

23. The Respondent’s witness stressed both in its written and oral testimony that Internal Memos from Policy Division are not legally binding. That they are meant for internal communication addressed to specific cadre of officials in the organization and not meant for external consumption by taxpayers.

24. The Respondent posited that according to GIR 1, classification of goods is as presented at the time of importation. That at the time of importation, a Toyota Hiace passenger capacity is usually 3 to 6 and this excludes it from being classified under Heading 87. 02.

25. The Respondent affirmed that it did not contravene the doctrine of legitimate expectations as averred by taxpayer because there cannot be a legitimate expectation against clear provisions of the law or the Constitution, considering that all the legal procedures and administrative fairness were adhered to in conducting the audit.

26. It justified its decision to demand for short levied tax under Sections 235 and 236 of EACMA which gives it powers to call for documents and conduct a PCAon the import and export operations of a taxpayer within a period of five years from the date of importation or exportation.

27. The Respondent stated that based on the photos and other supporting documents provided by the Appellant, it managed to establish that the used motor vehicle in the specified Bill of Lading documents bore the following specifications: Body: van type

Engine Capacity : 2500cc – 2980cc

Make : Toyota Hiace Van/Nissan Carvan

Gross Weight: Less than 5 Tonnes

28. It stated further that other specification of the vehicle included:a.One driver seat and co-driver’s seatb.Two adjacent passenger seats to the driver seat, one of which is foldablec.Seat belts for the front passengers and driverd.A lift up rear door and slide doors on the side of the rear areae.Windows on the side panelsf.Does not have a separation between the front driver/passenger seats and the rear space.

29. The Respondent's witness affirmed that the used motor vehicles were found to be classifiable under Heading 87. 03 that provides for the classification of motor cars and other motor vehicles principally designed for the transport of persons (other than those of Heading 87. 02), including station wagons and racing cars.

30. The Respondent witness further testified that:a.Explanatory Notes to Heading 87. 03 are helpful because it states that certain motor vehicles under that Heading is determined by certain features which indicate that the vehicles are primarily designed for the transport of persons rather than for the transport of goods. That it was guided by these Explanatory Notes in its classification of the Appellant’s vehicles.b.By application of the General Interpretation Rules (GIR) 1 & 6, the used motor vehicles said to be imported through the specified bill of lading were classified under EACCET HS Code 8703. 33. 90, which provides for the classification of motor cars and other motor vehicles principally designed for the transport of persons diesel or semi-diesel driven of a cylinder capacity exceeding 2,500cc.c.According to the World Customs organization (WCO) Harmonized System Compendium of Classification opinions (RAC-COM/MJ3-AS3) June 2013) the used motor vehicle under dispute are classified under Heading 87. 03. d.Heading 87. 03 covers classification of motor cars and motor vehicles principally designed for the transport of persons (other than those of Heading 87. 02) including station wagons and racing cars. The subheadings under this Heading provides for classification of various motor vehicles depending on the engine capacity and mode of propulsion, whether diesel or semi diesel motor vehicles are classifiable under subheading 8703. 31. 10 to 8703. 33. 90 while petrol powered vehicles are classifiable under 8703. 90. 90. Most of the Appellant’s motor vehicle imports are diesel powered therefore classifiable under subheading 8703. 33. 90.

Respondent’s Prayer 31. Based on the foregoing pleadings, documents and submissions the Respondent prayed to the Tribunal to consider and find that:a.The Respondent was justified in demanding Ksh 18,672,921. b.The review decision be upheld.c.The Appellant be found liable to pay the tax due.d.This Appeal be dismissed with costs to the Respondent as the same is without merit.

Issues for Determination 32. The Tribunal having carefully considered the pleadings and submissions made by the parties is of the considered view that the Appeal herein distills into two issues for determination;i.Whether the Respondent erred in re-classifying the Appellant’s Toyota Hiace Van HS code 8703. 33. 90 instead of the Appellant's preferred HSCode 8702. 10. 20; andii.Whether the Respondent was justified in assessing and demanding the additional taxes arising from the reclassification.

Analysis and Findings Whether the Respondent erred in re-classifying the Appellant’s Toyota Hiace Van HS code 8703. 33. 90 instaed of the Appellant's preferred Hs Code 8702. 10. 20; 33. The dispute herein hinges on whether the Respondent was correct in re-classifying the Appellant’s Toyota Hiace van(vehicles) under HS code 8703. 33. 90 instead of the Appellant'S preferred HS Code 8702. 10. 20.

34. The basis of the Respondent’s re-classification of the Appellant’s Toyota Hiace van under Hs code 8703:33:90 as discerned from its documents and pleadings was that:a.They are used to transport passengers and its capacity ranges from 3 persons to a maximum of 6 persons at the time of importation.b.They are designed for transportation of persons and are diesel powered.c.Based on its verification, photos presented by the Appellant and the Bill of Lading, the said vehicles had the following features:i.One driver seat and co-driver’s seatii.Two adjacent passenger seats to the driver seat, one of which is foldableiii.Seat belts for the front passengers and driveriv.A lift up rear door and slide doors on the side of the rear areav.Windows on the side panelsvi.Does not have a separation between the front driver/passenger seats and the rear space.d.The words ‘matatu’ or van’ in the excise Duty Act or the EACCET, 2007 and therefore the words as used by the Appellant in classification of the vehicles were non existent in law.

35. On its part, the Appellant’s case was that:a.Rule Number 4 of the Rules of Interpretation requires the closest tariff to be applied. That as such, the commercial vans and matatus are more proximate to HS codes 87. 03. 90. 90 and 87. 04. 2190 than 87. 03. 33. 90. b.Contrary to the Respondent’s assertion and its demand dated 27th March 2023, the following features identified by the Respondent as crucial in its re-classification affirmation are not found on Toyota Hiace Vans under considerations. The listed missing features are:-i.There are no permanent seats with safety equipment, e.g. safety belts, other than the driver and loader seats.ii.There are no comfort features and interior finish and fittings throughout the vehicle interior associated with passenger areas, e.g. floor carpeting and ashtrays.iii.The lack of ventilation as the panel windows available are permanently fixed and they only provide lighting.

36. The Appellant also averred that it had a legitimate expectation that the Respondent would abide by the Policy Guidelines it issued through the Commissioner of Customs Policy office and dated 10th August 2018 wherein importers were expected to pay 20% on Excise Duty under tariff 87. 02. 10. 22, 87. 03. 90. 90, 87. 04. 21. 90 as opposed to 30% under tariff 87. 03. 33. 90.

37. The parties in this dispute have agreed that Chapter 87 is the applicable heading, they however disagree on the applicable sub-heading.

38. The Appellant prefers a classification under:a.8704:21:90 for vans without seats which reads as follows:87. 04 Motor vehicles for the transport of goods.8704. 21. 90 --- Others 25%--g.v.w. exceeding 5 tonnes but not exceeding 20 tonnesb.8702. 10. 22 for commercial vehicles for the carriage of ten but not exceeding 15 passengers reads as follows:87. 02 Motor vehicles for the transport of ten or more persons, including the driver.8702. 10. 22 For the transport of not more that persons u 25%

39. The Respondent on the other hand preferred Hs code 8703:33:90 for the classification of the vans without seats and the van imported for the transportation of ten or more persons. Its preferred Hs Code reads as follows:87:03 Motor cars and other motor vehicles principally designed for the transport of persons (other than those of heading 87. 02),including station wagons and racing cars.8703. 33. 90 --- Other u 25%

40. The legal regime guiding the HS classification of goods is theEAC/CET Harmonised Commodity Description and Coding System as read together with the World Customs Organization Explanatory Notes. According to the General Interpretative Rule 1 (GIR 1), classification shall be determined according to the terms of the headings and any relative section and chapter notes.

41. The Harmonized Commodity coding system Rules of Interpretation provide as thus: -“When by application of Rule 2 (b) or for any other reason, goods are prima facie, classifiable under two or more headings, classification shall be effected as follows;a.The heading which provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set up for retail sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods.b.Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3(a) shall be classified as if they consisted of the material or component which gives them their essential character, in so far as this criterion is applicable.c.When goods cannot be classified by reference to 3(a) or 3(b), they shall be classified under the Heading which occurs last in the numerical order among those which equally merit consideration.”

42. Based on the foregoing rules of interpretation, from the First Rule “which is of the most specific description,” the Tribunal shall identify the Hs Code which gives a specific description of the vehicles as the right Hs Code.

43. It is agreed between the parties that the Appellant imported vehicles without seats. The said vehicles were verified by the Respondent’s verification officers at the Port of entry and confirmed as such by the Appellant’s witness, Benard Oyucho who had the chance to view the pictures of the vehicle as presented before the Tribunal in a pictorial format. It was clear from the pictures that the vehicles in contention had one seat for the driver, one seat for a passenger and the open back portion that did not have any seats.

44. The Appellant averred that it had imported these vehicles for transport of goods and as commercial Vehicles hence the reason why they were not fitted with any seats at the back. It therefore, proposed that they be classified as motor vehicles for transport of goods under Hs Code 8704:21:90 or as commercial vans under tariff 87. 02. 10. 22 for carriage of ten but not exceeding fifteen passengers, the Respondent preferred HS Code 8703. 33. 90

45. The Tribunal finds and holds that the nature of the vehicles presented before it are best suited for transport of goods or usable as commercial vans or matatus. That is to say, they could not be used for transport of persons other than one passenger accompanying the driver because it did not have any other seats or comfort features that come with private passenger vehicles from where other passengers could seat.

46. Based on the above conclusion, the Tribunal has looked at the Hs codes under contention and has concluded that Hs Codes 87. 02. 10. 22 and 8704. 21. 90 provides a more specific description of the vehicles imported by the Appellant as it refers to motor vehicles for transport of goods and commercial vans unlike Hs Code 8703. 33. 90 which refers to Motor cars and other motor vehicles principally designed for the transport of persons.

47. In light of the foregoing, the Tribunal finds and holds that the Appellant’s Toyota Hiace Vans were incorrectly re-classified by the Respondent to HS code 8703:33:90.

Whether the respondent was justified in assessing and demanding the additional taxes. 48. The Tribunal having made a finding that the Appellant’s subject consignment was incorrectly re-classified under HS code 8703. 33. 90, it logically follows that Respondent’s Review Decision dated 14th April 2023 was not justified in accordance with Section 135 and 249 of EACCMA, 2004.

Final Decision 49. In the upshot, the appeal is upheld and the Tribunal accordingly proceeds to make the following Orders:a.The Appellant‘s Appeal be and is hereby allowed.b.The Respondent’s review decision dated 14th April 2023 be and is hereby set aside.c.Each party bears its own costs.

50. Orders accordingly.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF SEPTEMBER, 2023. ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBERABRAHAM KIPROTICH - MEMBERCYNTHIA MAYAKA - MEMBEREUNICE NG’ANG’A - MEMBERBERNADETTE GITARI - MEMBER