[2024] KETAT 161 (KLR)

Kcssa East Africa Limited v Commissioner of Customs and Boarder Control (Tax Appeal 848 of 2022) [2024] KETAT 161 (KLR) (9 February 2024) (Judgment)

Neutral citation: [2024] KETAT 161 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 848 of 2022

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

February 9, 2024

Between

Kcssa East Africa Limited

Appellant

and

Commissioner of Customs and Boarder Control

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act. Its principal business activity is the production as well as distribution of baby care and fem care products. The Appellant’s baby care products include huggies diapers and wipes, while the fem care products include Kotex pads, liners, and tampons.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the said Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue.

3. The Respondent carried out a desk review of the Appellant’s imports for the period May 2017 to March 2022, and issued a demand notice vide a letter dated 22nd April 2022 of Kshs. 2,447,296. 00.

4. On 22nd June 2022, the Appellant replied to the Respondent asking for lifting of the demand and review as its consignment had erroneously been automatically picked by the Import Declaration Form (IDF) to include panty liners, which the Appellant never imported in the consignment.

5. The Respondent issued a review decision on the desk audit on 13th July 2022 rejecting the Appellant’s request and upholding its demand for extra taxes as assessed.

6. Aggrieved by the Respondent’s review decision, the Appellant lodged the instant appeal via a Notice of Appeal dated 26th July 2022 and filed on the same date.

The Appeal 7. The Appeal is premised on the Appellant’s Amended Memorandum of Appeal dated 24th February 2023 and filed on the same date stating the following grounds: -a.That the Respondent erred in fact by alleging that the Appellant’s consignment denoted under Entry Number 22XXXXX09 and Bill of Lading Number MEXXXX21 contained napkin liners and napkin diapers.b.That the Respondent erred in fact and in law by including additional import duty and VAT of Kshs. 10,050,518. 00 relating to Entry ICD93088 that had been set aside by the Respondent in its demand relating to Entry 22XXXX09. c.That the Respondent erred in law and in fact by reclassifying the Appellant’s said consignment containing sanitary towels from tariff 9619. 00. 10 to tariff 9619. 00. 90. d.That the Respondent’s demand for additional VAT and Import duty on sanitary towels violates the Appellant’s right to legitimate expectation.e.That the Respondent erred in law and fact by demanding penalties amounting to Kshs. 122,305. 00 based on erroneous assessment; andf.That the Respondent erred in law and in fact by demanding late payment interest amounting to Ksh. 48,946. 00 based on erroneous assessment.

The Appellant’s Case 8. The Appellant’s case is premised on the following documents filed before the Tribunal: -a.The Appellant’s Statement of Facts dated 12th August 2022b.Appellant’s Supplementary Statement of Facts dated 24th February 2023 and filed on the same date.c.Appellant’s Written Submissions dated 10th October 2023 and filed on 11th October 2023.

9. The Appellant averred that it challenged the Respondent’s demand of Kshs. 2,618,607. 00 being additional duties of customs inclusive of penalty and interest and gave the following explanations:a.That the Respondent’s description of the consignment in contention denoted under Entry Number 22XXXX09 and Bill of Lading Number MEXXXX21 was erroneous because the said consignment did not contain napkin liners and napkin diapers;b.That this erroneous description by the Respondent was selected from the Appellant’s Import Declaration Form;c.That the napkin liners and napkin diapers were never imported into the Country and that the above consignment in question only contained sanitary towels as evidenced by the Commercial invoice, packing list, Certificate of Conformity and final Bill of Lading, which do not indicate napkin liners and napkin diapers being part of the consignment; andd.That the above consignment was subsequently released under the seal of Kenya Bureau of Standards (KEBS) and samples were collected for sanitary towels and not napkin liners and napkin diapers.

10. That the Respondent issued its review decision on the Appellant’s response via a letter dated 13th July 2022, in which the Respondent upheld the assessed demand of Kshs. 2,618,607. 00 inclusive of penalty and interest.

11. That being dissatisfied with the Respondent’s review decision, the Appellant filed a Notice of Appeal on the 26th July 2022.

12. That the Appellant then proceeded to seek Alternative Dispute Resolution with the Respondent via a letter dated 19th October 2022 to resolve the dispute amicably.

13. That during the ADR deliberations, the Appellant sought to demonstrate to the Respondent that the consignment declared under Customs entry number 22XXXX09 did not contain panty liners. That in proving this, the Appellant provided a commercial invoice, packing list, certificate of conformity and bill of lading, which all indicated that the consignment contained sanitary towels alone.

14. That in pursuit of a resolution at ADR, the Appellant sought to, and eventually obtained, a Free Sale Certificate from the Economic Chamber of the Czech Republic and China, which certified that the Appellant’s related entity in the Czech Republic (Kimberly-Clerk s.r.o) only produces and sells sanitary pads of various sizes as enumerated in the certificate.

15. That it is important to note that the consignment declared under Customs entry number 22XXXX09, which is in dispute, contained goods originating from the Czech Republic as evidenced by the entry, commercial invoice, packing list and Certificate of Conformity.

16. That as further evidenced by the Free Sale Certificate, pantyliners could not have been part of the consignment as they are not manufactured in the Czech Republic, and thus the consignment in question only contained sanitary pads classifiable under tariff code 9619. 00. 10 and subject to both VAT and Import duty at the rate of 0%.

17. That the Appellant endeavored to present this new evidence to the Respondent during ADR deliberations. However, the Respondent declined to consider any new evidence on the premise that the same was not presented by the Appellant at the objection stage.

18. That the Appellant, in this regard, filed an application before the Tribunal dated 3rd February 2023 to request the Tribunal to amend its Memorandum of Appeal and supplement its Statement of Facts, and submit this new evidence before the Tribunal. The application was allowed by the Tribunal.

19. That the Appellant succinctly explained in response to the Respondent’s enforcement letter that even though the description within customs entry document relating to the consignment in question reflected napkin liners and napkin diapers as being part of the consignment, this was not the correct position.

20. That to further buttress this, the Appellant provided the commercial invoice, packing list and certificate of conformity, which the Respondent disregarded in its review decision.

21. That a Commercial invoice, being a legal document provided by a buyer to a seller in international transactions such as the instant one, and serves as a contract and proof of sale between the two parties. It details the number of goods sold, the prices, their value, and the supplier, Kimberly Clarke Europe Limited. The instant Commercial invoice concisely denotes the items to be disposable sanitary towels and Country of origin as Czech Republic.

22. That the Appellant wished to rely on Certificate of Origin, which is defined in Chapter 2 of World Customs Organization’s (WCO) Specific Annex K as:-“…a specific form identifying the goods, in which the authority or body empowered to issue it certifies expressly that the goods to which the certificate relates originated from a specific country…”

23. That the Certificate of Origin provided by the Appellant related to the consignment in dispute has referred to the exact goods as described in the Commercial invoice as being ‘611251’ and ‘611281’ of sanitary towels, and further the gross weight of the goods matches the Commercial invoice as being 5,921,57 kilograms.

24. That this cements the Appellant’s assertion that the goods contained in the consignment denoted as Entry Number 22XXXX09 were only sanitary towels and not panty liners and napkin diapers.

25. That Kenya Bureau of Standards (KEBS) issued the Appellant with a pre-export verification of conformity (PVOC COC) to standards. A PVOC is applied at the Country of origin to ensure compliance of imported products with the applicable Kenyan standards, and the description of the goods in page 2 of the PVOC clearly stipulates sanitary towels.

26. That KEBS subsequently released the said consignment upon entry into Kenya under seal and confirmed the identity of the goods as sanitary towels.

27. That considering the foregoing, the Appellant has sufficiently proven that the consignment in dispute was erroneously described by the Respondent as containing napkin liners and napkin diapers.

28. That the Commercial invoice alluded to above succinctly indicated the Country of origin for the consignment in question is Czech Republic, most specifically the Appellant’s related entity Kimberly Clark s.r.o in the Czech Republic solely manufactures sanitary towels.

29. That the aforementioned Free Sale Certificate affirms that Kimberly Clark s.r.o produces and sells the following products: Kotex Ultra-Thin Pads size normal; Kotex Ultra-Thin Pads size supper; and Kotex Ultra-Thin Pads size extra-long.

30. That considering the foregoing, it is unequivocal that the consignment in dispute denoted under Entry Number 22XXXX09, whose Country of origin is the Czech Republic could only have contained sanitary towels which are classified under tariff code 9619. 00. 10, thereby attracting both Import duty and VAT at 0%.

31. That the Appellant further annexed Free Sales Certificate from China Chamber of International Commerce, which certifies that Guangxi Shuya Healthcare Products Company Limited (Guangxi Shuya) domiciled and incorporated in the People’s Republic of China solely manufactures Kotex liners.

32. That Guangxi Shuya manufactures liners on behalf of the Appellant’s related entity, Kimberly Clarke China.

33. That the Appellant annexed the agreement between Guangxi Shuya and Kimberly Clarke China highlighting that the aforementioned will manufacture liners on behalf of the later.

34. That it is important for the Tribunal to note that no other entity in the globe manufactures liners and sells Kotex Liners apart from Guangxi Shuya on behalf of Kimberly Clarke China, and as such if the consignment in question contained pantyliners there would have been supplementary documents indicating goods originating from China, which is not the case.

35. That based on the foregoing, it is incontrovertible that the Appellant’s consignment in question solely contained sanitary towels and not liners as alleged by the Respondent.

Appellant’s Prayers 36. The Appellant prayed to the Tribunal for the following Orders: -a.That the Appeal be allowedb.That the Respondent’s decision dated 13th July 2022 be set asidec.That the Respondent’s assessment of additional duties of customs amounting to Ksh. 2,618,607. 00 be vacated in its entirety; andd.Any other orders the Tribunal deems fit.

The Respondent’s Case 37. The Respondent’s case is premised on the following documents filed before the Tribunal: -a.The Respondent’s Statement of Facts dated 15th September 2022 and filed on same date, together with the documents annexed thereto.b.The Respondent’s Written Submissions dated 26th October 2023, and filed on 31st October 2023.

38. The Respondent averred that it conducted a desk review of imports under tariff 9619. 00. 90 for the period May 2017 to 31st March 2022 on the Appellant.

39. That the review revealed that the Appellant imported what it described as “H; KTXUT DUO Super 16x16 Teacup; Sanitary Towels and Panti-Liners; 1;1062 KTX UT DUO Super 16x16 TE; and “Sanitary Towels – Huggies Dry COMF (2)22 x4Box” under entry no 22XXXX09 and ICD 9XXXX8, respectively. In both cases, it applied TI 9619. 00. 10, which is exempt from import duty and VAT by tariff.

40. That it is imperative to note that the descriptions in the first entry point to two different items which have different TI codes while the second entry is described in a way to cause confusion on the identity of the goods as sanitary towels, which cannot be ‘huggies’ a well-known diaper brand.

41. That sanitary towels are classifiable under 9619. 00. 10 with no import duty or VAT while diapers are classified in 9619. 00. 90 and has import duty of 25% and VAT of 16%.

42. That consequently the Respondent demanded for the taxes due from diapers from all the importers who had applied wrong TI including the Appellant.

43. That the Appellant’s liability demand is Kshs. 2,447,296. 00 which was not responded to within 30 days stipulated in Section 229 of EACCMA 2004.

44. That the Respondent considered the Appellant’s response dated 22nd June 2022 and upheld the demand issued.

45. That Customs Post Clearance Audit team conducted a desk review of customs entries of the importers of items under the tariff code for the period May 2017 to 31st March 2022 pursuant to Sections 235 and 236 of EACCMA 2004, and the Appellant is amongst the importers.

46. That in a letter dated 22nd June 2022, the Appellant acknowledged the wrong descriptions of its consignments and stated that the same was not imported into the Country therefore the taxes are not payable.

47. That the goods on Entry Number ICD 93088 were dealt with at release point and extra taxes were collected vide F147 No. 2019 ICD 21283, and therefore the Respondent has no objection of revising the amount by striking off the taxes due from that Entry.

48. That Sections 235 and 236 of EACCMA give the Respondent powers to call for documents and conduct post clearance audit on the import and export operations of a taxpayer within a period of five years from the date of importation or exportation.

49. That where post clearance audit reveals that taxes were short levied or erroneously refunded, Sections 135 and 249(1) of EACCMA empower the Commissioner to recover any such amount short levied or erroneously refunded with interest at a rate of two percent per month for the period the taxes remain unpaid.

50. That Section 229 of EACCMA provides for application for review by any person affected by the decision or omission of the Commissioner on matters relating to customs and provides the legal timelines to be observed is 30 days from the Commissioner’s decision.

51. That the Kenyan tax regime operates a self-declaration basis whereby the taxpayer makes declaration and pays taxes on the items that they import themselves or through their agents, and this creates a legitimate expectation that the taxpayer will pay the correct taxes.

52. That, however, in the event the taxpayer defaults in this expectation, the law under Sections 135, 235, 236 and 249 of EACCMA 2004 allows the Commissioner, within five years of importation to assess and demand for the short-levied taxes.

53. That the instant assessment was made within five-year window provided for by the law and therefore no legitimate expectation of the taxpayer was breached.

54. That the declaration by the Appellant was vague and, in the Respondent’s view meant to evade taxes.

55. That the Appellant has not provided any evidence to disprove the position taken the Respondent.

Respondent’s Prayers 56. The Respondent prayed to the Tribunal for the following Orders: -a.That the Appeal be dismissed in its entirety and the Respondent’s demand be upheld.b.Costs.

Issues for Determination 57. The Tribunal, having carefully reviewed the pleadings and filings made by the parties, the supporting documentation, and the submissions by both parties, is of the view that the following issue falls for its determination: -Whether the Respondent’s Review Decision dated 13th July 2022 is Proper and Justified.

Analysis and Findings 58. The Tribunal noted that the gist of the instant dispute relates to the Appellant’s imports vide Entry Number 22XXXX09 and 20XXXX88.

59. It is the Appellant’s contention that its declaration was erroneously mis-classified as containing panty liners and napkin diapers, which attract import duty of and VAT of 25 % and 16%, respectively, under Tariff Code 9619. 00. 90.

60. The Appellant further contended that in actual sense it imported sanitary pads/towels, which were correctly declared under Tariff Code 9619. 00. 10, which attract VAT and Import duty of 0%, and therefore the Respondent’s additional assessment is erroneous.

61. The Appellant submitted that it tried to engage the Respondent including through ADR, but this was rebuffed on the ground that the Appellant had not submitted the same evidence during objection stage. The Appellant applied to the Tribunal to amend its pleadings and introduce the new evidence, which was granted.

62. To prove its case, the Appellant submitted additional evidence to show that the Entry number and consignment in question could only have contained sanitary pads/towels. These include:a.Free Sale Certificate from Economic Chamber of Czech Republic confirming that the exporter in question only produce sanitary pads/towels.b.Commercial invoice from the exporter reference number 4504321397 indicating specific items in the consignment.c.Packing List from the exporter reference number 4504321397 indicating the specific items imported as being sanitary towels/pads.d.Pre-Export Verification of Conformity issued by Kenya Bureau of Standards showing goods approved for importation into Kenya in the consignment.e.KEBS Declaration No. 11710 showing the consignment was released under seal after verification and indicating details of the consignment.f.Free Sales Certificate from China Chamber of International Commerce showing that Guangxi Shuya Health Care Products Co. Ltd is the one manufacturing panty liners on behalf of the Appellant’s supplier.g.Contract Manufacturing Agreement between Guangxi Shuya and Kimberly-Clark for manufacturing of panty liners.

63. The Respondent on the other hand contended that it did a desk review on the Appellant and noted that the Appellant had mis-classified its consignment in dispute, and then proceeded to assess for extra taxes.

64. The Respondent submitted that the burden of proof lies with the Appellant and that the Appellant had not discharged its burden of proof.

65. The Respondent, however, did not contest the additional evidence presented by the Appellant and, instead argued that it was not submitted at the objection stage.

66. The Tribunal notes that the instant dispute raises fundamentally a question of burden of proof in tax matters. Since the dispute has already been filed before the Tribunal, the applicable law is Section 30 of the TAT Act which provides as follows:“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.”

67. The issue of burden of proof in tax matters is now settled in law in Kenya as reiterated in the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR as follows: -“... 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. The other important issue to bear in mind is that under our system of self-reporting of tax liability, the taxpayer initially decides the extent and amount of his/her statutory obligation to pay tax. The taxpayer in such cases generally possesses the objective evidence. Certainly, with the exception of filed returns and information provided by the taxpayer, the Revenue authority is in a poor position to establish an affirmative case ... "

68. In the instant case, the Tribunal notes that the Appellant took additional steps to supply the Respondent documents supporting its classification under Tariff Code 9619. 00. 10 covering sanitary pads/towels, which attracts import and VAT duty of 0%. These same documents have been filed before the Tribunal. The Appellant submitted that it had supplied the same to the Respondent during the ADR stage.

69. The Tribunal further noted that the Respondent did not contest the authenticity of the documents provided by the Appellant, which clearly show the chronology of the consignment and the actual goods in the consignment.

70. The Tribunal is of the opinion that based on the additional documentary evidence produced by the Appellant, with the leave of the Tribunal, the Appellant has discharged its burden of proof, and it must now logically shift to the Respondent.

71. Accordingly, the Tribunal holds that the Appellant has, in the circumstances, sufficiently discharged its burden of proof in terms of Section 30 of the TAT Act.

Final Decision 72. The upshot of the foregoing is that the Appeal is merited and the Tribunal accordingly proceeds to make the following Orders: -a.This Appeal be and is hereby allowed.b.The Respondent’s review decision dated 13th July 2022 be and is hereby set aside.c.That the Respondent’s assessment of additional duties of customs amounting to Ksh. 2,618,607. 00 be and is hereby vacated in its entirety.d.Each party to bear its own costs.

74. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF FEBRUARY, 2024GRACE MUKUHA - CHAIRPERSONDR. ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBERTIMOTHY VIKIRU - MEMBERGLORIA OGAGA - MEMBER