[2023] KETAT 1023 (KLR)

Kapa Oil Refineries Limited v Commissioner of Customs & Border Control (Tribunal Appeal 296 of 2020) [2023] KETAT 1023 (KLR) (8 September 2023) (Judgment)

Neutral citation: [2023] KETAT 1023 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 296 of 2020

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

September 8, 2023

Between

Kapa Oil Refineries Limited

Appellant

and

Commissioner of Customs & Border Control

Respondent

Judgment

1. The Appellant is a limited liability company duly incorporated in Kenya under the Companies Act, Chapter 486, of the laws of Kenya. Its principal activity is the manufacture of edible oils, margarine, detergent powder, baking powder, laundry soap, tissue and glycerin among others.

2. The Respondent is a principal officer appointed pursuant to Section 5 (1) of the East African Community Customs Management Act, 2004, (EACCMA) as read together with Section 13 of theKenya Revenue Authority (KRA) Act, with a mandate to ensure proper administration of customs laws and the collection of customs duties on behalf of the Government of Kenya.

3. The Respondent undertook a Customs post clearance a udit upon the Appellant covering the period January 2015 to December 2019, pursuant to the provisions of the EACCMA. The audit was carried out in the year 2020 on the site and at the premises of the business operations of the Appellant in relation to customs procedure.

4. The Respondent issued post clearance audit findings and tax demand notice pursuant to the provisions of Sections 235 and 236 of theEACCMA vide its letters dated May 7, 2020, demanding extra duties of Kshs. 183,169,578. 00 on the basis of alleged wrong tariff declarations for constituent parts of machines that it had imported and declared as fully assembled machines.

5. The Appellant objected to the said demand pursuant to Section 229 of the EACCMAvide its notice of objection dated May 26, 2020. In its objection, it sought for review of the taxes demanded. The parties subsequently held a meeting on June 18, 2020 in a bid to resolve the issues.

6. The Respondent rendered its review decision on the June 23, 2020, upholding its demand notice of the May 7, 2020.

7. Being dissatisfied with the review decision, the Appellant filed its Notice of Appeal dated July 17, 2020.

The Appeal 8. The Appellant’s Amended Memorandum of Appeal amended on July 5, 2021 listed the following as grounds of appeal:a.That the Respondent erred in law in purporting to re-classify the Appellant’s tariff declarations on its imported machinery, the subject of the tax demand, when the Respondent could not, in law, re-classify the Appellant’s tariff declarations as it did.b.That the Appellant erred in law by purporting to disallow the Appellant’s tariff classifications of its imported machinery relying on a provision of the law that did not sanction the Respondent’s actions.c.That in arriving at its decision, the Respondent misconstrued and misapplied the provisions of Section XVI and the General Interpretative Notes (GIN) of the East African Community Common External Tariff.d.That the Respondent erred in law in disregarding the applications made by the Appellant and the decision of its customs officers allowing the Appellant’s tariff declarations.e.That the Respondent erred in law when it assessed taxes on the Appellant on the basis that the Appellant applied erroneous tariff identification on classification of consignments.f.That the Respondent erred in law and in fact by upholding its decision to demand for tax on the importation of machinery by the Appellant on basis that the machines were parts and therefore not machinery qualifying as machinery of Chapters 84 and 85 for exemption under the Value Added Tax(VAT) Act, 2013. g.That the Respondent erred in law and in fact when it purported to apply the provisions of EACCMA to amend and or alter the exempt status of plant and machinery imported by the Appellant for purposes of manufacture.h.That the Respondent erred in law or fact when it upheld its decision that plants and machinery for use in manufacture imported in parts are not exempt as provided for under Paragraph 27 of the First Schedule to the VAT Act.i.That the Respondent erred in law and in fact when it failed to consider the Appellant’s evidence that it duly complied with the relevant provisions of the law in making its tariff declarations.j.That the Respondent erred in law in demanding taxes where the same are not sanctioned in law hence acting contra statute.

Appellant’s Case 9. The Appellant’s case is premised on the following documents as filed and proceedings before the Tribunal:-a.Appellant’s supplementary Statement of Facts amended on July 5, 2021 and the documents attached thereto.b.Appellant’s Further List & Bundle of Documents dated June 8, 2021 and filed on June 9, 2021. c.The Appellant’s list of authorities dated and filed on August 19, 2021 together with copies of the authorities attached thereto.d.The Appellant’s witness statements of Joshua Makuthu Mwendwa and Thaduru Munirthiman Chandra Sekar both dated July 6, 2021 and admitted as evidence in chief on oath on March 1, 2023. e.Appellant’s Written Submissions dated 16th March 2023 and filed on the same date.

10. The Appellant averred that it is a leading manufacturer of quality edible oils, margarine, detergent powder, baking powder, laundry soap, tissue and glycerin and has been in operation since the 1960’s. That the Appellant is a huge taxpayer paying taxes running into millions of shillings every year.

11. That in the period between the year 2015 and 2019, the Appellant imported, in unassembled and through several consignments, various machinery for its production processes to wit; coal and wood fired steam boiler, 380MTD Dry fractionation plant, retrofit of a heat-sealing system, 800MT physical refining plant, and Upgrading of fats homogenizing combinator.

12. That the Appellant applied to the Respondent to be allowed to import the complete set of the machinery in CKD form through several consignments.

13. The Appellant stated that in compliance with the provisions of East African Community Common External Tariff duly declared, for tariff classification purposes, the said consignments, which declarations were duly confirmed and allowed by the Respondent’s Import Point Customs officers. That the consignments were declared as follows:-i.Parts constituting Coal and Wood fired steam boiler were declared under tariff heading 84021100ii.Parts constituting retrofit of a head sealing system were declared under tariff heading 84223000. iii.Parts constituting 380 MTD dry fractionation plant were declared under tariff heading 84792000. iv.Parts constituting 800MT physical refining plant were declared under tariff heading 84792000. v.Upgrading of fats homogenizing combinator was declared under tariff heading 84792000.

14. That the Appellant’s decision to declare its importations as shown above was informed by the provisions of the East African Community Common External Tariff that allows the importation of machinery unassembled and in several consignments for ease of transportation.

15. That during the importation and declarations, the Appellant duly engaged the Respondent’s border-point customs officers on the issue of importing its machinery unassembled and in several consignments and provided the said officers with all documents necessary in support of its declarations pursuant whereof, the said officers allowed the declarations.

16. That thereafter, the Appellant installed the imported machinery in its factory premises located on Mombasa Road whereby some of the machinery are now running and others are still in the process of installation.

17. That in the year 2020, the Respondent, ostensibly acting pursuant to the provisions of EACCMA, undertook a customs post clearance audit in relation to customs procedures. That the audit was conducted on site at the premises of the business operations of the Appellant. That the audit covered the period from January 2015 to December 2019.

18. That the Respondent in its post clearance audit findings of 7th May, 2020 alleged that it had discovered some instances of non-compliance with East African Community Common External Tariff (EACCET) where the Appellant had declared some items as machinery yet, according to the Respondent, there was non-compliance with the provisions of Section XVI of the EACCET.

19. That during the audit period, the Appellant provided detailed explanations to the audit team on how the aforesaid machinery had been imported unassembled and in several consignments for ease of transportation as allowed under the EACCET.

20. That the audit team also carried a physical inspection of the machinery and clearly established that the same had been installed as complete machinery and others were still in the process of installation.

21. That the Appellant went further and took the audit team through the engagement between the Appellant and the Respondent’s officers, the queries raised by the Customs officers and the documents supplied to the said officers in support of the Appellant’s tariff declarations of the consignments as parts of a complete machinery.

22. That the above notwithstanding, the Respondent still maintained that the Appellant did not adhere to the provisions of additional notes 2 under Section XVI of EACCET (2012 and 2017) which provides the guidelines for partial importation of machinery in an unassembled state, and thus issued a demand notice to the Appellant in its letter dated May 7, 2020.

23. That the Respondent’s aforesaid demand notice was accompanied by a post clearance audit findings letter dated the same day, where the Respondent alleged that there was non-compliance by the Appellant with the following provisions of Paragraph 2 of the Additional Note 2 of Section XVI of EACCET;i.That a request must be made in writing to a customs post not later than the first consignment;ii.That the request should have a manual, diagram or, if necessary, several diagrams, of the machines showing the serial numbers of the most important constituent parts;iii.That there should be a general inventory containing an indication of the characteristics and approximate weights of the different parts and the serial numbers of the most constituent parts;iv.That there should be a contract for the supply of the complete machine;v.That all the constituent parts must be imported through the same point of entry and within allowed times unless otherwise authorised;vi.That upon each partial importation, a list of parts making up the consignment with reference to the above-mentioned general inventory must be provided; andvii.That the customs declaration for each consignment must contain description of both the parts making up the consignment and the complete machine.

24. That the above findings by the Respondent were erroneous for reasons that the Appellant had complied with all the relevant provisions of the law in its declarations.

25. That as a result of the erroneous findings, the Respondent demanded from the Appellant, by its letter dated 7th May 2020, additional taxes amounting to Kshs. 183,169,578. 00 in respect of import duty, VAT and interest thereof. That the Respondent demanded a sum of Kshs. 667,337. 00 in import duty, Kshs. 123,059, 568. 00 in Value Added tax and Kshs. 59,442,673. 00 in interest.

26. That the Appellant was aggrieved by the Respondent’s decision and served a notice of objection dated May 26, 2020, giving specific grounds of appeal to wit that contrary to the Respondent’s assertions, there was no non-compliance by the Appellant, with the provisions of the EACCET, and that nothing in Section XVI of the EACCET gave the Respondent powers to re-classify the Appellant’s machinery as the Respondent did. That the Appellant detailed its compliance with the provisions of additional notes 2 of Section XVI of EACCET and appealed that the demand for additional taxes on the imported machinery be vacated.

27. That on June 23, 2020, the Respondent issued an objection decision upholding its demand notice of May 7, 2020, demanding additional taxes despite the Appellant providing the Respondent explanations in a Meeting of June 18, 2020.

28. That the Respondent upheld its decision to demand for tax on the alleged basis that the Appellant did not comply with the provisions of Additional Note 2 of Section XVI of EACCET, and therefore applied erroneous tariff identification on classification of consignments of machinery imported by the Appellant.

29. That the Appellant duly complied with the requirements for importation of machinery unassembled and in several consignments as contained in Additional Note 2 of Section XVI of the East African Community Common External Tariff.

30. That prior to importing the first consignment, the Appellant indeed notified the Respondent through its letters to the Respondent seeking authority to import machinery in unassembled state and that it was declaring the same as machinery.

31. That the said letters clearly disclosed the true nature and characteristics of the machinery the Appellant intended to bring to the Country, and the fact that it was importing complete machinery, unassembled in completely knocked down (CKD) kits, which would be re-assembled.

32. That the Respondent allowed the importation of the CKDs as applied by the Appellant when it cleared the same imports for home use.

33. That prior to importing the first consignment, the Appellant also notified the Respondent through the import declarations forms or otherwise, that it was importing machinery in unassembled state and was declaring the same as machinery.

34. That the said Import Declarations Forms (IDFs) clearly disclosed the true nature and characteristics of the machinery the Appellant intended to bring to the Country, and the fact that it was importing complete machinery, unassembled in completely knocked down (CKD) kits, which would be re-assembled.

35. That the request contemplated in Section XVI of the EACCET is not in any required format and can therefore take any form.

36. That, therefore, in this case such request took the form of the IDFs presented by the Appellant to the Respondent notifying the Respondent of the Appellant’s intention to import its machinery unassembled and in several consignments and to declare the same as machinery in compliance with the provisions of Additional Note 2 of Section XVI of EACCET.

37. That the Appellant did, upon importation of the machinery, indicate in the import entries that such CKDs formed part importation of the machinery as had been declared in the IDF.

38. That the Respondent’s customs officers at the importation point also sought and were provided by the Appellant, with the necessary proof that each of the parts constituted the machinery being imported in CKD for assembly at the Appellant’s manufacturing site.

39. That during the importation process, the Respondent’s customs officers were provided by the Appellant with contracts, diagrams and details of the consignments including the characteristics and approximate weight of the different parts being imported at the port of importation, upon request by the Respondent, during the first import and thus, the required notification was indeed done.

40. That the Respondent also scanned the imports and satisfied itself that the imports were declared and indeed, acknowledged in its review reports that these were machines being imported in CKD form.

41. That it is clear that the Appellant did comply with the provisions of the law on importation of machinery unassembled and in several consignments but the Respondent now purports to demand additional taxes by misconstruing the provisions of Section XVI of the EACCET.

42. That the purpose of the import declaration form is to inform and notify the Respondent of the anticipated imports that the importer will be bringing to the Country and for the Respondent to issue any comments and/or directions.

43. That the Appellant has contracts in place for the supply of the complete machines with the respective manufacturers of the machinery.

44. That all the constituent parts of the same machines were imported through the same point of entry and within allowed times.

45. That upon importation, a list of the parts making the consignment were also provided to the customs officers.

46. That the customs declaration for each consignment contained description of both the parts making the consignment and the complete machines when assembled.

47. That from the above, it is indeed clear that the Appellant complied with the provisions of Additional Note 2 of Section XVI of EACCET. That the Appellant declared the correct tariff for machinery in question which undoubtedly qualified for exemption and was classified correctly under Section XVI of EACCET.

48. That in addition to the above, the Respondent seeks to impose VAT on the importation of the SPX upgraded fats homogenising combinator imported under Entry No. JKA397544 dated 26th June 2018.

49. That the Respondent asserts that although the IDF read “Upgrade of fats homogenising Kombinator”, the declaration read chilling tubes for the upgrading of fats homogenising kombinator thus meaning the import was for chilling tubes. That the Respondent further asserts that same item was verified by customs and two out of three verified packages were found to be chilling tubes.

50. That the Appellant imported the SPX Upgraded fats homogenising Kombinator in fully assembled state, and was declared as such on the entry form and was not indicated as being part of the machinery being imported in CKD. That the machine is used for the homogenising of fats in the manufacturing process of cooking oils and was introduced to add value to the manufacturing process and making the cooking oils.

51. That similarly the retrofit heat-sealing machine imported under import entry number JKIA302843 was imported in fully assembled state and not part of another machine. The Appellant submits that this type of machine is clearly specified under tariff classification 8422300 as a machine for sealing, and thus is correctly classified on its own. From the import entry, it is clear that the declaration did not indicate that this machine was being imported as part of a CKD of another machine, as it is a machine on its own.

52. That subsequent to the importations, the company has completed assembling one of the machineries and has indeed commenced its operations. That the coal and wood fired steam boiler was imported under import entries MSA6030563, MSA6045694, MSA6044781, MSA6054557, MSA6058876 and MSA6225488 is indeed fully installed and in operation.

53. That the dry fractionating plant whose CKDs were imported vide import entries numbers MSA7318101, MSA7322353, ICD149062 and MSA7391894, and the 800 MTD physical refining plant imported under import entries MSA7339664, ICD148024, ICD147867, MSA7391847, MSA7391930 and ICD158790 is in the process of installation to complete the imported machine.

54. That even if it was to turn out that there was non-compliance by the Appellant as alleged by the Respondent, which is denied, the same did not in any way change/alter the imported machineries’ VAT status.

55. That it is verifiable that the Appellant did import the machinery for use in manufacturing, a fact that has been independently verified by the Respondent when it undertook a site verification and satisfied itself that the purpose and intention of importation was achieved, rather than merely revoking and or altering and amending the tax status of the importation allegedly for non-compliance, which non-compliance does not in any way affect the consignments tax status.

56. That even if there was non-compliance, which is denied, the same cannot serve to amend or alter the VAT status of the importation, clearly specified as exempt under Paragraph 27 of Part I of the First Schedule to theVATAct. That the paragraph clearly specifies that plants and machinery of Chapters 84 and 85 used for manufacture are exempt from VAT.

57. That nothing under Additional Note 2 of Section XVI of the EACCET empowers the Respondent to disallow a tariff declaration as it purports to and the Respondent is therefore, in issuing the demand notice, acting without any enabling powers.

58. That for VAT purposes, as long as the machinery are used for manufacture, the issue of reclassifying does not change that status, as the machines or their parts thereof, are for use in manufacture, and indeed are being used or to be used for manufacture, which is the qualification specified under the VAT Act.

59. That the Appellant further submits that the relevant documents specified under the law are available for perusal if need be, again, for the Respondent to satisfy itself that the requirements have been met by the Appellant.

60. That the denial of the tax benefit for the importation of machinery for manufacturing cannot be denied merely due to the lack of such notification when all the substantive and established objectives of the importation have been met.

61. That the Respondent therefore has no basis whatsoever in law to demand for additional taxes from the Appellant where the conditions set therein in the EACCET have been met and documents provided for the machinery imported.

62. That the Respondent’s decision to demand for additional taxes on goods that are specifically exempt by the law is irrational and constitutes unreasonable exercise of power, which the Respondent has abused by issuing demands in respect of taxes that were not lawfully due and by so doing acted unfairly against the Appellant.

63. That although the Respondent has powers to assess and demand payment of taxes due, the statutory powers can only be exercised validly if they are exercised reasonably, rationally and properly and that no statute ever allows any public officer to exercise statutory power arbitrarily or capriciously.

64. That the Respondent has acted against the Appellant’s legitimate expectation by demanding taxes in respect of goods that were already cleared by the Respondent, where the VAT demanded would have been deductible but for the delay by the Respondent.

65. That notwithstanding the provisions of Sections 235 and 236 of the EACCMA, the Respondent plays a crucial role in the process of clearing of goods. That the goods cannot be released to an importer from customs control unless they are subjected to a rigorous verification of the imported goods and accompanying documentation, assessment and clearance by the Respondent upon payment of any taxes applicable and where applicable, authorizing exemptions accordingly; a process the Respondent undertook in clearing the machinery imported by the Appellant. It is therefore unreasonable for the Respondent and an act of bad faith to demand for tax, post clearance.

66. That it is a cardinal aspect of taxation that the Respondent cannot, by stretching the meanings of legal provisions, keep shifting positions in order to collect more taxes much to the detriment of the Appellant who has acted in good faith when complying with tax provisions.

67. That the Appellant will suffer great prejudice as a result of the Respondent’s actions as the Respondent has no basis whatsoever in law to demand for additional taxes from the Appellant whereas it is compliant with the provisions of EACCMAand the VAT Act.

Appellant’s Prayers 68. Accordingly, the Appellant prays to the Tribunal for the following Orders: -a.A declaration that the Respondent’s demand for taxes, from the Appellant, vide its demand letter dated 7th May 2020 and confirmed on June 23, 2020 was unmerited, without basis, ultra vires the law and therefore null and void.b.An order vacating in its entirety, the Respondent’s demand from the Appellant, for taxes in the sum of Kshs. 183,169,578. 00 (in duties, Value Added taxes and interest) by Respondent’s letter dated May 7, 2020 and confirmed on June 23, 2020. c.The costs of this Appeal be granted; andd.Any other reliefs that the Tribunal deems just and reasonable.

Respondent’s Case 69. The Respondent case is premised on the following documents:a.The Respondent’s 2nd Supplementary Statement of Facts dated and filed on July 23, 2021. b.Respondent’s Witness Statement of Maureen Okite dated July 23, 2021 and filed on the July 25, 2021 admitted in evidence on oath by the Tribunal on March 1, 2023. c.Respondent’s Written Submissions dated 15th March 2023 and filed on March 16, 2023.

70. The Respondent reiterated that the tax/duty demanded on May 7, 2020 was lawful and justified as it was based on post clearance audit on the Appellant’s import entries and import documents.

71. That the Respondent in execution of its mandate under the East African Community Customs Management Act, 2004, is duty bound to audit or investigate any reasonable suspicion aimed at subverting the laid down customs laws in order to avoid payments of correct duties.

72. That the Appellant did not import and declare a machinery in its constituent/component parts.

73. That the importation of Plant/Machinery & Equipment of Chapters 84 & 85 in partial shipments in several consignments over a period of time for convenience of transport is provided for under the East African Community Common External Tariff (EAC CET), 2012 and 2017 Additional Note 2 to Section XVI.

74. That the EAC Common External Tariff, 2012 & 2017 provides for the requirement to make an application in writing for partial shipment of a machinery in an unassembled or dissembled state under Additional Note 2 of Section Notes to Section XVI.

75. That in order to declare the different constituent parts under the same tariff heading or subheading as the assembled machine, it is a requirement that the declarant/Appellant must make a request/application in writing to the Respondent not later than the first consignment, and that the Applicant shall attach the following documents:i.A manual, diagram or, if necessary, several diagrams, of the machine showing the serial numbers of the most important constituent parts.ii.A general inventory containing an indication of the characteristics and approximate weights of the different parts and the serial numbers of the principal parts referred to above.iii.Complete Commercial/Sales Contract(s) for the supply of a machine.iv.All the Consequent parts must be imported through the same point of entry and within allowed time unless otherwise provided.v.That upon each partial importation, a list of parts making up the consignment with references to the above-mentioned general inventory must be provided.vi.That the customs declaration for each consignment must contain description for both the part making up the consignment and the complete machine.vii.Pro-forma invoices.

76. That the above conditions were not fulfilled by the Appellant for any single consignment, and the audit revealed that what was imported are separate component parts of a machinery which therefore led to re-classification of the constituent parts in their respective tariff headings or sub-headings.

77. That regarding additional documents filed by the Appellant, specifically letters dated September 16, 2019 and October 11, 2019, the Respondent avers that the said letters did not satisfy the requirements of the Additional Note 2 of Section Notes to Section XVI of the EAC Common External Tariff, 2012 & 2017.

78. That the letter dated October 11, 2019 was not served and thus no application/request to the Respondent can be deemed to have been made as required by law to enable the Appellant to declare the different constituent parts under the same tariff heading or subheading as the assembled machine.

79. That even if the purported application was made, it would still fail the test of law aforementioned as the Appellant was required to make the request/application in writing to the Respondent not later than the first consignment.

80. That the said letter sought permission to import a consignment described as ‘a 380 MTD Dry Fractional Plant in CKD Form’. That analysis of the entries made with respect to the consignment in question reveals that the first consignment arrived on August 20, 2019 and declared so under customs entry number, 7318101. That as a result, the purported application was made way after the first consignment and thus an afterthought with no probative value on the issue in dispute.

81. That accordingly, all the subsequent entries made with respect to the consignment subject to the letter/purported application are in contravention of the Additional Note 2 of Section Notes to Section XVI of the EAC Common External Tariff, 2012 & 2017. That the subsequent consignments thus cannot be classified as machinery imported under partial shipment regime.

82. That with respect to the letter dated September 16, 2019, the Respondent refutes the Appellant’s statement that it was served and that an application/request was made in advance to make importation of a consignment described as ‘800MTD Physical Refining Plant in CKD form’, and puts the Appellant to the strict proof thereof.

83. That even if the purported application/request was made, it would still fail the test of law aforementioned, as the Appellant was required to make the request/application in writing to the Respondent not later than the first consignment.

84. That analysis of the entries made with respect to the consignment in question reveals that the first consignment arrived on September 11, 2019 and declared so under customs entry number, 7339641. That as a result, the purported application was made way after the first consignment and thus an afterthought with no probative value on the issue in dispute.

85. That accordingly, all the subsequent entries made with respect to the consignment subject to the letter/purported application are in contravention of the Additional Note 2 of Section Notes to Section XVI of the EAC Common External Tariff, 2012 & 2017. That the subsequent consignments thus cannot be classified as machinery imported under partial shipment regime.

86. That all other accompanying documents required to accompany the purported applications made were never availed at the time of the application as required by law and were only provided at the Appeal stage before the Tribunal.

87. That, consequently, the production of the documents at the appeal stage serves no probative value in so far as the requirement of Additional Note 2 of Section Notes to Section XVI of the EAC Common External Tariff, 2012 & 2017 is concerned.

88. That as a result, having not complied with the law, extra taxes amounting to Kshs. 183,169,578. 00 were assessed being import duty, VAT and interest thereof.

89. That the Appellant’s argument that the Import Declaration Forms is the proper format/substitute for making an application for purposes of notes to Section XVI (Additional Note 2) of the EAC CET is refuted. That the conditions stated therein act as a constructive notice to prevent any revenue leakage during importation of goods.

90. That the procedure set out there in assists the Respondent to verify particulars of the impending importation to ensure that it conforms to the consent that granted in line with Additional Note 2 of Section Notes to Section XVI of the EACCET.

91. That as a result, a prior notice/application in writing required a prescribed form completed at a time or concurrent with the time of entering goods into the Country for home use. That as a result, it does not serve as a prior notice to the Respondent of the requirement of the conditions stated under the said provision.

92. That the General Interpretation Rules (GIRs) as cited in the East African Community CET govern classification of goods. That according to GIR 1, classification shall be determined according to the terms of the heading and any relative section or Chapter notes and, provided the headings or notes do not otherwise require, according to GIRs 1 through 6.

93. That further, the Harmonized Commodity Description and Coding System Explanatory Notes as well as the Additional Notes constitute the official interpretation of the Common External Tariff and provide the scope of each heading under the EAC CET.

94. That tariff classification as per the demand notice to the Appellant have been done in accordance to the GIR which stipulates that classification shall be determined according to the terms of the headings and any relative Section or Chapter notes.

95. That the assessed taxes arise as a result of the Appellant’s erroneous tariff classifications of the consignments imported. That the Appellant did not follow the GIR 1 and Section notes to Section XVI.

96. That at the point of importation into the Country, the Respondent noted that the machinery parts imported by the Appellant were being mis-declared under the tariff heading of assembled machinery which do not attract import duty and VAT.

97. That the Respondent reviewed the import entry and other documents relating to the entry and established that there were misdeclarations by the Appellant on the consignments imported with a view to concealing the correct nature of the goods and avoid payments of the correct duties applicable.

98. That the Appellant’s entry No. JKA 3975444 was not for machine allegedly imported or related to the machine. That the Appellant states in its Import Declaration Form and Statement of Facts that what was imported was ‘upgrade of fats homogenising kombinator’, whereas the actual declaration (import entries) states that the actual goods imported was ‘chilling tubes for the upgrading of the fats homogenising kombinator’.

99. That the post clearance audit equally revealed that what was actually imported was ‘chilling tubes for the upgrading of fats homogenesing kombinator’ as per the Appellant’s Import Entry Declaration.

100. That the imported good had no relationship with the machine allegedly imported in constituent parts.

101. That the consignments of machineries like the one indicated under entry No. JKA3928343 is governed by Note 3 of Section XVI of EACCMA, 2004. That as a composite machine, it is a requirement that it be declared together with the machine that performs the principal function. That the Appellant failed to do so as, and a result the Respondent classified it under its right tariff and charged duties accordingly.

102. That in execution of its mandate under Sections 235 and 236 of EACCMA, 2004, the Respondent has a statutory duty to carry out post clearance audits on import declarations made by taxpayers by verifying the accuracy of entry of goods and/or documents and further to determine whether a person has made the correct customs declaration and paid all taxes due.

103. That according to Section 236 ofEACCMA, the Commissioner has the powers to: -a.verify the accuracy of the entry of goods or documents through examination of books, records, computer stored information, business systems and all relevant customs documents, commercial documents and other data related to the goods.b.question any person involved directly or indirectly in the business, or any person in the possession of documents and data relevant to the goods or entry.c.inspect the premises of the owner of the goods or any other place of the person directly or indirectly involved in the operations; andd.examine the goods where possible for the goods to be produced.

104. That the Respondent acted within the confines of the law and that all the actions it took were justifiable and reasonable to ensure recovery of taxes owing from the Appellant.

105. That the Appellant’s prayers seeking to oust a clear procedure stipulated in customs law, if allowed will create a bad precedent and abuse due process.

106. That the Appellant’s grounds, if allowed, will result in real and imminent danger of loss of Government revenue where importers/taxpayers would re-characterize imported goods to beat a clear provision of the law.

107. That the Respondent has demonstrated that it acted within the law in all its dealings with the Appellant and having fully complied with the procedures thereof as elaborated in the forgoing paragraphs, and being actions taken in full compliance of its statutory duties, thus the Appellant’s assertions to the contrary cannot stand and is made in bad faith and completely lacking in merit.

108. That the Appellant misconstrued the law by claiming VAT exemptions on its importations on the basis of exemption provided for plants and machinery of Chapters 84 and 85 under the 1st Schedule Part 1 Paragraph, 27 of the VAT Act, 2013.

109. That the Respondent reiterates the express provision of the law that the VAT exemption stated under the said provision relates to the plants and machinery and not their composite parts.

110. That it’s a trite law that a revenue Act must be construed strictly without any intendment and inference being made to the express letter of the statute. Nothing is to be read in, nothing is to be implied. That one can only look fairly at the language used.

111. That the Respondent further reiterates that in exemption tax regimes, it is a fundamental principle that unless an item is exclusively exempted and expressly stated as such, the item becomes taxable. That consequently, the Appellant’s argument that it is entitled to VAT exemptions is not supported by the express provision of the law which only allows exemption of plants and machinery, but not their constituent parts thereof. That the Respondent’s demand for taxes therefore was lawful and justified.

Respondent’s Prayers 112. The Respondent prays that this Tribunal: -a.Upholds the objection/review decision as proper in law and in conformity with the provisions of the Law.b.This Appeal be dismissed with costs to the Respondent as the same is devoid of any merit.

Issue For Determination 113. The Tribunal, upon reading the pleadings, oral testimony of the respective parties’ witnesses as well as the testimony of Gerald Njoroge Mwangi, called as a witness following the Tribunal’s summons outlined in its Ruling dated 4th February 2022 and the written submissions together with supporting authorities filed by the parties identified only one issue for its determination, namely: -Whether the Respondent was justified in assessing the Appellant for additional taxes.

Analysis And Findings 114. Having identified the issue falling for its determination, the Tribunal wishes to analyze the same as hereunder.

115. The dispute between the parties herein was primarily triggered by the customs post clearance audit the Respondent conducted on the Appellant in 2020, covering the period January 2015 to December 2019, pursuant to the provisions of the East Africa Community Customs Management Act (EACCMA).

116. The audit resulted in a post clearance audit finding communicated to the Appellant vide the Respondent’s letter dated 7th May, 2020. The main issue of contention in the audit finding is tariff declarations. In particular, the Respondent noted in the findings that;“some machinery parts imported by yourselves were being mis-declared as machinery which do not attract import duty and VAT”.

117. The Tribunal also noted that an ancillary issue in dispute in the post clearance audit findings relates to procedure for declaring constituent parts of a machinery envisaged under Additional Notes to Section XVI of the EACCET 2012 and 2017.

118. The Tribunal notes that these two points of contestation raise the question of burden of proof in tax matters. Section 30 of the Tax Appeals Tribunal Act provides as follows regarding burden of proof:“In a proceeding before the Tribunal, the appellant has the burden of proving -a.where an appeal relates to an assessment, that the assessment is excessive; orb.in any other case, that the tax decision should not have been made or should have been made differently.”

119. The question of burden of proof in tax disputes was dealt with in Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR where Justice Mativo held that;“The shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the Commissioner's assessments or determinations of deficiency. The commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer.”

120. As highlighted above, the Tribunal noted that the main reason advanced by the Respondent in its post clearance audit finding letter of May 7, 2020, and that led to assessment of additional taxes, was that the Appellant failed to comply with Additional Note 2 of Section XVI of the EACCET on partial shipments when importing its machinery in partial shipments.

121. Additional Note No. 2 of Section XVI of the East Africa Community Common External Tariff provides as follows;“A machine in a disassembled or unassembled state may be imported in several consignments over a period of time if this is necessary for convenience of trade or transport.In order to be able to declare the different constituent parts under the same tariff heading or subheading as the assembled machine, the declarant must make a request in writing to the customs post not later than the first consignment and attach:a)A manual, diagram or, if necessary, several diagrams, of the machine showing the serial numbers of the most important constituent parts;(b)A general inventory containing an indication of the characteristics and approximate weights of the different parts and the serial numbers of the principal parts referred to above.The application may only be accepted in fulfillment of a contract for the supply of a machine which can be regarded as complete for the purposes of the EAC tariff Nomenclature.All the constituent parts must be imported through the same entry point within the allowed time. However, in special cases, the competent authorities may authorize importation through several points of entry. This time limit may not be exceeded unless a reasoned and justified request for an extension is made to the competent authorities.Upon each partial importation, a list of the parts making up the consignment with references to the above-mentioned general inventory must be provided. The customs declaration for each consignment must contain descriptions of both the part or parts making up the consignment and the complete machine.” (Emphasis Added)

122. The Tribunal noted that the contestation in this regard was whether the Appellant complied with Additional Note 2 of Section XVI of the EACCET which provides with emphasis that:-“…a request in writing to the customs post not later than the first consignment…”

123. The Appellant averred that it did indeed write letters to the Respondent seeking authority to import the machinery in completely knocked down (CKD) form. The Appellant’s letters were annexed and marked as “EO5” and dated September 16, 2019 and October 11, 2019.

124. The Respondent stated that the letters dated 16th September 2019 and October 11, 2019 did not satisfy the requirements of the Additional Note 2 of Section Notes to Section XVI of the EAC Common External Tariff, 2012 & 2017.

125. That the letter dated October 11, 2019 was not served and thus no application and/or request to the Respondent can be deemed to have been made as required by law to enable the Appellant to declare the different constituent parts under the same tariff heading or subheading as an assembled machine.

126. That even if the purported application was made, it would still fail the test of law aforementioned as the Appellant was required to make the request and/or application in writing to the Respondent not later than the first consignment. That the said letter sought permission to import a consignment described as ‘a 380 MTD Dry Fractional Plant in CKD Form’. Analysis of the entries made with respect to the consignment in question reveals that the first consignment arrived on 20th August, 2019 and declared so under customs entry number 2019MSA7318101. As a result, the purported application was made way after the first consignment and thus an afterthought with no probative value on the issue in dispute.

127. The Appellant on its part stated that the Respondent allowed the importation of the CKDs as applied by the Appellant when it cleared the same imports for home use.

128. That prior to importing the first consignment, the Appellant also notified the Respondent through the import declaration forms or otherwise, that it was importing machinery in unassembled state and was declaring the same as machinery.

129. That the said Import Declarations Forms (IDFs) clearly disclosed the true nature and characteristics of the machinery the Appellant intended to bring to the Country, and the fact that it was importing complete machinery, unassembled in completely knocked down (CKD) kits, which would be re-assembled.

130. That the request contemplated in Section XVI of the EACCET is not in any required format and can therefore take any form.

131. It was not in dispute that the Appellant had imported disassembled machinery in several consignments. The main issue in this dispute therefore, is whether the importation complied with the provisions of the law, particularly Additional Note 2 of Section XVI of the EACCET guidelines for partial importation of machinery in an unassembled state.

132. The law at Additional Note 2 of Section XVI of the EACCET is couched in mandatory terms that the declarant must make a request in writing to the customs post not later than the first consignment.

133. The Tribunal perused the documents presented and noted that the Appellant had attached letters dated September 16, 2019 and October 11, 2019 titled seeking authority to import the machineries in CKD form. However, although the Respondent denies receiving the letter of October 11, 2019 it stated that both letters could not pass the requirement as provided in Additional Note 2 of Section XVI of the EAC CET guidelines as the letters were later than the date of the first consignment which was on August 20, 2019.

134. The Appellant does not dispute that its first consignment arrived on August 20, 2019 but sought to rely on the IDFs as being sufficient arguing that there was no prescribed format for the application to the Commissioner. It was the Tribunal’s view that this position by the Appellant is not correct as the law clearly states that there must be a request in writing to the Customs Post not later than the first consignment. An IDF is a basic document for importation of any item into the Country. If the drafters of the law had been referring to it in Additional Note 2 to Section XVI of the EAC CET guidelines, nothing would have been easier than stating as such.

135. The Tribunal reiterates its finding in TAT 398 of 2019 Mombasa Maize Millers (Nakuru) Limited vs. Commissioner Investigation and Enforcement where it held at Paragraph 47 as follows;“Going by the provisions of Subheading Note 2 to Chapter 84 of the EAC Common External Tariff, the Tribunal agrees with the Respondent that the Appellant ought to have made a written application to make partial consignments to the Commissioner for Customs for the grain storage silos to qualify for tariff code HS code is 8437. ”

136. In the instant case, given that the Appellant’s first consignment arrived on August 20, 2019, the Appellant ought to have provided evidence that it made the application to the Commissioner not later than the date of arrival of this consignment which it did not provide. The Appellant’s attempt to rely on the IDFs is not supported by the relevant law.

137. The Tribunal therefore makes the finding that the Respondent was justified in assessing the Appellant for additional taxes.

Final Decision 138. From the above analysis, the Tribunal finds that the Appeal lacks merit and accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s review decision dated 23rd June, 2020 be and is hereby upheld.c.Each Party to bear its own costs.

139. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8THDAY OF SEPTEMBER, 2023ERIC NYONGESA WAFULACHAIRMAN....................................CYNTHIA B. MAYAKAMEMBER....................................GRACE MUKUHAMEMBER....................................JEPHTHAH NJAGIMEMBER....................................ABRAHAM K. KIPROTICHMEMBER....................................