[2024] KETAT 116 (KLR)

Hygrotech East Africa Limited v Commissioner of Customs and Border Control (Tax Appeal 1376 of 2022) [2024] KETAT 116 (KLR) (2 February 2024) (Judgment)

Neutral citation: [2024] KETAT 116 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1376 of 2022

RM Mutuma, Chair, EN Njeru, M Makau, BK Terer & W Ongeti, Members

February 2, 2024

Between

Hygrotech East Africa Limited

Appellant

and

Commissioner of Customs and Border Control

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act of the laws of Kenya, and is engaged in the business of sale of agricultural inputs, vegetable seeds, foliar range and the provision of related agricultural services such as technical advisory, research and development of various plant chemicals and nutritional products.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, and the Kenya Revenue Authority is mandated with the responsibility of assessing, collecting, receipting and accounting of all the tax revenue as an agent of the Government of the Republic of Kenya. The Respondent is also mandated with the responsibility of the administration and enforcement of all the statutes set out under the Schedule to the Act.

3. The dispute giving rise to the Appeal herein arose following a customs post-clearance audit of the Appellant’s imports for the period 2017 to 2022, upon which the Respondent issued a demand notice to the Appellant dated 5th August 2022 demanding VAT in the sum of Kshs. 4,367,057. 88 as due from the Appellant.

4. The basis of the Respondent’s assessment was that the Appellant had wrongly classified the DK-20norganic fertilizer imports under HS Tariff Code 3101. 00. 00 which does not attract VAT, as opposed to the Respondent’s proposed HS Tariff Code 3808. 93. 90, which attracts VAT.

5. The Appellant lodged its application for review on 2nd September 2022 in line with the provisions of Section 229 of the East African Community Customs Management Act, 2004 (EACCMA) objecting to the reclassification and assessment and seeking a review thereof by the Respondent.

6. The Respondent rendered its review decision vide its letter dated 26th September 2022, and communicated its review decision amending the applicable HS Code from 3808. 93. 90 to 3824. 99. 90 on the basis of a further review, and confirmed its VAT assessment and demand of Kshs. 4,367,057. 88.

7. The Appellant being dissatisfied with the Respondent’s review decision lodged its Notice of Appeal with the Tribunal on 25th October 2022.

The Appeal 8. The Appellant filed its Memorandum of Appeal dated 8th November 2022 on 15th November 2022 and set out the following grounds of appeal:-i.That the Respondent erred in law and fact by classifying DK-20 as a plant growth enhancer contrary to the General Rules of Interpretation (GIRs).ii.That the Respondent erred in law and fact in disregarding the classification of DK-20 as an organic fertilizer by the Kenya Plant Health Inspectorate Service (KEPHIS).iii.That the Respondent erred in law and fact in its classification of DK-20 under HS Code 3808. 93. 90 for purposes of imposing VAT.iv.That the Respondent erred in law and fact in failing to appreciate and recognize the organic nature of DK-20 and its main components as being soil microbes.v.That the Respondent erred in law and fact by disregarding the Appellant’s legitimate expectation stemming from the Respondent’s practice of classifying DK-20 under HS Code 3101. 00. 00. vi.That the Respondent erred in law and fact in notifying the Appellant and applying at least two different HS Codes for DK-20 at various points, which is clear evidence of lack of a consistent and clear HS Tariff Code classification basis.vii.That the Respondent erred in law and fact by failing to appreciate international standards on the treatment of fertilizer such as DK-20 and further erred in deviating from such international standards without any cogent justifications and reasons.viii.Without prejudice to the above grounds, the Respondent erred in law and fact by failing to acknowledge the implicit admission of the lack of specificity of the applicable HS tariff code for DK-20.

The Appellant’s Case 9. The Appellant has set out its case on its;a.Statement of Facts dated 8th November 2022 and filed on 15th November 2022 together with the documents annexed thereto;b.Witness statement of Dr Kwa Siew Hwa dated and signed on 25th July 2023 and filed on the 26th July 2023, that was admitted in evidence under oath on the 28th September, 2023c.Written submissions dated and filed on the 27th June 2023; andd.Supplementary Submissions dated and filed on 12th October 2023.

10. The Appellant stated that following a customs post-clearance audit of its imports for the periods 2017 to 2022, the Respondent issued a demand notice dated 5th August 2022 demanding a sum of Kshs. 4,367,057. 88 in VAT taxes.

11. The Appellant stated that the Respondent indicated the primary basis of the assessment was that the Appellant’s imports of DK-20 organic biofertilizer had been wrongly classified under Tariff Code 3101. 00. 00, which does not attract VAT, instead of HS Code 3808. 93. 90, which attracts VAT.

12. The Appellant sought a review of the said classification decision vide its letter dated 2nd September 2022 in line with the provisions of Section 229 of EACCMA, 2004.

13. The Respondent issued its review decision on 26th September 2022, and amended the earlier classification from tariff HS Code 3808. 93. 90 to HS Code 3824. 99. 90 on the basis of a further review, and thereby confirmed its VAT assessment and demand of Kshs. 4,367,057. 88.

14. The Appellant stated that the product DK-20 is not a plant growth regulator as purported by the Respondent, and that in confirming its assessment, the Respondent reclassified DK-20 under HS Code 3824. 99. 90. It further added that HS Tariff Heading 38. 24 relates to;“prepared binders for foundry moulds or cores; chemical products and preparations of the chemical or allied industries (including those consisting of mixtures of natural products) not elsewhere specified or included.”

15. The Appellant also stated that DK-20, an organic fertilizer, does not fall within HS Tariff Code 3824. 99. 90 as it is an organic biofertilizer that does not have any chemicals or mixture of chemicals with natural products it is purely organic. Accordingly, it is a grave misclassification by the Respondent to consider and classify the DK-20 organic biofertilizer under HS Code 3824,99. 90.

16. The Appellant further stated that Chapter 38 of the Structure of the Eat African Community Common External Tariff (EAC/CET) provides for – “Miscellaneous chemical products.” and that, Rule 1 of GIRs provides that Chapters are for ease of reference whereas headings take preference, it is the Appellant’s assertion that DK-20 does not fall within the Chapter or the Heading employed and relied upon by the Respondent.

17. The Appellant further stated that DK-20 as an organic fertilizer is free of chemicals. Consequently, it is not possible to place the DK-20 organic biofertilizer within HS Code 3824. 99. 90 as alleged by the Respondent. It further stated that the DK-20 organic biofertilizer has greater qualities as a fertilizer under HS Code 3101. 00. 00 than it does under the HS codes employed and relied on by the Respondent.

18. The Appellant also stated that its product DL-20 was classified by KEPHIS as an organic fertilizer.

19. The Respondent failed to consider the classification of DK-20 as an organic fertilizer by KEPHIS (Kenya Plant Health Inspectorate Service) which is a statutory body established under the KEPHIS Act (No.12 of 2012) and charged with the responsibility of assessing, reviewing, testing and licensing of produce and agricultural inputs including fertilizers for use in Kenya, the Appellant stated.

20. The Appellant further stated that in a letter dated 28th October 2020, the said KEPHIS confirmed that DK-20 is an organic metabolite from soil microbes and is to be classified as an organic fertilizer that enhances direct absorption of plant nutrients.

21. The Appellant also stated that Section 5 (e) of KEPHIS Act provides that KEPHIS is the principal advisor to the Government “on issues relating to seeds, and planting material,” and as a planting material, DK-20 organic biofertilizer falls squarely within the regulatory mandate of KEPHIS. It is therefore the mandate of KEPHIS to ascertain the qualities and composition of planting material such as organic biofertilizers and to advise the Government, including the Respondent, on the classification of such plant material, the Appellant asserted.

22. The Appellant asserted that the Respondent erred in law and fact in failing to appreciate and be bound by the KEPHIS classification of DK-20 organic biofertilizer as an organic fertilizer, and not a plant growth stimulant as purported by the Respondent.

23. The Appellant submitted that its imported product DK-20 falls within tariff HS Code 3101. 00. 00. under which it contended that it had correctly classified its product, which is an organic fertilizer that consists of metabolites derived from culture soil microbes produced from native soil bacteria.

24. The Appellant also submitted that HS Tariff 3101. 00. covers:“animal or vegetable fertilizers, whether or not mixed together or chemically treated; fertilizers produced by the mixing or chemical treatment of animal or vegetable products.”

25. The Appellant averred that DK-20 organic biofertilizer contains plant and animal matter released into the soil, as a result of which the DK-20 organic biofertilizer contains byproducts of animal and plant matter that makes the biofertilizer active, and it is not possible to have DK-20 organic biofertilizer without soil microbes that allow it to function as an organic fertilizer.

26. The Appellant also averred that the classification of DK -20 organic biofertilizer is supported by the manufacturer’s chief scientist in a letter dated 25th November 2020, as a plant fertilizer that contains animal and plant products. The manufacturer of DK-20 has further acknowledged that there are no chemical components in DK-20 as it is made through fermentation of native soil bacteria and is therefore a biofertilizer on the basis that it is made from native bacteria which have a biological source.

27. The Appellant stated that it presented an expert witness, Dr Kwa Siew Hwa, the product manufacturer’s chief scientist and General Manager. The witness testified virtually during the hearing and testified that she worked with the manufacturer of DK-20 as the Chief Scientist as was well acquainted with the process of its manufacture, composition and usage.

28. The witness averred that DK-20 is an organic metabolite from soil microbes processed for application as a biofertilizer to crops. She averred that the classification as a bio-fertilizer follows both the normal definition of how a fertilizer acts upon crops and follows the definition of a biofertilizer under definitions by IFOAM (International Federation of Organic Agriculture Movements) as;“microbiological preparations based on naturally occurring organisms.”

29. The Witness further testified as the product manufacturer, rather than rely on its own classification of the product, it sought the classification of the local regulatory body, KEPHIS, who undertook tests on the product efficacy on crops, and at the end of the trials approved the product for use in Kenya as a biofertilizer, and advised its customers to import the product under Customs Tariff 3101. 00. 00, a classification under;“fertilizers produced by the mixing or chemical treatment of animal or vegetable products.”

30. On cross – examination, the witness testified that the DK-20 product was not a plant growth regulator as suggested by the Respondent, as plant growth regulators are hormonal products which change the nature of growth aspects of a plant, and there are no growth regulators in the product DK-20.

31. The witness also rebutted the Respondent’s contention that DK-20 is not a fertilizer but rather is a growth regulator (bio-stimulant), suggesting that it should fall under classification Tariff 3824. 99. 90 for;“micronutrient preparations which applied to seeds, to foliage, or to soil to assist in seed germination or plant growth. They may contain small amounts of fertilizing elements nitrogen, phosphorous and potassium but not as essential constituents.”

32. The witness also averred that the product is not a micronutrient preparation, and does not contain micro-nutrients, except perhaps in trace elements as may be found in any sample of water, which cannot fit in the classification.

33. The Appellant further averred that the manufacturer’s classification without more, justifies the Appellant’s classification of DK-20 organic biofertilizer as a fertilizer within HS Code 3101. 00. 00. It contended that the Respondent’s insistence on reclassifying the DK-20 organic biofertilizer lacks a valid basis as it fails to account for the organic nature of DK-20 organic fertilizer.

34. The Appellant also stated that the Respondent failed to appreciate and recognize the organic nature of DK-20 and its main components contending that the Respondent merely conducted a desk review audit of DK-20 organic fertilizer, without conducting tests to ascertain the main components that make up DK-20 organic fertilizer.

35. The Appellant further stated that the Respondent deliberately ignored tests conducted by the manufacturer of the product and KEPHIS in its analysis of DK-20 fertilizer. Whereas the KEPHIS tests support the Appellant’s assertion that DK-20 organic biofertilizer is an organic fertilizer, the Respondent failed to appreciate the same on the basis that it had conducted a desk review of the product.

36. The Appellant stated that it is unfair and unjust for the Respondent to ignore laboratory tests that clearly show that DK-20 is an organic biofertilizer, with no chemical components added to it. The Respondent failed to disclose to the Appellants the grounds, if any, under which it is reclassifying DK-20 under HS Tariff Code 3824. 99. 90.

37. The Appellant also contended that it had a legitimate expectation stemming from the Respondent’s practice of classifying DK-20 under HS Code 3101. 00. 00 as it had been importing DK-20 organic biofertilizer under HS Code 3101. 00. 00 since the year 2017, and continued to avail all relevant importation documents to the Respondent and customs officers for purposes of clearing of the imported DK-20 organic biofertilizers.

38. The Appellant contended that arising from this practice, and with no evidence to the contrary or cogent basis for her departure, the Appellant has a legitimate expectation that the classification of DK-20 organic fertilizer for importation purposes is correct.

39. The Appellant cited the case of Keroche Industries Ltd vs. Kenya Revenue Authority & 5 others [2007], where it was stated that;“where a client has submitted all relevant documents to KRA and has been cleared each time over a long period of time, this gives rise to legitimate expectation that such classification is correct.”

40. The Appellant contended that it has continuously availed all documents to the Respondent and has had its DK-20 organic biofertilizer consignments repeatedly cleared, and it was therefore unfair and unjust for the Respondent to issue a demand letter that has a retroactive effect and which changes the HS Tariff Code of the same product, to the detriment of the Appellant.

41. The Appellant cited the case of Solutions Medical Systems Ltd vs. Commissioner of Customs and Border Control TAT Appeal No. 472 of 2020, where it was stated,“it is unreasonable and unfair for KRA to demand taxes for previous years, especially when the taxman has had access to all the taxpayer’s relevant documents.”

42. The Appellant also contended that there will be miscarriage of justice for the Respondent to be allowed to backtrack on its past HS Code classifications for the DK-20 organic biofertilizer as the Appellant had a legitimate expectation that the DK-20 organic biofertilizer had been correctly classified. The Appellant cited the case of Kenya Revenue Authority vs. Universal Corporation Ltd [2020] CA No. 150 of 2018, where it was stated that the Respondent can conduct a post clearance audit, and this must be done in a timely manner and without prejudice to the client.

43. The Appellant submitted that in the instant case, the Respondent acted in gross prejudice to the Appellant, as there was a legitimate expectation that the classification of DK-20 organic biofertilizer under HS Code 3101. 00. 00 was correct, and in the case that it was not, the Respondent ought to have raised the issue in a timely manner and in line with the World Trade Organization Trade Facilitation Agreement, 2013, to which Kenya is a signatory.

44. The Appellant submitted that it would be greatly prejudiced and burdened in the execution of its business if the Respondent was allowed to arbitrary go against its own actions, as this would create an adverse and uncertain business environment, particularly considering that the Appellant sold the DK-20 organic biofertilizer based on the declared HS Tariff Code.

45. The Appellant also submitted that the Respondent applied different HS Codes for DK-20 at various points, indicating a lack of a consistent and clear HS Tariff Code classification basis.

46. It averred that the Respondent has on different occasions directed the Appellant to apply at least two varying and conflicting HS Tariff Codes. In its letter dated 11th March 2020, the Respondent classified DK-20 organic biofertilizer under HS Code 3824. 99. 90. Further, in its letter dated 5th August 2022, the Respondent again classified the said product under tariff HS Code 3808. 93. 90, while in the impugned review decision, the Respondent has classified the said product under HS 3824. 99. 90.

47. The Appellant asserted that from the foregoing the Respondent is not certain as to the proper classification of DK-20 organic biofertilizer, adding that the Respondent has been irresolute and indecisive, evidencing the fact that the Respondent acted arbitrarily without any test results to guide it on the specific components forming DK-20 organic biofertilizers, and its subsequent classification.

48. It was the submission of the Appellant that it was unreasonable and unjust for the Respondent to provide conflicting HS Tariff Codes, as the Respondent is by dint of doing so unfairly and unjustifiably trying to impose VAT on the Appellant without clear reasons for its actions, hence an arbitrary use of power which constitutes abuse of power by the Respondent.

49. The Appellant submitted that it would be commercially unsustainable and prejudicial for the Respondent to arbitrary apply conflicting HS tariff codes without any justification as it goes against the tenets of taxation that a tax ought to be imposed on clear words and not intendment or implication and cited the cases of Keroche Industries ltd vs. Kenya Revenue Authority & 5 others, and Cape Brandy Syndicate vs. Inland Revenue Commissioners.

50. The Appellant further submitted that without prejudice to the foregoing, the Respondent has implicitly admitted to the lack of specificity of the applicable HS Code.

51. The Appellant also submitted that the Respondent has failed to appreciate international standards. It stated that it is widely accepted that fertilizers will generally be fall within Chapter 31 of EAC/CET titled “Fertilizers” as HS Tariff Code 3101. 00. 00 “fertilizers produced by the mixing of animal or vegetable products”. The Respondent deviated from the said classification without a justifiable reason, while it was clear from the facts presented that the product is an organic biofertilizer that is free of chemicals and consists of metabolites from soil culture.

52. The Appellant submitted that in determining the appropriate classification of a product , reference to the intended use of the product should be the guiding factor in line with the holding in the cases of R vs. Commissioner General & Anor Ex-parte AWAL Ltd [2018] eKLR, Enkais Flowers Growers Ltd vs. Kenya Revenue Authority [2010] eKLR, and Commissioner of Customs and Excise vs. Export Trading Company Ltd [2019] eKLR, in which the courts have not only placed importance on the specific descriptions of the products but also the ultimate intended usage of the product as the basis of determining their Tariff Codes.

53. The Appellant also submitted that the components of DK-20 as a fertilizer fell well within the definitions covered by Tariff Code 3101 pursuant to GIRs 1, 2, 3 & 6. It added that it was clear that DK-20 as a biofertilizer qualifies under Chapter 31 Tariff Code 3101 and not Chapter 38 Tariff Code 3824. 99. 90 as contended by the Respondent.

54. The Appellant further submitted that in the Puratos Canada Inc case a practice was well established that consideration must be made on the terms of the headings in line with GIR 1 on whether the product in question fits the heading. Accordingly, for reclassification by the Respondent to be proper and in accordance with the GIRs, the Appellant’s product DK-20 should have similar characteristics as those under Tariff Heading 38. 24.

55. The Appellant submitted that GIR Rule 1 states: -“classification shall be determined according to the terms of the headings and any relative section or chapter notes and, provided such headings or notes do not otherwise require.”

56. That where a product is not classified in accordance with Rule 1, the Rule 2 applies as follows: -“Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances. Any reference to goods of a given material or substances shall be taken to include a reference to goods consisting wholly or partly of such material or substance.”

57. That further where the product is neither classifiable pursuant to Rule 1 or Rule 2, the application of Rule 3 is preferred. Rule 3 provides: -“mixtures, composite goods consisting of different materials, and goods put up in sets for retail sale, which cannot 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.”

58. It was a further submission of the Appellant that given the components of the product DK-20, and given the product is a mixture of various substances, the proper classification should rely on Rule 2 (b) and/or Rule 3 (b).

59. The Appellant relied on the case of, TAT Appeal No. 160 of 2010 Lachlan Kenya Ltd vs. Commissioner of Customs and Border Control, to buttress this submission.

60. The Appellant also submitted that EAC/CET Tariff Heading 38. 24 deals with goods such as;“Cultured crystals, fossil oils, Dipple’s oil, ink removers, stencil correctors, ceramic firing testers, binders for foundry mounds, or cores and chemical products and preparations of the chemicals or allied industries (including those consisting of mixtures of natural products) not else specified or included.”

61. The Appellant submitted that given the foregoing class of products listed under the heading, it is clear that its product DK-20 does not qualify under this heading as it is not a chemical product neither is it used in the preparation of chemicals or allied industries, as defined in the Food, Drugs and Chemical Substances Act Cap 254 of the laws of Kenya.

62. It was a further submission of the Appellant that it was manifestly clear that its product, DK-20, cannot be classified alongside the products listed under Chapter 38, and specifically Tariff Code 3824. 99. 90, as the product lacks the functions and characteristics of the products falling under the broad Heading 38. 24 or Chapter 38, whether that be 38. 24 or 38. 08 as contended by the Respondent.

63. The Appellant submitted that the Respondent to reclassify DK-20 organic biofertilizer are therefore unjustified and ought to be declared null and void, for lack of proper reason and a clear violation of internationally accepted standards in the treatment of fertilizer.

64. The Appellant in closing submitted that, from the foregoing submissions and averments, the Respondent’s review decision does not proffer a good or sufficient reason for re-classifying the Appellant’s product DK-20, under Tariff Code 3824. 99. 90, or 3808. 93. 90, and that the proper classification for the product DK-20 is 3101. 00. 00.

The Appellant’s Prayers 65. By reason of the foregoing, the Appellant prayed that the;a.Respondent’s review decision dated 26th September 2022;b.Consequential demand for Kshs. 4,367,057. 88 be set aside; andc.Appeal herein be allowed with costs.

The Respondent’s Case 66. The Respondent has set out its case on its;a.Statement of Facts dated and filed on 9th December 2022,b.Witness statement of Dennis Kabiru dated and signed on 25th July 2023, filed on 26th July 2023, that was admitted in evidence under oath on 28th September, 2023c.Written submissions dated 23rd October 2023 and filed on 27th October 2023.

67. The Respondent stated that the dispute herein arose as a result of a demand for additional VAT taxes that had been assessed on incorrect tariff classification of DK-20 organic plant growth stimulant which was incorrectly classified under the general HS Code 3101. 00. 00 which is for fertilizers that attracted no duties or VAT instead of 3808. 93. 90 that attracts VAT at 16%.

68. The Respondent further stated that upon consideration of the Appellant’s review application, the product was reclassified to Tariff Code 3824. 99. 90 which attracts VAT at 16%.

69. The Appellant being dissatisfied with the decision of the Respondent filed the Appeal herein.

70. The Respondent stated that the Customs Post Clearance Audit team conducted a desk review of customs entries of importers products classified under Chapter 31 for the period 2017 to 2022 pursuant to Sections 235 and 236 of EACCMA.

71. The Respondent further stated that examination of the entries revealed that most of the importers were classifying plant growth stimulators and enhancers under Chapter 31, and among the importers profiled was the Appellant.

72. It stated that the General Interpretative Rules (GIRs) as cited in the EAC/CET govern the classification of goods, which is determined according to the terms of the headings and any relative section or chapter notes.

73. It further stated that the Harmonized Commodity Description and Coding System Explanatory Notes constitute the official interpretation of the Common External Tariff and provide the scope of each heading under the EAC/CET.

74. The Respondent submitted that the HS Rules of General Interpretation provide as follows;“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 resale 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, insofar 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 numerical order among those which equally merit consideration.”

75. The Respondent submitted that from the first rule, which gives provision for most specific description, the most specific description can only be found from the scientific analysis of the product or the physical analysis of the product.

76. The Respondent stated that Tariff Code 3101. 00. 00 covers;“animal or vegetable fertilizers, whether or not mixed together or chemically treated; fertilizers produced by the mixing or chemical treatment of animal or vegetable products.”

77. The Respondent also stated that Tariff Code 3808. 93. 90 covers;“other herbicides, anti-sprouting products and plant growth regulators.”

78. It also stated that Tariff Code 3808. 99. 90 covers;“prepared binders for foundry mounds or cores, chemical products and preparations of the chemical or allied industries (including those consisting of mixtures of natural products) not elsewhere specified or included.”

79. The Respondent stated that it reclassified the Appellant’s product to Tariff Code 3824. 99. 90 vide its review decision dated 26th September 2022 and stated the reasons for the decision.

80. It submitted that Heading 38. 24 covers the classification of chemical products and preparations of chemical or allied industries (including those consisting of mixtures, of natural products) not elsewhere specified or included.

81. The Respondent called a witness, Mr. Dennis Kabiru, a Customs officer who testified that the Respondent reclassified the Appellant’s imported product DK-20 to Tariff Code 3824. 99. 90 after considering that the product was not a plant growth regulator under Tariff 3808. 93. 90, but instead the product was a bio -stimulant that acts as a physiological trigger for plant growth and development.

82. The Respondent stated that the General Interpretative Rules (GIR) as cited in the EAC/CET govern classification of goods. According to GIR 1, classification shall be determined according to the terms of the headings and any relative section or chapter notes and, provided the headings the headings or chapter notes do not require otherwise, according to GIR 2 through to GIR 6.

83. The Respondent further stated that the Harmonized Commodity Description and Coding System Explanatory Notes constitute the official interpretation of the Common External Tariff, and provide the scope of each heading under the EAC/CET.

84. The Respondent also submitted that DK-20 is not a fertilizer but rather it is a plant growth stimulator (bio stimulant) that acts as a physiological trigger for plant growth and development in roses, rice, and other crops. The stimulation increases the plant’s metabolic efficiency, positively influencing its cell and tissue development, thereby maximizing the plant’s innate potential.

85. The Respondent further submitted that the WCO Explanatory Notes to Chapter 31 exclude, “micro-nutrient preparations which are applied to seeds, to foliage or to soil to assist in seed germination and plant growth”. They may contain small amounts of the fertilizing elements, nitrogen, phosphorous, and potassium, but not as essential constituents.

86. The Respondent stated that in accordance with GIR 1 and the Explanatory Notes, the product is classified under Tariff Code 3824. 99. 90.

87. The Respondent stated that it did not err in disregarding the classification of DK-20 as an organic fertilizer by KEPHIS. It stated that KEPHIS responsibility is to assure the quality of agricultural inputs and produce, to prevent adverse impacts on the economy, the environment, and human health.

88. It further submitted that the GIRs as cited in the EAC/CET govern tariff classification, and asserted that it is not KEPHIS mandate to classify products that are imported into the Country.

89. The Respondent averred that it erred in classifying the product under Tariff 3808. 93. 90, but upon review of the Appellant’s review objection, the product was reclassified to the correct Tariff Code 3824. 99. 90.

90. The Respondent also averred that it did not err by disregarding the Appellant’s legitimate expectation stemming from the Respondent’s practice of classifying DK-20 under HS Tariff Code 3101. 00. 00.

91. It submitted that the PCA mandate is anchored in Section 235 and 236 of EACCMA, 2004, which allows the Respondent to be satisfied beyond reasonable doubt of the compliance with all customs laws and regulations for imports and exports. In the instant Appeal, the PCA checked retrospectively the importations of the importer as guided by the law. It added that the mandate is also under the WTO TFA Article 7 on clearance of goods, which allows Customs authorities to set up PCA.

92. Further, the Respondent averred that the Respondent operates on a self-declaration regime whereby, taxpayers make self-declarations and assessments and pays taxes on items they import or through their agents. The same also creates a legitimate expectation that the taxpayer will make correct declarations and pay the correct taxes.

93. It stated that in the event that a taxpayer defaults on this expectation, the law under Sections 235, 236, 135 and 249 of EACCMA 2004, allows the Respondent, within five years of importation, to assess and demand for the short-levied taxes.

94. The Respondent averred that the assessment was made under the aforementioned Sections of the law and within the five-year window provided by the law.

95. The Respondent also submitted that it did not err or fail to appreciate the International standards on the treatment of fertilizer such as DK-20, and did not deviate from such International standards without justification and reasons as contended by the Appellant.

96. It was the Respondent’s submission that the GIRs in the EAC/CET govern the tariff classification of goods, and a constructionist approach ought to be applied in the interpretation of tax statutes. As such, exhaustive provisions of the Section, Chapter, Subheading and Explanatory Notes should be considered.

97. The Respondent further submitted that the basis of reclassification, and the applicable Explanatory Notes, were clearly stated in the demand notice as well as in the Respondent’s review decision.

Respondent’s Prayers 98. By reason of the foregoing, the Respondent prayed that;a.Its review decision dated 26th September 2022 be allowed.b.The consequential demand be upheld.c.The Appeal herein be dismissed with costs.

Issues For Determination 99. The Tribunal having carefully considered the filings of the parties, the witness testimony, and the submissions made is of the considered view that the Appeal herein distils into two issues which commend for determination;i.Whether the Appellant ‘s right to legitimate expectation was breached by the Respondent in the reclassification of its imported product DK-20. ii.Whether the Respondent was justified in reclassifying the Appellant ‘s imported product from Tariff HS Code 3001. 00. 00 to Tariff HS Code 3824. 99. 90. Analysis And Determinationi.Whether the Appellant’s right to legitimate expectation was breached by the Respondent in the reclassification of its imported product DK-2.

100. The dispute herein arose as a result of a demand for additional VAT taxes that had been assessed on the Appellant by the Respondent on the basis of incorrect classification of DK-20 product, which was allegedly incorrectly classified under HS Code 3101. 00. 00 instead of HS Code 3924. 99. 90.

101. The aforesaid assessment and demand had been occasioned when the Respondent’s Customs Post Clearance Audit team conducted a desk review of customs entries of importers products classified under Chapter 31 for the period 2017 to 2022, pursuant to Sections 235 and 236 of EACCMA.

102. The Appellant submitted that it had a legitimate expectation stemming from the Appellant’s practice of classifying DK-20 under HS Code 3101. 00. 00, as it had been importing DK-20 biofertilizer under HS Code 3101. 00. 00 since the year 2017, and continued to avail all the relevant documents to the Respondent for purposes of clearing the DK-20 product, and it was always cleared under the aforesaid Code.

103. The Appellant further submitted that arising from the foregoing practice, and without evidence to the contrary or cogent basis for departure, the Appellant had a legitimate expectation that the classification of DK-20 organic fertilizer for importation purposes is correct. To buttress its submission the Appellant cited the case of Keroche Industries Ltd vs. Kenya Revenue Authority & 5 others [2007], where it was stated that;“where a client has submitted all the relevant documents to KRA and has been cleared each time over a long period of time, this gives rise to legitimate expectation that such classification is correct.”

104. The Appellant therefore contended that it has continuously availed all documents to the Respondent and has had its DK-20 organic fertilizer consignments repeatedly cleared and it would therefore be unfair and unjust for the Respondent to reclassify and issue a demand letter that has a retroactive effect, and which changes the HS Tariff Code of the same product, to its detriment.

105. The Appellant also submitted that there will be miscarriage of justice if the Respondent is allowed to backtrack on its past HS Code classifications for DK-20 organic fertilizer as the Appellant had a legitimate expectation that the said product had been correctly classified. The Appellant cited the case of Kenya Revenue Authority vs. Universal Corporation Ltd (2020) CA 150/ 2018, where it was stated that the Commissioner can conduct post clearance audit, and the said audit must be conducted in a timely manner and without prejudice to the client.

106. The Appellant further submitted that it would be greatly prejudiced and burdened in the execution of its business if the Respondent was allowed to arbitrarily go against its own actions, as this would create an uncertain and adverse business environment, and it should therefore not be allowed to breach the Appellant’s right to legitimate expectation.

107. On the other hand, the Respondent submitted that it did not err by disregarding the Appellant ‘s practice of classifying its product DK-20 under Tariff Code HS 3101. 00. 00, as this did not give rise to legitimate expectation.

108. The Respondent submitted that its mandate to conduct post clearance audit is anchored in Sections 235 and 236 of EACCMA, 2004, which allows the Respondent to be satisfied beyond reasonable doubt of the compliance with all customs laws and regulations for imports and exports. It added that the mandate is also provided under the World Trade Organization’s Trade Facilitation Agreement Article 7 on clearance of goods, which allows customs authorities to set up Post Clearance Audit framework.

109. The Respondent further submitted that in the instant Appeal, the post clearance audit checked retrospectively the importations of the Appellant as guided by the law, as the Respondent operates on a self-declaratory regime, whereby a taxpayer makes self-declarations and assessments and pays on items they imported, thus on the converse creating a legitimate expectation that the taxpayer will make correct declarations and pay the correct taxes.

110. It was also a submission of the Respondent that, in the event that a taxpayer defaults on this expectation, the law under Sections 135, 235, 236 & 249 of EACCMA, 2004, allows the Respondent, within five years of importation, to assess and demand for the short-levied taxes.

111. The Respondent therefore submitted that the reclassification and assessment on the Appellant was conducted by the Respondent under the aforementioned Sections of the law, and within the five-year window as provided by the law, thus there was no right to legitimate expectation accrued to the Appellant, nor breached.

112. The Tribunal has carefully reviewed the arguments made by both parties for and against the claim for breach of the right to legitimate expectation, and note the principles on establishment of the right to legitimate expectation are well set out by the Supreme Court in the case of Communications Authority of Kenya & 5 others vs. Royal Media Services & 5 others SC Pet, No. 14 of 2014, where the court held that;“There must be express, clear, unambiguous promise given by a public authority; the expectation itself must be reasonable; the representation must be one which was competent and lawful for the decision maker to make; and there cannot be a legitimate expectation against clear provisions of the law or the Constitution.”

113. In the Case of Oindi Zaippeline & 39 others vs. Karatina University & Anor [2015] eKLR, the court stated;“Legitimate expectation applies the principles of fairness and reasonableness, to the situation in which a person has a legitimate expectation, or interest in a public body retaining a long-standing practice, or keeping a promise. An instance of legitimate expectation would arise when a body, by representation or by past practice, has aroused an expectation that is within its power to fulfill a promise.”

114. The Appellant has contended that the practice of importing and declaring its product DK-20 over some period of time and declaring it under Tariff Code 3101. 00. 00 created a legitimate expectation that the product will in future continue to be imported and declared under the said tariff.

115. The Tribunal notes that the Respondent is mandated under Sections 235 & 236 of EACCMA, 2004, to conduct post clearance audit within a period of five-years, and seek documents to verify the correctness of the declarations made and taxes paid. Further the Country’s system of tax declarations and returns is one of self-assessment and returns whereon the taxpayer is expected to self-assess, declare and pay the correct taxes.

116. The Tribunal therefore applying the principles set out in the Communications Authority of Kenya vs. Royal Media case is of the view that the Respondent was within its right to conduct the post clearance audit within the five years period provided for under the law, and as such there cannot be a legitimate expectation against the clear provisions of the law. In this regard there was no clear, express, unambiguous, promise given by the Respondent, a public body, to the Appellant, which representation would have been competent and lawful for the Respondent to make given the clear provisions of the law.

117. The Tribunal further observes that the Appellant has not made any assertion or contention that the said post clearance audit was conducted outside the statutory period of five years, which would then have changed the facts of the case.

118. Be that as it may, the Tribunal concludes that the Appellant has failed to demonstrate its claim to a right to legitimate expectation and how such right was breached, and consequently its claim fails.

119. In light of the foregoing, the Tribunal finds and holds that the Respondent did not breach any right to legitimate expectation in the reclassification of the imported product DK-20 as contended by the Appellant.ii.Whether the Appellant was justified in reclassifying the Appellant’s imported product DK-20 from Tariff Code 3101. 00. 00 to Tariff Code 3824. 99. 90.

120. The Respondent reclassified the Appellant’s product DK-20 from Tariff HS Code 3101. 00. 00 to HS Code 3824. 99. 90 on the basis that it was plant growth regulator.

121. The Appellant contended that DK-20 product, is an organic fertilizer and does not fall within Tariff Code 3824. 99. 90 as it is an organic biofertilizer that does not have any chemicals or mixture of chemicals with natural products, being purely organic, and asserted that the Respondent erred in reclassifying the product under HS Code 3824. 99. 90.

122. It is noteworthy that the Chapter 38 of the EAC/CET tariff classification relates to;“Miscellaneous chemical products.”

123. While the tariff heading preferred by the Respondent, 38. 24, relates to;“prepared binders for foundry moulds or cores; chemical products and preparations of the chemical or allied industries (including those consisting of mixtures of natural products) not elsewhere specified or included.”

124. The Appellant averred that the product DK-20 as an organic fertilizer is free of chemicals and it is not feasible to classify the organic fertilizer within HS Code 3824. 99. 90 as contended by the Respondent.

125. The Appellant also averred that in a letter dated 28th October 2020, the Kenya Plant Inspectorate Service (KEPHIS), upon testing and analyzing the efficacy of the product, confirmed the same as an organic metabolite from soil microbes classifiable as an organic fertilizer that enhances the absorption of plant nutrients.

126. The Appellant submitted that KEPHIS as established under the KEPHIS Act No.12 of 2012, is the statutory body mandated with the responsibility of assessing, reviewing, testing and licensing of agricultural produce and inputs, including fertilizers for use in Kenya, and further under Section 5 of the KEPHIS Act, is the principal advisor to the Government and its agencies (including the Respondent) on issues relating to agricultural seeds, produce, and planting inputs material, and as a planting input material, DK-20 organic fertilizer falls squarely within the regulatory mandate of KEPHIS.

127. The Appellant further submitted that it is the mandate of KEPHIS to test, evaluate, analyze, and ascertain the quality and composition of planting materials and inputs such as fertilizer, and advise the Government, including the Respondent on such classification or categorization of such plant materials and inputs.

128. The Appellant submitted that the Respondent erred by failing to consider or ignoring the analysis and categorization by KEPHIS of DK-20 as an organic fertilizer while undertaking its customs tariff classification.

129. The Appellant further called an expert witness, Dr Kwa Siew Hwa, who is the product manufacturer ‘s Chief Scientist based in Singapore. The witness gave her evidence virtually and testified that the product DK-20 is an organic metabolite from soil microbes manufactured for application as a biofertilizer to crops. She testified that the classification of the product as a biofertilizer follows both the normal definition of how the fertilizer acts on the crops , and the definition of a biofertilizer under the definitions by the International Federation of Organic Agriculture Movement (IFOAM) as;“microbiological preparations based on naturally occurring organisms.”

130. On cross-examination by the Respondent, the witness testified that the product DK-20 was not a plant growth regulator as suggested, as plant growth regulators are hormonal products which change the nature of growth aspects of a plant, and there were no growth hormone regulators in DK-20.

131. The witness also testified that the product is not a micronutrient preparation, and does not contain micronutrients, except perhaps in trace elements, as may even be found in a sample of water, which cannot fit in such classification. The witness opined that the manufacturer’s classification was enough to justify the Appellant ‘s classification of DK-20 organic biofertilizer as a fertilizer within HS Code 3101. 00. 00.

132. On the other hand, the Respondent contended that the Appellant’s product DK-20 is not a fertilizer but rather it was a plant growth stimulator (bio stimulant) that acts a physiological trigger for plant growth and development in roses, rice and other crops.

133. The Respondent also called a witness, Mr. Dennis Kabiru, a Customs Officer, who testified that the Respondent reclassified the Appellant’s imported Product DK-20 from Tariff Code 3101. 00. 00 to Tariff Code 3824. 99. 90 after considering that the product was not a plant growth regulator, but was a bio-stimulant that acts as a physiological trigger for growth and development.

134. The Respondent further submitted that WCO Explanatory Notes to Chapter 31 excluded;“micronutrient preparations which are applied to seeds, to foliage, or to soil to assist in seed germination and plant growth.”

135. The Respondent also submitted that in disregarding KEPHIS classification of DK-20 as an organic fertilizer, it noted KEPHIS responsibility is to assure the quality of agricultural inputs and produce, to prevent adverse impact on the economy, the environment and human health.

136. The Respondent further submitted that the GIRs as cited in the EAC /CET govern tariff classification, and asserted that it is not KEPHIS mandate to classify products that are imported into the Country.

137. The Respondent therefore submitted that in accordance with GIR 1 and the Explanatory Notes, the product is classified under Tariff Code 3824. 99. 90.

138. The Tribunal notes that in determining the appropriate classification of a product, it is critical and absolutely important that regard be given to the composition of such product to give it a character, and further reference must be made to the intended use.

139. In the instant Appeal, the product being presented being an agricultural fertilizer for application on crops, the establishment of its chemical or biological composition is of absolute importance in determining the nature of the fertilizer.

140. The Tribunal is satisfied that from the evidence submitted through documents and witness testimony, the composition of the product was adequately established as an organic bio fertilizer.

141. The Tribunal is also satisfied that the Appellant and the manufacturer of the product submitted the product for appropriate testing, evaluation of composition and efficacy of the product, and the appropriate categorization as an agricultural fertilizer by KEPHIS, which is the statutory body mandated with such responsibility. It is worthy noting that the Respondent did not undertake its own independent testing and analysis of the product.

142. Whereas the Respondent has imputed that KEPHIS does not play any role in the customs tariff classification, while it is so, it plays a key role in the testing and analysis of the constituents of the agricultural inputs, and accordingly categorize them according to their composition, role and usage in crop application, which expert certification is used to classify the products into the respective HS Tariff classifications.

143. In view of the foregoing, the Tribunal finds satisfaction in the Appellant’s evidence that its product DK-20 is an organic bio-fertilizer, without any chemical formulation or micronutrients.

144. The foregoing composition of the product having been established, the Hs classification of the product follows course as guided by the GIRs and the EAC/CET tariffs.GIR 1 states; “Classification shall be determined according the terms of the heading and any relative section or chapter notes and, provided such headings or notes do not otherwise require.”GIR 2 states; “Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances. Any reference to goods of a given material or substance shall be taken to include a reference to goods consisting wholly or partly of such material or substance.”GIR 3 states; “mixtures, composite goods consisting of different materials, and goods put up in sets for retail sale, which cannot 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.”

145. The Tariff Sub-Heading 3824. 99. 90 which is preferred by the Respondent describes its class of products classifiable thereunder as;“prepared binders for foundry moulds or cores; chemical products and preparations of the chemical or allied industries (including those consisting of mixtures of natural products) not elsewhere specified or included.”

146. It is clear this heading applies to products whose composition is made up of chemicals or mixtures of chemicals even with natural products, in line with the Chapter 38 – miscellaneous chemical products.

147. The Appellant’s product DK-20 is an organic fertilizer and is not constituted with any chemicals or mixture of chemicals and is therefore free of any chemicals, and therefore cannot appropriately be classified under this Tariff Heading.

148. The Tariff Sub-Heading 3101. 00. 00 covers;“Animal or vegetable fertilizers, whether or not mixed together or chemically treated; fertilizers produced by the mixing or chemical treatment of animal or vegetable products.”

149. It has been submitted to this Tribunal that the Appellant’s product is excluded from the Heading 31. 01 by the Explanatory Notes to Chapter 31, which excludes;“micro-nutrient preparations which are applied to seeds, to foliage or to soil to assist in seed germination and plant growth.”

150. However, in her testimony, the Appellant’s expert witness Dr Kwa Hwa stated that the product is not a micronutrient and does not contain micronutrients. This testimony buttresses the fact the Appellant’s product is not excluded by any Explanatory Note from the classification under Heading 31. 01.

151. Given the totality of the foregoing facts, the Tribunal comes to the inescapable conclusion that the most appropriate classification for the Appellant ‘s product DK-20 is under Tariff HS Code 3101,00. 00.

152. In light of the foregoing the Tribunal finds and holds that the Respondent erred and was not justified in classifying the Appellant’s product DK-20 under tariff code 3824. 99. 90, from the Tariff Code 3101. 00. 00.

153. In light of the foregoing, the Appellant’s Appeal is found to have merit and hereby succeeds.

Final Decision 154. The Appeal having succeeded the Tribunal makes the following Orders;a.The Appeal be and is hereby allowed.b.The Respondent‘s review decision issued on 26th September 2022 be and is hereby set aside.c.Each party to bear its own costs.

155. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF FEBRUARY, 2024ROBERT M. MUTUMA - CHAIRPERSONELISHA N. NJERU - MEMBERMUTISO MAKAU - MEMBERBONFACE K. TERER - MEMBERDR WALTER J. ONGETI - MEMBER