[2023] KETAT 895 (KLR)

Kapa Oil Refineries Limited v Commissioner of Customs and Border Control (Tribunal Appeal 576 of 2022) [2023] KETAT 895 (KLR) (Commercial and Tax) (20 December 2023) (Judgment)

Neutral citation: [2023] KETAT 895 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tribunal Appeal 576 of 2022

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

December 20, 2023

Between

Kapa Oil Refineries Limited

Appellant

and

Commissioner of Customs and Border Control

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated in Kenya under the Companies Act. Its principal business activity is the manufacture of cooking oil, margarine, and other household products.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. Under Section 5(2) of the Act with respect to the performance of its function under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act for the purposes of assessing, collecting, and accounting for all revenues in accordance with those laws.

3. The dispute arose from the Respondent’s post clearance desk audit of the Appellant’s importation of Palsgaard 6111 for the tax periods in 2018 to 2020 and which resulted in the Respondent issuing the Appellant with a demand notice dated 11th December 2020 for VAT and import duty of Kshs. 4,858,055. 00. The demand classified Palsgaard 6111 as Tariff 1517. 90. 00 that attracts an import duty of 25% from Tariff 3824. 99. 90 that attracts import duty of 0%.

4. The Appellant paid the principal amount demanded of Kshs. 3,077,454. 00 being import duty and Kshs. 531,023. 00 being VAT. The Appellant applied for a waiver of the interest demanded which the Respondent waived 50% of, and the Appellant paid the balance of interest of Kshs. 622,289. 00.

5. The Appellant applied for a refund of the above-mentioned payments when the Respondent on 24th November 2021 issued a tariff classification ruling classifying Palsgaard 6111 and Palsgaard PGPR 4110 as tariff 3824. 99. 00.

6. The Respondent stated that on 16th February 2022 it revoked its tariff classification ruling dated 24th November 2021 pending tariff determination by the Respondent.

7. The Appellant made an application for review of the Respondent’s decision to revoke its tariff classification ruling in a letter dated 24th November 2021 and requested the Respondent to promptly refund the Appellant the taxes that it paid upon its receipt of the tariff ruling that was revoked.

8. The Respondent subsequently made a review decision in a letter dated 22nd March 2022, revising its tariff ruling of 24th November 2021 and reclassifying Palsgaard 6111 to tariff 1516. 20. 00 of the Common External Tariff (CET) of EACCMA which attracts duty of 25%.

9. The Appellant, dissatisfied with the review decision, filed its Notice of Appeal on 20th May 2022.

The Appeal 10. The Appeal is premised on the Memorandum of Appeal dated and filed on 3rd June 2023 which raised the following grounds: -a.That the Respondent erred in fact and in law in revising and revoking its tariff ruling classifying Palsgaard 6111 and Palsgaard PGPR 4110® AS ‘Prepared binders for moulds or cores; Chemical products and preparations of the chemical or allied industries (including those consisting of mixturesb.That the Respondent erred in fact and in law in classifying the Appellant’s imports (Palsgaard 6111®) as ‘Animal or vegetable fats and oils and their fractions, partly or wholly hydrogenated, inter-esterified, re-esterified or elaidinised, whether or not refined, but not further prepared - Vegetable fats and oils and their fractions’ – Tariff 1516. 20. 00 of the HS Code of the Common External Tariff of the East African Community Customs Management Act (EACCMA).c.That the Respondent erred in fact and in law in failing to reclassify the Appellant’s imports (Palsgaard 6111®) as ‘Chemical products and preparations of the chemical or allied industries (including those consisting of mixture sf natural products) not elsewhere specified or included – Other’ – Tariff 3824. 99. 90 of the HS Code of the Common External Tariff of EACCMA.d.That the Respondent erred in fact and in law in failing to refund the Appellant import duty tax of Kshs. 5,188,701. 00 following the Respondent’s tariff ruling of 24th November 2021 classifying Palsgaard6111® (the Appellant’s imports) as ‘Chemical products and preparations of the chemical- or allied industries (including those consisting of mixtures of natural products), not elsewhere specified or included – Other’ – Tariff 3824. 99. 90 of the HS Code of the Common External Tariff of EACCMA.e.That the Respondent erred in fact and in law in holding that the Appellant’s imports, Palsgaard 6111®, are not ‘mixtures of mono-, di—and tri fatty acids of ester used as emulsifiers for fats’ and therefore not classified as ‘Chemical products and preparations of the chemical or allied industries (including those consisting of mixtures of natural products), not elsewhere specified or included – Other’ under Chapter 38. 24 contrary to Note 11 of the Explanatory Notes to Chapter 38. 24 of the HS Code Common External Tariff of EACCMA.f.That the Respondent erred in fact and in law in classifying the Appellant’s imports under Chapter 15 alleging that the imports are vegetable fats and oils and their fractions as against the facts that the Appellant’s imports are emulsifiers used in manufacture of margarine as a binder of oil and water and not for their nutritive value.g.That the Respondent erred in fact and in law in failing to find that the Appellant’s imports, Palsgaard 6111® are valued for their role as binders (emulsifiers) and not for their nutritive value and are therefore classified under Chapter 38 of the HS Code contrary to the Explanatory Note to chapter 38 that provides that mere presence of foodstuffs or substances with nutritive value does not exclude a mixture from chapter 38, especially if the nutritive value is merely subsidiary to its function as a chemical product.h.That the Respondent erred in fact and in law in revoking its correct tariff classification to avoid paying the Appellant’s legitimate refund in contravention of the Appellant’s legitimate expectations and right to administrative action.

Appellant’s Case 11. The Appellant’s case is premised on the following documents: -a.The Appellant’s Statement of Facts dated and filed on 3rd June 2022 and the documents attached thereto.b.The Appellant’s Written Submissions dated and filed on 17th January 2023 and the authorities filed therewith.

12. The Appellant stated that it manufactures margarine by the brand name ‘Prestige Margarine’ and that the manufacture of margarine involves mixing water and oil, which process requires the Appellant to import a chemical known as an emulsifier that is used to enable the water and oil to mix as they typically separate when they are combined.

13. The Appellant averred that since the emulsifiers are added to margarine, which is food, the Appellant uses emulsifiers sourced from food. That the emulsifiers that the Appellant uses are Palsgaard 6111® and Palsgaard PGPR 4110® that are partly drawn from edible oils.

14. The Appellant stated that Palsgaard 6111® is composed of triglycerides which are esters (chemical compounds) of glycerol tied to three fatty acids (thus the tri- prefix). That the three fatty acids are sourced from Rapeseed Oil (Canola Oil) which are an edible vegetable oil.

15. The Appellant also stated that Palsgaard PGPR 4110 is also composed of esters (chemical compounds) made from tying glycerol to fatty acids. That the fatty acids, in this case, are sourced from castor oil, also an edible vegetable oil.

16. The Appellant asserted that it does not use the above emulsifiers in its manufacture but as a crystal promoter and emulsion stabiliser to keep the water and oil together in the manufactured product, margarine.

17. The Appellant further stated that Palsgaard 6111 is a crystal promoter which promotes fast crystallisation. That fast crystallisation creates many small crystals, which prevents the water droplets from coming together. and that if the water droplets come together, they separate from the oil. The crystal promoters absorb oil, preventing oiling out problems (the oil separating itself from the mixture) during the entire shelf-life of the finished product. The Appellant attached a copy of its supplier’s product profile of Palsgaard 6111 in its appeal.

18. The Appellant stated that Palsgaard PGPR 4110 has a strong emulsifying effect and increases the viscosity in emulsions, contributing additionally to the emulsion stability and production safety. That it reduces the surface tension between the water and the fat phase; stabilises the water-in-oil emulsion during the emulsification and cooling and ensures a stable and homogeneous emulsion in the margarine with a low-fat content. The Appellant attached a copy of the its supplier’s product profile of Palsgaard PGPR 4110 in its appeal.

19. The Appellant confirmed that the Respondent conducted a post clearance desk audit of the Appellant's importation of Palsgaard 6111 for the year 2018 to 2020 and issued a demand on 11th December 2020.

20. That by its demand, the Respondent reclassified Palsgaard 6111 as Tariff 1517. 90. 00 (25% import duty) from Tariff 3824. 99. 90 (0% import duty) of the HS Code of the Common External Tariff of EACCMA and demanded VAT and import duty and interest amounting to Kshs. 4,853,055. 00.

21. The Appellant averred that on 16th December 2020 the Appellant paid principal import duty of Kshs. 3,077,454. 00 and VAT of Kshs. 531,023. 00 totalling to Kshs. 3,608,477. 00 following the Respondent's reclassification of the Appellant's imports and demand.

22. The Appellant stated that on 17th December 2020, it applied to the Respondent for a waiver of interest, which the Respondent granted 50% of on 29th December 2020 and informed the Appellant to settle the 50% balance of Kshs. 622,289. 00. That the Appellant paid the interest on 30th December 2020.

23. The Appellant stated that on 24th November 2021, the Respondent issued a tariff classification ruling, classifying Palsgaard 6111 and Palsgaard PGPR 4110 as Tariff 3824. 99. 90 of the HS Code of the Common External Tariff of EACCMA that is chargeable to import duty at 0%.

24. The Appellant stated that following the Respondent tariff ruling, the Appellant on 18th January 2022 applied to the Respondent for a refund of import duty paid on its importation of Palsgaard 6111 ® under customs entries No. 20211ICD283690 and 202111CD314948 totalling Kshs. 1,488,958. It further stated that on 20th January 2022 it applied for a refund of import duty and interest totalling to Kshs. 3,699,743. 00 that it paid to the Respondent following the Respondent's demand notice dated 11th December 2020.

25. The Appellant averred that it met the Respondent on 1st February 2022 and 15th February 2022 to deliberate on the classification of its imports. That the Appellant wrote to the Respondent on 3rd February 2022 enumerating the components of the Appellant's imports and explaining that the Respondent correctly classified its imports as Tariff 3824. 99. 90.

26. The Appellant stated that the Respondent on 16th February 2022 wrote to the Appellant revoking the tariff ruling dated 24th November 2021 pending tariff determination by the Respondent.

27. The Appellant asserted that on 17th March 2022 the Appellant made an application for review of the Respondent's decision to revoke its tariff ruling dated 24th November 2021 and the Respondent's decision to suspend the processing of the Appellant's application for refund due to the revocation of the tariff ruling.

28. The Appellant stated that the Respondent made its review decision by its letter dated 22nd March 2022 revising its tariff ruling dated 24th November 2021 and reclassifying Palsgaard 6111 as Tariff 1516. 20. 00 of the Common External Tariff of EACCMA attracting import duty at 25%. That by its review decision the Respondent alleged that:-a.The product was found to be organic compound with sepctro-chemical properties of saturated fatty acid esters, specifically an all- vegetable trans-free and non-GMO, fully hydrogenated triglyceride properties.b.Chapter 15 covers classification of animal or vegetable fats and oils and their cleavage products; prepared edible fats; whether crude purified or refined or treated in certain ways.c.Heading 15. 16 covers classification of animal or vegetable fats and oils and their fractions, partly or wholly hydrogenated, inter-esterified, re-esterified or eladinised whether or not refined but not further prepared.d.Explanatory Notes to Heading 15. 16 provides that the heading covers vegetable fats and oils that have undergone a specific chemical transformation but have not been further prepared.e.Palsgaard is a tri-fatty ester of glycerol and not a mixture of mono-di and tri fatty acid esters of glycerol included in heading 38. 24.

29. The Appellant averred that the Respondent’s review decision was dated 22nd March 2022, but was delivered in a letter to the Appellant by post on 22nd April 2022, and that the Appellant received the letter on 4th May 2022.

30. The Appellant reiterated its position in its email to the Respondent dated 3rd February 2022 and its application for review that the imports of Palsgaard 6111 and Palsgaard PGPR 4110 are correctly classified as 'other 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' - Tariff 3824. 99. 90 of the HS Code of the Common External Tariff of EACCMA.

31. The Appellant submitted that the following two issues are the main issues to be determined in this Appeal:a.Whether the Respondent applied the correct tariff classification with respect to the Appellant's imports, classifying them as Tariff 1516. 20. 00 instead of Tariff 3824. 99. 90 of the Common External Tariff of the EACCMA.b.Whether the Respondent should refund the Appellant's import duty amount and interest thereon, which was paid lawfully and in good faith.

32. The Appellant submitted that tariff no. 3824. 99. 90 is the correct tariff classification for the Appellant’s imports.

33. The Appellant adduced the product profile by the Appellant's imports' manufacturer, Palsgaard A/S, to submit that Palsgaard 6111 is a fully hydrogenated tri-glyceride with crystallising properties, used to catalyse fast crystallisation. That fast crystallisation creates many small crystals, which prevents the water droplets from coalescing, since upon coming together, they separate from the oil. That the crystal promoters absorb oil, thus preventing 'oiling out problems' (the oil separating itself from the mixture) during the entire shelf-life and useful life of the finished product(s).

34. That Palsgaard A/S also has a product profile curated for Palsgaard PGPR 4110, which describes the product as a polyglycerol polyricinoleate (emulsifier made from fatty acids and glycerol) having a strong emulsifying effect, to increase the viscosity in emulsions, thereby contributing additionally to the emulsion stability and product safety. That it achieves this by reducing the surface tension between the water and the fat, thus stabilising the water-in-oil emulsion during the emulsification and cooling process, to ensure a stable and homogeneous emulsion in the margarine, with a low-fat content.

35. The Appellant averred that from a reading of the respective product profiles created by the imports' manufacturer, it is clear that Palsgaard 6111 and Palsgaard PGPR 4110 are both tri-glyceride esters of glycerol, and that this fact was similarly acknowledged by the Respondents demand notice to the Appellant issued on 11th December 2020, whereby the Appellant submitted that the letter described Palsgaard 6111 as a "...a fully hydrogenated triglyceride...", in the opening to the third paragraph therein.

36. Furthermore, Appellant averred that the Respondent’s letter to the Appellant reviewing the product's tariff classification on 22nd March 2022 indicated that the Respondent had conducted laboratory analysis on Palsgaard 6111 and disclosed its findings in Paragraph 2 of the letter stating that: -“Upon laboratory analysis, the product was found to be an organic compound with spectro- chemical properties of saturated fatty acid esters. The product was specified to be an all-vegetable trans-free and non-GMO, fully hydrogenated triglyceride with crystallising properties, special oil absorbing properties and effect on emulsion stabilisation derived from rapeseed oil.”

37. The Appellant submitted that the Respondent's description of the product and its laboratory analysis was accurate and congruent with the manufacturer's product profile, as highlighted in Paragraphs 26 through 29. It however contended that the Respondent's subsequent tariff classification of the products under Tariff 1516. 20. 00 of the Common External Tariff of the EACCMA was wrong and in contravention of the Explanatory Notes to Chapter 38. 24 of the Common External Tariff of the EACCMA.

38. The Appellant averred that Note 11 of the Explanatory Notes to Chapter 38. 24 expressly includes 'Mixtures of mono-, di- and tri fatty acids of ester used as emulsifiers for fats' as chemicals under Chapter 38. 24. It claimed that since both Palsgaard 6111 and Palsgaard PGPR 4110 have irrefutably been classified as "triglyceride esters of glycerol", they should therefore be correctly classified under Tariff 3824. 99. 90 of the Common External Tariff to the EACCMA.

39. It was the Appellant’s averment that the ordinary meaning of the word mixture is 'a substance made by mixing other substances together.' That Palsgaard 6111 and Palsgaard PGPR 4110 being substances made from mixtures of substances including glycerol and fatty acids they qualify as 'Mixtures of mono-, di-, and tri-, fatty acids of ester' in its ordinary meaning.

40. The Appellant submitted that Respondent's interpretation that a mixture should include a mono, di and tri fatty acid of an ester to qualify under Note 11 of the Explanatory Notes to Chapter 38. 24 does not follow the principle of strict interpretation of taxation laws and that the Respondent has strained, tortured and laboured the construction of Note 11 to include the above requirement. The Appellant relied on the case of Keroche Industries Limited v Kenya Revenue Authority & 5 others [2007] eKLR where it was held: -“The literal and grammatical meaning of a statute or Act using linguistic canons of constructions is always preferred where the meaning of an enactment is clear and unambiguous. The Act is to be read as a whole without attributing to any particular provisions or words a tortured or strained construction or interpretation. The starting point is the statute itself which is read by construing the words used or gathering the meaning from the words used before venturing onto other aids of construction... The court must turn against a construction, which would undermine the integrity of the clear words of on Act of Parliament and its provisions....taxation can only be done on clear words and that taxation cannot be on intendment. Linked to this is that a penalty must be imposed in clear words. Finally, even where the inclination of the legislature is not clear or where there are two or more possible meanings, the inclination of the court should be against a construction or interpretation which imposes a burden, tax or duty on the subject.It has been designated as "a great rule" in the construction of fiscal law, "that they are not to be extended by any laboured construction, but that you must adhere to the strict rule of interpretation; and if o person who is subjected to o duty in a particular character or answers that description, the duty no longer attaches upon him and cannot be levied. A penalty moreover must be imposed by dear words. The words of o statute shall be restrained for the benefit of him against whom the penalty is inflicted, and the language of the statute must be strictly looked at in order to see whether the person against whom the penalty is sought to be enforced has committed an offence to do with it.”

41. The Appellant further relied on the case of Primarosa Flowers Limited v Commissioner of Income Tax [2017] eKLR where the court in stating the rules of interpretation of statutes held: -“First, the words ore to be given their ordinary meaning. They are not to be given some other meaning simply because their object is to frustrate legitimate tax avoidance devices...moral precepts are not applicable to the interpretation of revenue statutes. Secondly,... one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption so to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used...”

42. It was the Appellant’s submission that Explanatory Note to Chapter 38 of the Common External Tariff to the EACCMA provides that: -“The mere presence of foodstuffs or other substances with nutritive value in a mixture would not suffice to exclude the mixture from Chapter 38, by application of Note 1(b). Substances having a nutritive value that is merely subsidiary to tbeir function as chemical products e.g. as food additives or processing aids are not regarded as foodstuffs or substances with nutritive value for the purpose of this note. The mixtures which are excluded from Chapter 38 by virtue of Note 1(b) are those which are of a kind used in the preparation of human foodstuffs and which are valued for their nutritional qualities.”

43. As per the above, it was the Appellant’s submission that despite Palsgaard 6111 and Palsgaard PGPR 4110 being " made from fatty acids sourced from vegetable oils", they are used by the Appellant in their manufacture of margarine not because of any nutritional value but rather because of their roles as a crystal promoter and emulsion stabiliser, and emulsification, respectively. That the Appellant uses emulsifiers sourced from edible substances since the emulsifier is used in their food product, margarine (there are industrial emulsifiers used for the production of lotion, paints and other products that must keep oil and water together). That in accordance with the Explanatory Note to Chapter 38 of the Common External Tariff to the EACCMA, the mere presence of foodstuffs or substances with any nutritive value in the imports does not suffice to exclude them from classification under Chapter 38. Further, that the imports' main function as emulsion stabilisers and emulsifiers to the Appellant's manufacture of margarine supersedes any nutritive benefits they may be deemed to have, thus reinforcing their categorisation under Chapter 38.

44. The Appellant further averred that the mere presence of foodstuffs or other substances with nutritive value in a mixture would not suffice to exclude the mixture from Chapter 38, by application of Note l(b). That substances having a nutritive value that is merely subsidiary to their function as chemical products e.g., as food additives or processing aids are not regarded as foodstuffs or substances with nutritive value for the purpose of this note. That the mixtures which are excluded from Chapter 38 by virtue of note 1 (b) are those which are of a kind used in the preparation of human foodstuffs and which are valued for their nutritional qualities.

45. The Appellant stated that Explanatory Note 1 (e) of Chapter 15 of the Common External Tariff to EACCMA explicitly excludes fatty acids of section VI. That Chapter 38 is in section VI. That Palsgaard 6111 and Palsgaard PGPR 4110 are made from fatty acids tied to glycerol which are used as emulsifiers for fats which are included in Heading 38. 24 and are therefore not covered under Chapter 15, as wrongly classified by the Respondent.

46. The Appellant posited that Heading 1516 and specifically subheading 1516. 20. 00 of the HS Code covers 'vegetable fats and oils and their fractions.' Palsgaard 6111 and Palsgaard PGPR 4110 does not qualify under this heading as they are not vegetable oils but emulsifiers made from tying glycerol to fatty acids. That considering this, the Respondent's review decision dated 22nd March 2022, revising its tariff ruling of 24th November 2021, was misguided in fact and in law, since the Commissioner disregarded and/or ignored the Explanatory Notes to the Common External Tariff to the EACCMA, which Notes are meant to decipher the tariff classification system applied for efficient and harmonised customs collection on cross-border commerce.

47. The Appellant highlighted that Kenya is a party to the World Customs Organization (since May 1965), and by virtue of this membership, and the provisions of Article 2(5) and (6) of the Constitution of Kenya, 2010, the parties are bound to adhere to any conventions, treaties, and rules, that the government has ratified and adopted as a member state, provided there is no inconsistency with any local laws. In the same breath, the Appellant submitted that since the World Customs Organization member states apply a universal HS Code of the Common External Tariff (which Code has been adopted by the EACCMA), the parties are bound to ensure our customs practices conform to the standards and guidelines provided by the World Customs Organization.

48. The Appellant averred that the World Customs Organization has in its classification decisions classified emulsifiers and fatty acids including those that are sourced from items under chapter 15 under HS code 3824. 90 in accordance with Rule 1 and 6 of the General Interpretation Rules for the Classification of Goods and listed below:Description of Goods WCO Classification Rationale and Observations

Emulsifier in the form of a powder consisting of diocetyl tartaric odd ester of vegetable mono- and diglycerides and tricolcium phosphate (10%) intended to be used as volume improver in powdered bread preparations and flour mixes The Committee agreed to classify this product in heading 38. 24 subheading 3824. 90 by application of GIRs 1 and 6. The Committee considered that this product consisted of chemicals and not "mixtures of chemicals with foodstuffs or other substances with nutritive value" within the meaning of Note 1 (b) to chapter 38 and thus could not be excluded from chapter 38 by application of this Note

Emulsifier in the form of a powder, consisting of diacetyl tartaric ester of monoglycerides and calcium carbonate (20%) intended to be used as volume improver in powdered bread preparations and flour mixes. The Committee agreed to classify this product in heading 38. 24 subheading 3824. 90 by application of GIRs 1 and 6. The Committee considered that this product consisted of chemicals and not "mixtures of chemicals with foodstuffs or other substances with nutritive value" within the meaning of Note 1 (b) to chapter 38 and thus could not be excluded from chapter 38 by application of this Note

Combined emulsifier and stabiliser in the form of a powder consisting mainly of a mixture of mono- di and tri fatty acid esters of glycerol (the triglyceride content of which is a residue of the manufacturing process), Sodium carboxymethylcellulose, guar gum, carrageen, Sodium alginate and locust bean gum, intended to be added in small portions (less than 1%) to ice-cream and soft ice to improve the texture and consistency. Adopted by the WCO under Chapter 3824 in 1992 and 1994

49. The Appellant argued that the Respondent is under a duty to apply and interpret the HS Code of the Common External Tariff of the EACCMA as the national revenue collector on behalf of the National Treasury, and with due regard to the decisions, rulings, opinions, and guidelines of the World Customs Organisation to ensure fair, efficient, and effective revenue collection across borders, the Commissioner's apparent disregard of the said decisions with a view to avoid paying the Appellant's lawful refund breaches the latter's legitimate expectation and right to fair administrative action, contrary to Article 47 of the Constitution of Kenya, 2010.

50. The Appellant cited the case of Kenya Revenue Authority V Export Tradinq Company Limited, [Petition No. 20 of2020 (E021 of 2020)], where the Supreme Court of Kenya upheld the findings of the Court of Appeal and the High Court, that the Kenya Revenue Authority ("KRA") acted unfairly in demanding additional taxes and customs duties from the Respondent for the importation of rice four years after the importation, which had been imposed at the original rate of 35% as opposed to the reviewed rate of 75%, through an error attributable to the KRA's Tradex Simba System. The Supreme Court in this matter firmly cemented the administrative law principle of legitimate expectation, and its connection to the right to fair administrative action in Kenyan tax jurisprudence. In its decision, the Supreme Court held that the taxpayer in this case, the Respondent, had a legitimate expectation to have import duty levied by the revenue collector at the proprietary rates, and the failure to do so by the KRA breached this legitimate expectation, thus ruling in the taxpayer's favour, and declaring that their Right to Fair Administrative Action had effectively been breached.

51. The Appellant submitted that in applying the principle of legitimate expectation to the present case, it observed that the Respondent created a legitimate expectation in favour of the Appellant, when it issued its Tariff Ruling on 24th November 2021 and classified the imports under Tariff No. 3824. 99. 90, (which attract import duty at the rate of 0%). The Respondent had also created a legitimate expectation towards the Appellant that it adhered to the law and followed the relevant guidelines in its determination of the correct tariff classification.

52. The Appellant decried that by the Respondent revoking its own Tariff Ruling on 16th February 2022 and later reclassifying the imports under Tariff 1516. 20. 00 (which then attracted import duty at the rate of 25%), and doing so while disregarding widely accepted international customs practices as well as the Explanatory Notes to the Common External Tariff to the EACCMA, the Respondent indeed breached its legitimate expectation to the Appellant, and thereby infringed on its right to fair administrative action as guaranteed by Article 47 of the Constitution of Kenya, 2010.

53. The Appellant implored the Tribunal to protect the Appellant's legitimate expectation to have the Tariff Ruling dated 24th November 2021 upheld, the erroneous review decision dated 22nd March 2022 effectively struck out entirely, and the import duty and interest paid on the wrongful tariff classification, Tariff 1516. 20. 00, be refunded to the Appellant.

54. The Appellant averred that the consensus of the imports' manufacturer, the World Customs Organisation tariff classification rulings, and the provisions of the Common External Tariff of the EACCMA, as well as its Explanatory Notes therein, were overwhelmingly in support of the Appellant's classification of the products under Tariff 3824. 99. 90, as opposed to the Respondent's wrongful classification under Tariff 1516. 20. 00.

55. Further the Appellant submitted that the Respondent's interpretation of the HS Code against the East African Community External Tariff and WCO decisions creates a situation where the Appellant pays import duty on its imports increasing the cost of its products causing the Appellant to lose its competitive edge as a local manufacturer against imported finished goods.

56. The Appellant submitted that the Respondent should refund the Appellant's import duty and interest charged thereon. It cited Section 229(4) of EACCMA which provides that: -“The Commissioner shall, within a period not exceeding thirty days of the receipt of the application under subsection (2) and any further information the Commissioner may require from the person lodging the application, communicate his or her decision in writing to the person lodging the application stating reasons for the decision.”

57. The Appellant cited subsection (1) as read with subsection (2) (cited above) of Section 229 of the EACCMA, which together stipulate that: -“A person directly affected by the decision or omission of the Commissioner or any other officer on matters relating to Customs shall within thirty days of the date of the decision or omission lodge an application for review of the said decision or omission. The application referred to under [subsection (1)] shall be lodged with the Commissioner in writing, stating the grounds upon which it is lodged.”

58. In light of the above excerpts from Section 229 of the EACCMA, the Appellant reiterated that in compliance with the cited provisions in Section 229 (1) and (2), the Appellant on 17th March 2022 made an application for review of the Respondent's decision issued on 16th February 2022, whereby it revoked its Tariff Ruling dated 24th November 2021. That this was within the statutory limit of thirty days for lodging an application for a review.

59. The Appellant submitted that the Commissioner, gave its review decision in a letter dated 22nd March 2022, but delivered by the Respondent via post on 22nd April 2022 and received by the Appellant on 4th May 2022 with both the delivery date and the date of receipt by the Appellant falling beyond the statutory limit envisaged by the EACCMA of "within a period not exceeding thirty days of the receipt of the application under subsection (2)".

60. The Appellant averred that in strict adherence to Section 229(4) of the EACCMA, the Commissioner ought to have issued its review decision on or about 15th April 2022, for the Respondent to be compliant with the letter of the law, noting that the EACCMA takes precedence over all other tax statutes in place with reference to Customs.

61. The Appellant submitted that the Commissioner's delay in issuing its review decision was indeed contradictory to Section 229(4) of the EACCMA, and further argued that it was an unreasonable delay.

62. The Appellant referred to its understanding of the term ‘unreasonable delay’ by citing the Environment and Land Court in Eldoret in the case of Jaber Mohsen A" & Another 1/ Priscilla Boit & Another [2014] eKLR where the court held: -“What is unreasonable delay is dependent on the surrounding circumstances of each case. Even one day after judgment could be unreasonable delay depending on the judgment of the court and any order given thereafter..."

63. The Appellant argued that by a review of the surrounding circumstances in the present case, it emerged that the Respondent unreasonably delayed in its delivery of the review decision, since after its preparation of the said letter on the date indicated thereon, 22nd March 2022, the letter was not actually dispatched for delivery until approximately a week after the lapse of the statutory limit for communicating the decision to the Appellant (which was supposed to fall on 15th April 2022).

64. The Appellant averred that in further aggravation of the situation, the Respondent dispatched the letter by way of post on 22nd April 2022 in lieu of more expedient means of communication such as e-mail, which the Respondent had used before in its transmission of various correspondence. That this resulted in the Appellant receiving the review decision on 4th May 2022, well beyond the statutory timeline indicated under Section 229(4) of EACCMA.

65. The Appellant submitted that the Respondent's lack of urgency in its handling of the issue has been indicative of its unwillingness to co-operate, and lack of desire to follow due process and rightfully determine the Applicant's refund amounts. Furthermore, the Respondent's laxity on settling the issue of tariff classification conclusively threatens to disrupt the Customs assessment and collection process through ambiguity and lack of clarity, which can prove very disruptive to cross-border commerce and other economic activity in the region.

66. The Appellant added that the Respondent's laxity in responding to the Appellant's application for review and subsequent suspension of the latter's processing of the refund has negatively impacted the Appellant's plans to perhaps utilise the tax refunds recouped for the furtherance of their financial activities as well as potentially settling future tax liabilities, despite being a diligent and compliant taxpayer who co-operates with the revenue collection authorities. That this was best exemplified in the build-up to this matter, whereby the Appellant expediently settled their tax liability within a week of receiving the demand letter, despite the same later being deemed erroneous since it was based on a wrong tariff classification of the Appellant's imports.

67. The Appellant submitted that considering that the Respondent conducted himself/herself with laxity and without due regard to the impact of his delay on the Applicant's economic activities, and potentially other taxpayers with vested interests in the tariff classification ruling, the Tribunal should grant the Appellant’s prayers and strike out the Respondent’s letter of 16th February 2022.

68. In support of this prayer, the Appellant alluded to Section 229(5) of the EACCMA, which proffers that: -“Where the Commissioner has not communicated his or her decision to the person lodging the application for review within the time specified in subsection 4 (within a period not exceeding thirty days), the Commissioner shall be deemed to have made a decision to allow the application.”

69. The Appellant submitted that its prayers were similarly elucidated in the Appellant's application for review dated 17th March 2022 and that they ought to be granted by virtue of Section 229(5) of the EACCMA, since the Commissioner failed to respond to the Appellant's application for review.

70. The Appellant further argued that the Respondent's interpretation of the HS Code against the East African Community External Tariff and WCO decisions creates a situation where the Appellant pays import duty on its imports, thereby increasing the cost of its products causing the Appellant to lose its competitive edge as a local manufacturer against imported finished goods.

71. The Appellant decried that the Respondent's decision to revoke its correct tariff classification so as not to pay the Appellant's lawful refund is against the Appellant's legitimate expectation and fair administrative action.

Appellant’s prayers 72. The Appellant prays for the following: -a.The Respondent’s review decision dated 22nd March 2022 be struck out in its entirety and the Respondent’s tariff ruling dated 24th November 2021 be upheld.b.The Respondent’s demand dated 11th December 2020 demanding Kshs. 4,853,055 .00 be struck out in its entirety.c.The Respondent be ordered to refund the Appellant Kshs. 5,188,701. 00 paid as import duty tax in accordance with the Respondent’s demand.d.The Respondent, its employees, agents or other person purporting to act on its behalf be barred and/or estopped 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.e.The costs of this Appeal.f.Any other remedies that the Honourable Tribunal deems just and reasonable.

Respondent’s Case 73. The Respondent’s case is premised on the following documents:a.The Respondent’s Statement of Facts dated and filed on 1st July 2022; andb.The Respondent’s Written Submissions filed on 30th January 2023.

74. The Respondent stated that the dispute arose from a post clearance desk audit of the Appellant’s importation of Palsgaard 6111 for the tax periods in 2018 to 2020 and proceeded to issue a demand notice dated 11th December 2020 for VAT and import duty of Kshs. 4,858,055. 00

75. That the demand classified Palsgaard 6111 as Tariff 1517. 90. 00 that attracts an import duty of 25% from Tariff 3824. 99. 90 that attracts import duty of 0%.

76. The Respondent confirmed that the Appellant paid the principal amount demanded of Kshs. 3,077,454. 00 being import duty and Kshs. 531,023. 00 being VAT, and that it applied for a waiver of interest on 17th December 2020.

77. The Respondent averred that on 29th June 2020 it waived 50% of the interest demanded and informed the Appellant to settle the balance of Kshs. 622,289. 00, which the Appellant paid.

78. The Respondent further stated that the Appellant applied for a refund of the above-mentioned amounts when the Respondent on 24th November 2021 issued a tariff classification ruling classifying Palsgaard 6111 and Palsgaard PGPR 4110 as tariff 3824. 99. 00.

79. The Respondent stated that on 16th February 2022 it revoked its tariff ruling dated 24th November 2021 pending tariff determination by the Respondent.

80. The Respondent stated that the Appellant made an application for review of the Respondent’s decision to revoke its tariff classification ruling dated 24th November 2021 and the Respondent’s decision to suspend the processing of the Appellant’s application for refund that the Appellant had made upon its receipt of tariff ruling that was revoked.

81. The Respondent asserted that it subsequently made a review decision on 22nd March 2022, revising its tariff ruling of 24th November 2021 and reclassifying Palsgaard 6111 to tariff 1516. 20. 00 of the Common External Tariff of EACCMA which attracts duty of 25%.

82. The Respondent averred that it carried out a laboratory analysis of Palsgaard 6111 with a view of establishing the correct classification of the product following different opinions on its classification. That the laboratory analysis established that:a.The product is an organic compound with spectro-chemical properties of saturated fatty acid esters.b.The product is an all-vegetable, trans-free and non-GMO, fully hydrogenated triglyceride with crystalising properties, special oil absorbing properties and has an effect of emulsion stablisation derived from rapeseed oil.

83. The Respondent stated that with the laboratory analysis result, it then analysed and established the tariff classification of the product. It stated that Chapter 15 of the EAC CET covers classification of animal or vegetable fats and oils and their cleavage products prepared edible fats.

84. The Respondent further stated that the General Explanatory Note A (1) to Chapter 15 of EAC CET provides for the classification of animal or vegetable fats and oils, whether crude, purified or refined or treated in certain ways (e.g. boiled, sulphurised or hydrogenated).

85. That Heading 15. 16 covers classification of animal or vegetable fats and oils and their fractions, partly or wholly hydrogenated, inter-esterified, re-esterified or elaidinised, whether or not refined, but not further prepared. The Respondent submitted that Palsgaard 6111 is a fully hydrogenated triglyceride.

86. The Respondent averred that the Explanatory Note to Heading 15. 16 provides in part that the heading covers animal or vegetable fats and oils, which have undergone a specific chemical transformation but have not been further prepared.

87. The Respondent submitted that Explanatory Note A (2) to Heading 15. 16 states that the products most commonly hydrogenated are oils of fish or marine mammals and certain vegetable oils (cotton seed oil, sesame oil, ground nut oil, colza oil, soya bean oil, maize (corn) oil, etc.). That wholly or partly hydrogenated oils of this type are frequently used as constituents in the preparation of edible fats of heading 15. 17.

88. The Respondent posited that the product in question, Palsgaard 6111, is used in the manufacturing process of margarine. That the product is valued in the manufacturing process not for any nutrition that it may or may not provide, but for its role as a crystal promoter and emulsion stabiliser. That the product aids in keeping the water and the oil together in the product.

89. The Respondent argued that Heading 38. 24 of the EAC CET covers the classification of products and preparations of the chemical or allied industries (including those consisting of mixtures of natural products), not elsewhere specified or included.

90. The Respondent submitted that mixtures of mono-, di- and tri-fatty acid esters of glycerol, used as emulsifiers for fats are indeed classifiable in Heading 38. 24. It however submitted that Palsgaard 6111 powder is a tri-fatty acid ester of glycerol and not a mixture of mono-, di- and tri-fatty acid esters of glycerol included in heading 38. 24.

91. The Respondent averred that it considered the product as a tri-fatty acid ester of glycerol used in the manufacturing process of margarine as a crystal promoter and emulsion stabiliser classifiable in EAC CET 2017 Code 1516. 20. 20 as guided by the General Rules for the Interpretation of the Harmonized System (GIRs) 1 and 6.

92. The Respondent stated that it classified Palsgaard 4110 in EAC CET 2017 Code 3824. 99. 90.

93. The Respondent asserted that Sections 235 and 236 of EACCMA give the Respondent powers to call for documents and conduct a Post Clearance Audit (PCA) on the import and export operations of a taxpayer within a period of five years from the date of importation or exportation.

94. The Respondent highlighted that if a PCA reveals that taxes were short-levied, or erroneously refunded, Sections 135 and 249 (1) of EACCMA empower the Commissioner to recover the short-levied or erroneously refunded taxes with interest at a rate of two per cent per month for the period the taxes remained unpaid.

95. The Respondent further stated that Section 229 of EACCMA provides for application for review by any person affected by the decision or omission by the Commissioner on matters relating to customs and provides the legal timelines to be observed.

96. The Respondent cited that Section 230 (1) of EACMMA provides that a person dissatisfied with the Commissioner’s decision in after an application for review under Section 229 of EACCMA may appeal to a tax appeals tribunal established in accordance with Section 231 of EACCMA.

97. The Respondent also submitted that the Appeal herein lacks merit and that the Tribunal should dismiss it.

Respondent’s prayers 98. The Respondent prayed that the Tribunal finds:a.That this Appeal lacks merit and the same be dismissed with costs.b.The Respondent’s review decision dated 22nd March 2022 be upheld.

Issues for Determination 99. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issues for determination to be as follows:-a.Whether the Respondent’s review decision dated 22nd March 2022 is proper in law.b.Whether the Appellant’s appeal against the alleged Respondent’s refund rejection is valid.

ANALYSIS AND FINDINGS 100. Having identified the issues that call for its determination, the Tribunal proceeds to analyse them as hereunder.

a. Whether the Respondent’s review decision dated 22nd March 2022 is proper in law. 101. The dispute arose from the Respondent’s post clearance desk audit of the Appellant’s importation of Palsgaard 6111 for the tax periods in 2018 to 2020 which resulted in the Respondent issuing the Appellant with a demand notice dated 11th December 2020 for VAT and import duty of Kshs. 4,858,055. 00. That the demand classified Palsgaard 6111 as Tariff 1517. 90. 00 that attracts an import duty of 25% from Tariff 3824. 99. 90 that attracts import duty of 0%.

102. The Appellant paid the principal amount demanded of Kshs. 3,077,454. 00 being import duty and Kshs. 531,023. 00 being VAT. The Appellant applied for a waiver of the interest demanded which the Respondent waived 50% of, and the Appellant paid the balance of interest of Kshs. 622,289. 00.

103. The Appellant applied for a refund of the above-mentioned payments when the Respondent on 24th November 2021 issued a tariff classification classifying Palsgaard 6111 and Palsgaard PGPR 4110 as tariff 3824. 99. 00.

104. The Respondent stated that on 16th February 2022 it revoked its tariff classification ruling dated 24th November 2021 pending tariff determination by the Respondent.

105. The Appellant made an application for review of the Respondent’s decision to revoke its tariff classification ruling in a letter dated 24th November 2021 and requested the Respondent to promptly refund the Appellant the taxes that it paid upon its receipt of the tariff ruling that was revoked.

106. The Respondent subsequently made a review decision in a letter dated 22nd March 2022, revising its tariff ruling of 24th November 2021 and reclassifying Palsgaard 6111 to tariff 1516. 20. 00 of the Common External Tariff (CET) of EACCMA which attracts duty of 25%.

107. The Tribunal has considered the assertions by both parties and scrutinised the documents presented before it and is of the considered view that the procedure for resolving tax disputes under the mandate of the Respondent is outlined in Section 229 of EACCMA which provides that: -“(1)A person directly affected by the decision or omission of the Commissioner or any other officer on matters relating to Customs shall within thirty days of the date of the decision or omission lodge an application for decision or omission.(2)The application referred to under subsection (1) shall be lodged with the Commissioner in writing stating the grounds upon which it is lodged.(3)…(4)The Commissioner shall, within a period not exceeding thirty days of the receipt of the application under subsection (2) and any further information the Commissioner may require from the person lodging the application, communicate his or her decision in writing to the person lodging the application stating reasons for the decision.(5)Where the Commissioner has not communicated his or her decision to the person lodging the application for review within the time specified in subsection (4) the Commissioner shall be deemed to have made a decision to allow the application.”

108. The Tribunal notes that the Appellant made an application for review of the Respondent’s decision on 17th March 2022. Respondent issued its review decision in a letter dated 22nd March 2022. The letter was however posted on 22nd April 2022 according to the postage stamp on the envelope in which the letter was delivered.

109. The Tribunal finds that the date the Respondent communicated its review decision was the date on the postage stamp which was on 22nd April 2022.

110. The Tribunal has reviewed the statutory timelines within which the Respondent was to communicate the review decision and finds that the Respondent delayed its communication by 6 days, as it was to communicate the review decision by 16th April 2022, that is, 30 days of its receipt of the Appellant’s application for review. Due to this delay by the Respondent, the Tribunal finds that the Respondent was deemed to have made the decision to allow the application, and the tax assessment therein vacated, according to Section 229 (5) of EACCMA cited above.

111. Further, the Tribunal buttresses its observation of the importance of adherence to timelines by referring to the case of Eastleigh Mall Limited v Commissioner of Investigations & Enforcement (Income Tax Appeal E068 of 2020) [2023] KEHC 20000 (KLR) where the court stated that: -“Parliament in its wisdom knew that in matters tax, time is very crucial as those in commerce need to make informed decisions. If the Commissioner is allowed to exercise his discretion and stay ad-infinitum before issuing an objection decision, the tax payer would be unable to make crucial decisions and plan his/her business properly. The timelines set are mandatory and not a procedural technicality.”

112. The Tribunal is further guided by the case of W.E.C. Lines Ltd vs. The Commissioner of Domestic Taxes [TAT No. 247 of 2020] where it was held at paragraph 70 while reiterating the holding in Krystalline Salt Ltd vs KRA [2019] eKLR that: -“Where there is a clear procedure for redress of any particular grievance prescribed by the constitution or an Act of Parliament, that procedure should be strictly followed. Accordingly, the special procedure provided by any law must be strictly adhered to since there are good reasons for such special procedures. The relevant procedure here is the process of opposing an assessment by the Commissioner.”

113. Based on the foregoing, the Tribunal finds that the Appellant’s review application was deemed to be allowed by operation of law. The Respondent’s review decision dated 22nd March 2022 and communicated to the Appellant more than 30 days later was therefore not proper in law.

b). Whether the Appellant’s appeal against the alleged Respondent’s refund rejection is valid. 114. Having determined that the Appellant’s application for review was deemed to have been allowed by operation of law, the Tribunal did not analyze the second issue for determination as it had been rendered moot.

Final Decision 115. The upshot of the foregoing is that the Appeal succeeds, and the Tribunal accordingly proceeds to make the following orders: -a.The Appeal be and is hereby allowed.b.The Respondent’s review decision dated 22nd March 2022 be and is hereby set aside.c.Each party to bear its own costs.

116. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF DECEMBER, 2023. GRACE MUKUHACHAIRPERSONDR ERICK KOMOLO JEPHTHAH NJAGI MEMBER MEMBERTIMOTHY VIKIRU GLORIA A. OGAGA MEMBER MEMBER