[2023] KETAT 346 (KLR)

Insteel Limited v Commissioner of Customs and Border Control (Appeal 27 of 2022) [2023] KETAT 346 (KLR) (9 June 2023) (Judgment)

Neutral citation: [2023] KETAT 346 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 27 of 2022

Robert M. Mutuma, Chair, Rodney Odhiambo Oluoch, E.N Njeru, D.K Ngala & Edwin K. Cheluget, Members

June 9, 2023

Between

Insteel Limited

Appellant

and

Commissioner of Customs and Border Control

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated under the Companies Act of the Laws of Kenya and its principal activity is the manufacture of steel pipes and tubes.

2. The Respondent is the principal officer appointed under the Kenya Revenue Authority Act cap 469 of the Laws of Kenya charged with the responsibility of assessing, collecting, and accounting for all the tax revenue on behalf of the Government of Kenya, and also the administration and enforcement of the statutes set out in the Schedule to the Act.

3. The Appellant carried out a post clearance audit (PCA) of the Appellant’s customs entries of hot rolled steel coils in grade SPHT-1 of width 1219mm from Rizhao Steel Mills Holding Group Co. Ltd (Rizhao) based in China for the period 8th February 2017 to 14th August 2018. Arising from the PCA exercise the Respondent issued a demand notification letter dated 8th June 2021 to the Appellant that additional principal tax of Kshs 60,687,528. 00 on account of wrong classification of imported hot rolled steel coils was due. The amount was made up of import duties amounting to Kshs 52,316,835. 00 and VAT tax of Kshs 8,370,694. 00.

4. The Respondent reclassified the Appellant’s product under HS code 72:25:30 (flat rolled products of other alloy of steel, of a width of 600mm or more at 10% duty), instead of the Appellant’s declared HS Code of 72:08:39 (flat rolled products of Iron or non-alloy steel, of a width of 600mm or more, hot rolled, neither clad, plated nor coated – of a thickness of less than 3mm which attracted 0% duty).

5. The Appellant applied for a review of the Respondent’s decision vide a letter dated 15th November 2021.

6. The Respondent issued its review decision vide its letter dated 1st December 2021 and confirmed a tax assessment and demand in the sum of Kshs 114,364,746. 00

7. Being dissatisfied with the Respondent’s review decision dated 1st December 2021, the Appellant filed this Appeal on January 11, 2022.

The Appeal 8. The Appellant filed its Memorandum of Appeal on January 11, 2022 and set out the following grounds of Appeal;i.That the Respondent erred in fact and law by computing and levying additional tax of Kshs 114,364,746. 00, being import duty of Kshs 52,316,835. 00, VAT of Kshs 8,370,694. 00 and interest and penalty of Kshs 53,677,218. 00 on account of the Respondent’s tariff re-classification of the Appellant’s customs entries of hot rolled steel coils in grade SPHT -1of width 1219mm from Rizhao based in China imported in the period February 8, 2017 to August 14, 2018. ii.That the Respondent erred in fact and in law in undertaking a retrospective tariff re-classification and levying additional taxes on the Appellant’s goods on the basis of inference ‘assumption and or analogy’.iii.That the Respondent erred in fact and law by undertaking a tariff code reclassification of the Appellant’s hot rolled steel coils by imputing fraud on the Appellant without providing proof and particulars thereof.iv.That the Respondent contrary to equity, unfairly, unreasonably, and arbitrary against the legitimate expectation of the Appellant erroneously reclassified the tariff codes of the Appellant’s consignments of hot rolled steel coils imported in the period 8th February 2018 to 14th August 2018 to HS code 7208:39:00 in total disregard that the HS code 7208;39:00 (at 10%) was as a result of a negotiated settlement between the Kenya Association of Manufacturers, Steel industry stakeholders, and the Respondent around November 2018 to cover specific coils held consignments of hot rolled steel held at the port and all other future consignment instead of the Respondent’s demanded HS code 7225:99:00 at 35% pending the gazettement and implementation of the stay application of the Common External Tariff for HS code 7208:39:00 from 10% to 0% vide the East African Gazette Vol. AT 1 - No. 10 dated 30th June 2019.

9. By reason of the grounds aforesaid the Appellant prayed that the Respondent’s review decision dated 1st December 2021 be set aside and the Appeal allowed, with costs.

The Appellant’s Case 10. The Appellant has set out its case in the Statement of Facts dated and filed on 11th January 2022, the Witness Statements of Patrick Kaminja and Phelix Odhiambo both dated August 22, 2022 and filed on August 26, 2022, and the Supplementary List of Documents dated August 22, 2022 and filed on August 26, 2022, and the Written Submissions dated and filed on 30th November 2022.

11. The Appellant stated that between February 8, 2017 and August 14, 2018, it imported hot rolled steel coils in grade SPHT -1 of width 1219mm manufactured under JIS G 3132 standards (steel coils) by Rizhao and sourced from various steel traders including, but not limited to, Steel Resources LLC which were cleared under HS code 7208:39 at 0% duty.

12. Around June 2021, the Respondent conducted a post clearance audit on the Appellant’s steel coils imports and subsequently issued a tax demand under HS code 7225;30 and demanded extra duties at 10%, plus VAT and penalties.

13. The Appellant stated that it objected to the Respondent’s erroneous re-classification of the HS code for its steel coils import, based on alleged inconclusive analysis conducted unilaterally by the Respondent on a specific consignment in the absence of the Appellant or its agent.

14. The Appellant also stated that it further objected to the retrospective tariff reclassification that was based on the Respondent’s letter of January 29, 2018 on the ground the Respondent had issued a subsequent conflicting tariff guidance dated February 1, 2019 for the same consignment.

15. The Appellant asserted that the Respondent issued it with its review decision on December 1, 2021 and demanded taxes amounting to Kshs 114,364,746. 00 prompting the Appellant to appeal to this Tribunal.

16. The Appellant contended that without reliance on the Appellant’s mill test certificates, the Respondent cannot with certainty determine the applicable tariff code as the impugned steel coils are not present for verification and testing.

17. It was the submission of the Appellant that depending on the chemical composition and production of hot rolled steel coils, they can either be classified as non-alloy steel or alloy steel, which is considered a finished product and attracts higher duty.

18. The Appellant further submitted that the interpretation of what constitutes an alloy or non-alloy, is guided by the General Interpretation Rules (GIRs) cited in the EAC/CET, and classification is determined in accordance with the terms of the Heading, and any relative section or chapter notes.

19. The appellant stated that Note 1 (f) to chapter 72 of the EAC/CET defines;“Other alloy steels not complying with the definition of stainless steel and containing by weight one or more of the following, inter alia 0. 0008% or more of Boron.”

20. The Appellant stated that in the period 2017 to 2018, the applicable tariff classification for the hot rolled steel coils, included but limited to;i.HS code 7208:39 – flat rolled products of Iron or non-alloy steel, of a width of 600mm or more, hot rolled, not clad, plated or coated- of a thickness of less than 3mm attracting a duty of 0%.ii.HS code 7225;30:00 – flat rolled products of other alloy steel, of a width of 600mm or more. Other – Not further worked than hot rolled, in coils attracting duty at 10%.iii.HS code 7225:99:00 – flat rolled products of other alloy steel, of a width of 600mm or more other – Other which attracted 10% and 35% duty in 017 and 2018 respectively.

21. The Appellant stated that between September 2018 and March 2019, the Respondent issued to the Appellant different and contradictory tariff classifications from the alleged chemical analysis of the samples drawn from the Appellant’s steel coils - i.e. HS 7208:39 (10% duty) and HS 7225:99:00 (35% duty).

22. The Appellant contended that it was not involved or represented in the testing of the sample from this consignment of steel coils which resulted into a different tariff code and duty, and it was not clear why the Respondent based its classification and demand on HS Code 7208:39 (10% duty) and 7225:99 (35% duty) for the impugned steel coils which it did not sample, creating a situation of uncertainty for the Appellant.

23. The Appellant submitted that article 47 (1) of the Constitution of Kenya provides that, “Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable, and procedurally fair.”

24. The Appellant stated that to date, other than the Respondent’s different tariff classification letter detailing the boron content, it has never been presented or issued with the laboratory results detailing the chemical composition of the sample drawn from its consignment of hot rolled steel coil.

25. The Appellant stated further that its witness Phelix Odhiambo in his evidence confirmed that the Appellant was not involved in the testing of the samples taken by the Respondent, and the tests were done in a unilateral manner, and the said lab results were not produced before the Tribunal.

26. The Appellant further stated that it imported the steel coils as raw materials at 0% in strict conformity with the certificates of origin, and the manufacturer’s mill test certificates and sales orders which were produced in evidence, and attached to the Appellant’s bundle of documents.

27. The Appellant contended that contrary to the Respondent’s allegation that the Mill Test Certificates presented by the Appellant were unreliable and invalid as it did not indicate the boron content of the coils, a mill test certificate for steel coils does not need to indicate Boron for it to be valid and proper. The Appellant contended that Boron is an optional chemical added to steel coils for hardening that is not required by the Appellant for manufacture of steel tubes and pipes.

28. The Appellant submitted that the JIS G 3132 (2011) standard which provided mandatory chemical composition of hot rolled steel coils in grade SPHT -1 as : Carbon (c) (<0. 010%); manganese (Mn) (<0. 50%); Silicon (Si) (<0. 35%);Phosphorous (p) (<0. 40%),Sulphur (s) (<0. 40%), and the remaining percentage where applicable is Iron (fe) with a few negligible impurities or minerals.

29. The Appellant’s witness Eng. Patrick Kaminja, who is its Production Manager, testified that boron is an optional mineral added to steel to enhance the hardness of steel depending on the requirements of the imported steel, and demonstrated that the Appellant’s operations of manufacturing steel pipes do not require hardened steel (i.e. steel with boron), and in particular, the addition of boron would be detrimental to the Appellant’s process of shaping, curving and welding steel coils into pipes and tubes.

30. The Appellant further contended that the fact that another steel importer requires boron in its steel coils does not mean the Appellant’s steel coils had boron.

31. The Appellant submitted that retrospective reclassification of the Appellant’s hot rolled steel coils in grade SPHT-1 of width 1219mm from Rhizao Steel Holding from HS code 7208:30 was not proper, as the tests in respect of which the retrospective reclassification of tariff is being done the Respondent issued two contradicting tariff classification. The Appellant cited the case of Keroche Industries Ltd -vs- KRA & 5 others eKLR.

32. By reason of the foregoing submissions the Appellant prayed that the Respondent’s review decision dated December 1, 2021 be set aside and the Appeal herein be allowed.

The Respondent’s Case 33. The Respondent has set out its case on the Statement of Facts dated February 11, 2022 and filed on February 21, 2022, and the Witness Statement of Jane Karen Kigoro dated and filed on August 10, 2022, and the Written Submissions filed on January 6, 2022.

34. The Respondent stated that it undertook a post clearance audit of the Appellant’s customs entries of hot rolled steel coils in grade SPHT-1 as provided under sections 235 and 236 of the EACCMA, 2004, of the import entries of the Appellant for the period February 8, 2017 to August 14, 2018.

35. The Respondent further stated that the desk audit findings established instances where the Appellant used the wrong tariff classification for the consignment imported by the Appellant. The Appellant was in compliance with JIS 3132-2011 standard specifications for the period 2017 and 2018. However, the Respondent appreciated that there was a tariff ruling issued to the Appellant dated 29th January 2019 in favour of the tariff code 7225:30:00 after a chemical analysis test. This was after it was established that the Appellant’s mill test certificates as presented for correct tariff code determination were found to be unreliable.

36. The Respondent following the re-classification of hot rolled steel in coils, the Respondent communicated this to the Appellant, that the Appellant’s tariff HS code 7208:39:00, which relates to flat rolled, not clad, plated, or coated of thickness of less than 3mm, which attracts import duty at 0% to HS code 7225:30:00 which relates to flat rolled products of other alloy steel, of a width 600mm or more while subheading 7225:30:00 covers, other – not further worked than hot rolled in coils, which attracts import duty of 10%. This resulted in short levied taxes amounting to Kshs 60,687,528. 00.

37. The Respondent stated that it undertook a lab test on some of the Appellant’s consignment on the imported hot rolled steel in coils grade SPHT-1 and a specific Tariff Ruling issued dated 19th January 2019. It was the contention of the Respondent that the lab test established that Appellant’s imported hot rolled steel coils in grade SPHT-1 to have a boron content of between 0. 0012% - 0. 0015% by mass.

38. The Respondent then issued the Appellant with a letter of findings dated 8th June 2021 explaining the desk audit review on the misclassification, and allowed the Appellant a period of 7 days to provide a sustentative formal response.

39. The Respondent served the Appellant with a demand notice for the additional taxes in the sum of Kshs 114,364,746. 00 upon the response from the Appellant.

40. The Respondent submitted that the classification of goods in the nomenclature is guided by the General Interpretative Rules (GIRs) of the EAC/CET. According to GIR 1, classification shall be determined according to the terms of the Headings and any relative section or chapter Notes. The legal regime guiding the HS classification of goods in East Africa is the Common External Tariff as read together with the World Customs Organization Explanatory Notes.

41. The Respondent further submitted that according to GIR 1, classification shall be determined according to the terms of the Headings and any relative Section or Chapter notes. It is worthy noting that the rules of classification clearly provide that the HS classification should be read not to distort the true classification but to give it meaning.

42. The respondent also submitted that from the HS Rules of General Interpretation, the First Rule, the most specific description can only be found from the scientific analysis of the product. The laboratory analysis established that the Appellant had indeed imported hot rolled steel in coils grade SPHT- 1 to have a boron content of between 0. 0012% - 0. 00 15% by mass of width 1219mm consignments from Rhizao Steel based in China, manufactured under standard JIS G 3132.

43. The Respondent also stated that to establish the boron content, samples were randomly tested and, in each case, the analysis showed that the boron content for each of the tested consignments was above the threshold required for classification under Heading 72:08.

44. The respondent’s contention is that the Appellant’s hot rolled steel in coils should be reclassified under Heading 72:25 – Flat – rolled products of other alloy steel, of a width of 600mm or more, and Sub-heading 7225:30:00 – which covers; Other, not further worked than hot -rolled in coils attracting 10% duty.

45. The Respondent stated that Chapter 72 of the CET, 2017 introduces Iron and steel, whereby Note 1(f) on Chapter 72 states in part;“In this chapter and, in the case of Notes d, e, and f, throughout the Nomenclature, the following expressions have the meaning hereby assigned to them;(f)Other alloy steel – steels not complying with the definition of stainless steel and containing by weight one or more of the following elements in the proportion shown:- 0. 3% or more of aluminium- 0. 0008% or more of Boron”.

46. The Respondent submitted that Heading 72:25 which covers ‘Flat rolled products of other alloy of steel, of a width of 600mm’ or more while sub-heading 72225:30: 00, which covers ‘Other, not further worked than hot rolled, in coils’ establishes that the Appellant’s consignments are hot rolled steel in coils of width 1219mm and thus correctly classifiable under the tariff sub-heading 7225:30:00.

47. It was the contention of the Respondent that the reclassification was guided by the manufacturer’s intended purpose on boron content for the hot rolled steel in coils tested for each of the consignments was above the threshold required for classification under Heading 72:08 and were re-classified under tariff heading 7225:30:00.

48. The Respondent submitted that the uncontroverted explanation and evidence on the purpose of the hot rolled steel coils must therefore stand and the Respondent therefore was justified in re-classifying the hot rolled steel coils from HS 7208:39:00 to HS code 7225:30:00.

49. By reason of the foregoing, the Respondent prayed that the Tribunal finds the Respondent’s classification is correct, uphold the demand for Kshs 114,364,746. 00, and dismiss the Appellant’s Appeal with costs.

Issues For Determination 50. The Tribunal having carefully considered the pleadings and submissions made by the parties is of the considered view that the Appeal herein distils into two issues for determination;i.Whether the Respondent erred in re-classifying the Appellant’s Hot Rolled Steel in Coils under HS code 7225:30:00; andii.Whether the Respondent was justified in assessing and demanding the additional taxes in the sum of Kshs 114, 364, 746 from the Appellant.

Analysis And Findings i. Whether the Respondent erred in re-classifying the Appellant’s Hot Rolled Steel in Coils under HS code 7225:30:00. 51. The dispute herein hinges on whether the Respondent was correct in re-classifying the Appellant’s steel coils from HS code 7208:39:00 attracting duty at 0% to HS code 7225:30:00 attracting duty at 10%.

52. The basis of the Respondent’s re-classification of the Appellant’s imported hot rolled steel is the boron content as stipulated in the Respondent’s letter of findings dated 8th June 2021 to the Appellant as here below;“The lab analysis test established your importation of Hot Rolled Steel in Coils grade SPHT-1 to have Boron content of between 0. 0012% - 0. 0015% by mass.Note1 (f) to Chapter 72 states in part, “in this chapter and, in the case of Notes d, e & f, throughout the Nomenclature, the following expressions have the meanings hereby assigned to them.; 9f) Other alloy steel – steels not complying with the definition of stainless steel and containing by weight one or more of the following elements in the proportion shown; 0. 3% or more of aluminium

0. 0008% or more of Boron”

53. As such, the hot rolled steel coils are other alloy steel by way of application of Note 1 (f) to Chapter 72 of the HS classification.

54. The legal regime guiding the HS classification of goods is the EAC/CET 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.

55. 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.”

56. Based on the foregoing rules of interpretation, from the First Rule “which is of the most specific description”, the most specific description can be found in the laboratory analysis of the product. The Respondent’s lab analysis established that the Appellant’s imported hot rolled steel in coils grade SPHT-1 had a boron content of between 0. 0012% - 0. 0015% by mass of width 1219mm consignments from Rizhao based in China.

57. The Respondent averred that to establish boron content, samples were randomly taken and tested, and in each case, the analysis showed that the boron content for each of the tested consignments was above the threshold required for classification under Heading 72. 08.

58. During the hearing it was confirmed that samples were collected from three consignments belonging to the Appellant in the presence of the Appellant’s clearing agent.

59. The Appellant’s witness Phelix Odhiambo confirmed that the clearing agent was present when the samples were taken, and that the Appellant’s Mill tests did not test for boron, and the mill tests submitted did not did not contain results for boron. The said witness also confirmed that the Appellant did not provide any alternative lab tests to prove the Respondent’s results wrong.

60. The Appellant’s contention is that its hot rolled steel in coils should be classified under Heading 72:08 which covers flat rolled products of iron or non-alloy steel, of a width of 600mm or more, hot rolled, not clad plated or coated - sub-heading 7208:39:00 – of a thickness of less than 3mm kg attracting 0% duty.

61. The Respondent’s contention is that the Appellant’s hot rolled steel in coils should be re-classified under Heading 72:25 – Flat rolled products of other alloy steel, of a width of 600mm or more. - of silicon-electrical steel; And Sub-Heading 7225:30:00- covers Other, not further worked than hot -rolled, in coils attracting 10% duty.

62. Chapter 72 covers Iron and Steel and Note 1(f) Other alloy steel – steels not complying with the definition of stainless steel and containing by weight one or more of the following elements in the proportion shown:- o.3% or more of aluminium.- 0. 0008% or more of boron.

63. It is noteworthy that Heading 72:25 which covers;” flat rolled products of other alloy steel, of a width of 600mm or more, while 7225:30:00 covers, Other, not further worked than hot rolled in coils”, establishes that the Appellant’s products are hot rolled steel in coils of width 1219mm, and thus correctly classifiable under the tariff sub-heading 7225;30:00.

64. In light of the foregoing, the Tribunal finds and holds that the Appellant’s consignment of hot rolled steel in coils grade SPHT-1 manufactured under standard JIS G3132 from Rhizao based in China were correctly re-classified by the Respondent under HS code 7225:30:00.

ii. Whether the Respondent was justified in assessing and demanding the additional taxes. 65. The Tribunal having made a finding that the Appellant’s subject consignment is correctly classifiable under HS code 7225:30:00 which attracted duty at the rate of 10%, it logically follows that the new rate would result into short levied taxes. The Respondent was therefore justified in levying the additional taxes.

66. In view of the foregoing the Tribunal finds and holds that the Respondent’s decision dated 1st December 2021, assessing and demanding the sum of Kshs 114,364,576. 00 being short levied duties is proper and justified in accordance with sections 135 and 249 of EACCMA, 2004.

Final Decision 67. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent’s review decision dated December 1, 2021 confirming its assessment for Kshs 114,364,746. 00 be and is hereby upheld.c.Each party to bear its own costs.

68. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF JUNE, 2023. …………………………ROBERT M. MUTUMACHAIRPERSON……………………. ……. ……………………………RODNEY O. OLUOCH ELISHAH N. NJERUMEMBER MEMBER………………………. …………………………….DELILAH K. NGALA EDWIN K. CHELUGETMEMBER MEMBER