[2024] KETAT 151 (KLR)

Kenya Sweets Limited v Commissioner of Customs and Border Control (Tax Appeal 411 of 2022) [2024] KETAT 151 (KLR) (9 February 2024) (Judgment)

Neutral citation: [2024] KETAT 151 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 411 of 2022

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

February 9, 2024

Between

Kenya Sweets 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. It carries business of importing eucalyptus oil into Kenya.

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 revenue.

3. The Respondent carried out a desk audit on the Appellant’s custom entries for eucalyptus oil BP 80/85, which the Appellant had imported for the period December 2016 to December 2021 pursuant to provisions of Sections 235 and 236 of the East Africa Community Customs Management Act.

4. The Respondent issued a demand on 21st January 2022 of Kshs. 3,017,964. 00 inclusive of interest after reclassifying the Appellant’s products under tariff Heading 3302, which attract import duty of 10 per cent, instead of Heading 3301, which is zero rated.

5. On 25st January 2022, the Appellant wrote to the Respondent appealing for review of the reclassification and affirming that it imported pure eucalyptus oil which is to be classified under tariff Heading 3301, which is zero rated for import duty. The Appellant provided additional documents to support its case.

6. On 18th March 2022, the Respondent rejected the Appellant’s appeal and upheld its tariff ruling.

7. The Respondent concurrently issued a review decision on 17th March 2022, and advised the Appellant, if dissatisfied to appeal in line with the provisions of EACCMA.

8. Aggrieved by the Respondent’s review decision, the Appellant lodged the instant appeal via Notice of Appeal dated 8th April 2022 and filed on 11th April 2022.

The Appeal 9. The Appeal is premised on the Memorandum of Appeal dated 20th April 2022 and filed on 21st April 2022 stating the following grounds: -a.That the Respondent erred in law and fact in finding that the custom entries for the import of eucalyptus oil BP 80/85 was wrongly classified under tariff code 3301. 19. 00 instead of tariff code 3302. 10. 00b.That the Respondent erred in law and fact in finding that the goods imported by the Appellant contained or was found to have benzene ring with essential oil content of 2 percent despite the Appellant giving evidence that the product had eucalyptus content of 81 per cent.c.That the Respondent erred in law and fact in failing to undertake any or proper laboratory analysis of the products and made unsubstantiated and unverifiable finding generalizing the contents of goods imported by the Appellant.d.That the Respondent erred in law and fact in reclassifying goods imported by the Appellant to attract more import duty, Value Added Tax and interest under tariff code 3302. 10. 00e.That the Respondent erred in law and fact in attempting to reclassify the essential oil (eucalyptus) into a category that it was not and a wrong intended usage contrary to that declared by the Appellant, but aimed only to suit its own imagination.f.That it is unfair that the Appellant is penalized for errors of its officers and the system set up by the Respondent and whose control the Appellant does not have, after the Appellant has complied with all its obligations.

The Appellant’s Case 10. The Appellant’s case is also premised on the following documents filed before the Tribunal: -a.The Appellant’s Statement of Facts dated 20th April 2022 and filed on 21st April 2022, together with annexures thereto.b.Witness statement of Mr. Preeyesh Shah filed on 20th February, 2023 and expert Witness statement of Dr. Sandra Bye filed on 20th February, 2023 that were both admitted in evidence under oath on 6th September, 2023. c.Appellant’s Written Submissions dated 15th September 2023.

11. The Appellant averred that it imports eucalyptus essential oil which it duly declares at the Port of entry and completes Single Administrative Document Form C17B, and declares the description of goods and applicable commodity code.

12. That the Appellant correctly applied the relevant EAC common external tariff codes and the goods attracted 0% import duty.

13. That on 21st January 2022, the Appellant received a desk audit demand for Kshs. 3,017,967. 00.

14. That the Appellant being aggrieved by the decision of the Respondent lodged an application for review of the decision vide a letter dated 25th January 2022.

15. That the Respondent in its letter dated 18th March 2022, rejected the Appellant’s review application.

16. That the Respondent made various communications on the demand including its letters of 2nd February 2022, 17th March 2022 and 18th March 2022, all aimed at denying the Appellant an opportunity to lodge this Appeal.

17. That the Respondent incorrectly interpreted the table on classification classes by alleging that the classifications appearing after the Heading 33. 02 applied to goods imported by the Appellant despite irrefutable evidence that the goods fell under the classification Heading 33. 01.

18. That the Appellant supplied laboratory results from South Africa and additional information to the Respondent, which conflicted with the findings by the Respondent on the composition of the imported products.

19. That the Appellant’s goods were examined at the warehouse, and the seals were intact, which gave the impression that the Respondent did not take any samples for analysis and none was done. That the Respondent has not supplied the Appellant with any laboratory tests.

20. That the Appellant subsequently requested various laboratories in the Country to undertake local examination of the product but were informed that they did not have local capacity to undertake verification.

21. That the action of the Respondent to reclassify the Appellant’s products despite evidence that the Appellant’s classification is proper and correct is unfair and infringes on Appellant’s right to fair administrative action as enshrined under Article 47 of the Constitution of Kenya, 2010.

Appellant’s Prayers 22. The Appellant prayed to the Tribunal for the following orders: -a.The Respondent’s demand for import duty, Value Added Tax and interest dated 21st January 2022 and 18th March 2022, and review ruling dated 18th March 2022 demanding Kshs. 3,017,964. 00 be struck out in its entirety.b.The Respondent’s action to demand for import duty, Value Added Tax and interest dated 21st January 2022 and 18th March, 2022 is based on guesswork, without any laboratory findings and should be declared arbitrary, unreasonable, unfair, and contrary to right to fair administrative action.c.The Tribunal do find that the reclassification by the Respondent is not based on actual goods imported by the Appellant.d.The Ruling on classification dated 18th March 2022 be set aside.e.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 penalties and interests from the Appellant.f.A declaration does issue that classification of eucalyptus oil was properly done under code 3301. 19. 00g.Costs of the Appeal; andh.Any other remedies that the Honorable Tribunal deems just and reasonable.

The Respondent’s Case 23. The Respondent’s case is premised on the following documents filed before the Tribunal: -a.The Respondent’s Statement of Facts dated 19th May 2022 and filed on 20th May 2022, together with the documents annexed thereto.b.Witness statement of Florence Chaura dated 27th March, 2023 and filed on 31st March, 2023 that was admitted in evidence under oath on 6th September, 2023. c.The Respondent’s Written Submissions dated 25th September 2023.

24. The Respondent averred that it conducted a desk audit on the Appellant’s customs entries for eucalyptus oil BP 80/85, which had been imported for the period December 2016 to December 2021 pursuant to the provisions of Sections 235 and 236 of EACCMA.

25. That from the audit, the Respondent noted a tariff ruling had been issued to the Appellant vide a letter dated 12th November 2021 in favor of tariff code 3302 after a chemical analysis test. This was done after code determination under entry 2021MSA7890263 was found to be unreliable.

26. That the lab analysis test established that the Appellant’s importation of eucalyptus oil BP 80/85 classifiable under HS code 3302 of EAC/CET 2017, being a preparation with an aromatic fragrance indicating presence of benzene ring with essential oil content of 2 percent of a kind to be used in food and drink industry.

27. That from the observations made and following GIR1, the correct tariff code for non-refractory surfacing preparations is 3302. 10. 00, which attracts an import duty of 10 per cent.

28. That consequently, it was noted that the Appellant had failed to pay import duty and VAT amounting to Kshs. 1,690,693. 00

29. That the Respondent issued a demand letter dated 21st January 2022, demanding for payment of taxes amounting to Kshs. 3,017,964. 00, and the Appellant was asked to provide a response within seven (7) days.

30. That the Appellant responded vide a letter dated 25th January 2022 and, inter alia, was of the opinion that in view of the previous ruling, the Respondent should review the ruling classifying eucalyptus oil under Code 3302. 10. 00, and the correct Code 3301. 29. 00 be applied.

31. That the Appellant had appealed the tariff ruling vide a letter dated 27th August 2021 arguing why the Respondent’s ruling was erroneous.

32. That vide a letter dated 21st January 2022, the Appellant through Biochemical and Scientific Consultants CC forwarded further information and evidence to support its classification.

33. That through a letter dated 21st February 2022, the Respondent stated that based on the review, eucalyptus oil BP 80/85 is considered essential oil with basis of eucalyptus oil in 58. 58% vv diluent, intended for use in the food and drink industry and classifiable under HS 3302. 10. The Respondent, as a result, maintained that the taxes were payable as per demand letter issued on 21st January 2022.

34. That the Respondent issued a review decision on 17th March 2022 in accordance with the provisions of Section 229 of EACCMA upholding the tariff ruling of 21st December 2021.

35. That the Respondent tested eucalyptus oil 80/85 and issued a tariff ruling stating the reasons for the said ruling according to the law, which was shared with the Appellant.

36. That the Appellant has failed to discharge its burden of proof to show that the Respondent’s tax decision is incorrect as per provisions of Section 30 of the TAT Act.

Respondent’s Prayers 37. The Respondent prayed to the Tribunal for the following orders: -a.That the review decision issued on 17th March 2022 upholding the demand for Kshs. 3,017,964. 00 being both import duty and VAT is proper and be upheld.b.That the Appeal be dismissed with costs to the Respondent as the same is without merit.

Issue for Determination 38. 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 fall for its determination: -Whether the Respondent’s Review Decision dated 17th March 2022 is Proper and Justified.

Analysis and Findings 39. The Tribunal notes that the gist of the instant dispute relates to reclassification of the Appellant’s products from tariff code 3301. 19. 00, which attracts import duty of 0%, to tariff code 3302. 10. 00, which attracts import duty of 10%.

40. The Respondent submitted that it conducted a test on the Appellant’s product, eucalyptus oil 80/85, which is an essential oil with basis 58. 58% vv diluent intended for use in food and drink industry, and classifiable under HS 3302. 10.

41. The Tribunal further notes that although the Respondent did not attach its laboratory chemical test results, it did annex a letter to the Appellant dated 12th November 2021 communicating the results of the test and the basis for reclassification. This position is further buttressed by the Respondent’s witness statement of Florence Chaura dated 27th March 2023 and filed on 31st March 2023.

42. The said Respondent’s witness testified that she was involved in testing the sample in dispute and justified reclassification from tariff code 33. 01 to tariff code 32. 10. The witness statement, however, did not include laboratory test results or certificate.

43. On its part, the Appellant extensively submitted that its product was not tested by the Respondent as the seals were still intact. In any event, the Appellant argued that it should not be penalized for errors of its officers and systems set up by the Respondent.

44. The Appellant further relied on the expert testimony of Dr. Sandra Bye who averred that they did test eucalyptus oil BP 80/85 that are the subject of the proceedings and issued a certificate to that effect. It was Dr. Bye’s testimony that they have been doing the test for the Appellant and their client, Busby Oils of South Africa for over 15 years.

45. To support its case, the Appellant supplied the Respondent with laboratory test results, import documents and certifications related to the consignment. These documents were annexed to the Respondent’s Statement of Facts.

46. 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.”

47. 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 ... "

48. In the instant case, the Tribunal noted that the Appellant took additional steps to supply the Respondent documents supporting its classification under tariff code 3301. 19 including lab test results. These documents are, indeed, annexed to the Respondent’s own Statement of Facts.

49. The Appellant further submitted that its products were sealed by the time they arrived in their store and it is not possible that the Respondent drew samples from them.

50. The Respondent, on the other hand, submitted that it did conduct laboratory tests on the Appellant’s products but did not attach the laboratory test results. Other than its letter dated 12th November 2021, there is nothing substantive to confirm that the Appellant’s instant products were tested, and competently so, by the Respondent. Pleadings alone without relevant annexures cannot constitute sufficient evidence to discharge burden of proof one way or the other.

51. The Tribunal is of the opinion that based on the additional documentary evidence produced by the Appellant and which have, indeed, been annexed by the Respondent itself, the Appellant has discharged its burden of proof, and it must now logically shift to the Respondent.

52. 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 53. The upshot of the foregoing is that the Tribunal proceeds to make the following Orders: -a.This Appeal be and is hereby allowed.b.The Respondent’s review decision dated 17th March 2022 be and is hereby set aside.c.Each party to bear its own costs.

54. It is so ordered.

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