[2023] KETAT 311 (KLR)

Kikopa Limited v Commissioner of Customs & Border Control (Appeal 493 of 2021) [2023] KETAT 311 (KLR) (26 May 2023) (Judgment)

Neutral citation: [2023] KETAT 311 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 493 of 2021

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

May 26, 2023

Between

Kikopa Limited

Appellant

and

Commissioner Of Customs & Border Control

Respondent

Judgment

1. The Appellant is a company incorporated and registered in Kenya and deals with the importation of raw materials and particularly jute hessian cloth.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya and is the Kenya Revenue Authourity responsible for the administration and enforcement of various revenue laws amongst them Import duty and VAT.

3. The Customs and Border Control Department undertook a Post Clearance Audit (PCA), pursuant to Sections 235 and 236 of EACCMA 2004,of the Appellant’s importation consignments of hessian jute cloth covering the period between May 2019 and March 2021.

4. The Respondent conducted a desk audit of the customs entries of the Appellant relating to importation of 45”9Oz jute hessian cloth.

5. The Respondent subsequently issued the findings of the desk audit vide a letter dated 26th March 2021 adjusting the FOB value of the Appellant’s imports with the extra taxes amounting to ksh.9,572,503. 00. The Respondent also called upon the Appellant to respond to the findings.

6. The Appellant did a response vide a letter dated 1st April 2021 stating that it did not agree with the Respondent’s findings and requesting for 60 days to make an appropriate response whereupon the Respondent vide a letter dated 7th April 2021 gave the Appellant an extension of 14 days.

7. The parties thereafter held meetings on 1st April 2021,10th May 2021 and 26th May 2021 wherein the parties discussed the dispute and some documents were produced by the Appellant.

8. The Appellant also did two letters to the Respondent on 11th May 2021 stating in one that it was objecting to the desk audit findings of ksh.9,572,503. 00 and attaching bank statements and the second one explaining the Appellant’s bank transactions.

9. The Respondent on 7th July 2021 assessed additional duties, taxes and interest, on the differences between the Appellant’s total remittances and the declared CIF, amounting to ksh.12. 125,286. 00 and issued a demand for the same.

10. The Appellant decided to appeal upon receipt of the demand.

The Appeal 11. The appeal is premised on the Memorandum of Appeal dated 13th August 2021 and filed on the same date and which raises the following grounds:i.The Commissioner erred in law and in fact by placing heavy reliance on a speculative and tenuous desk audit which was counter to an uncontroverted value determination department.ii.The Commissioner erred in law and fact by deliberately and without any justification and probable cause ignoring the value determination of the valuation department.iii.The Commissioner erred in law and in fact by failing to appreciate that the Appellant had cleared several consignments as per the provided custom entries, which containers were all cleared after the due process was followed in regard to the normal clearance procedures and values approved by the relevant departments every time a clearance of a consignment was done.iv.The Commissioner erred in fact and in law by arriving at an illegal tax decision against the provisions of the relevant governing tax laws.v.The Commissioner erred in law and in fact by imposing and demanding excessive and exorbitant taxes not commensurate to the transaction value of the consignments imported.vi.The Commissioner erred in law and in fact by raising an illegal demand note based on a desk audit while ignoring the evidence presented by the Appellant to the post audit clearance department on demand, on several occasions including bank statements, invoices, bills of lading and other documents that were used to purchase the goods from origin.vii.The Commissioner erred in law and in fact by issuing a demand note in respect of goods paid for by the Appellant but which the suppliers were unable to deliver prompting the Appellant to seek a refund of,as evidenced in the presented import declaration forms and letters by the Appellant to the suppliers.viii.The Commissioner erred by raising a demand note based on all monies paid to the suppliers without considering all the documents produced and without bothering to give any reason for ignoring all the previous valuation reports for the other shipments which were subjected to the valuation process.ix.The Commissioner erred in law and in fact by failing to objectively go through all the documents provided clearly showing the goods that were delivered and the ones that were not delivered yet this could have been easily confirmed internally from the Respondent’s systems.x.In making a determination on the value of goods the Commissioner erred in law and in fact by ignoring the hierarchical canon rules of valuation by failing to use the transaction value based on prove of payment to support the Appellant’s transaction values in which case the transaction value refers to the price paid or payable for the goods and as a matter of procedure and practice that forms the basis of taxation.xi.The Commissioner erred by failing to appreciate that the price paid or payable is the value used to determine the value of goods before going to rule number 2 of “similar goods” which is applied if the importer is not able to prove the rule number 1 on the transaction value.xii.The Commissioner erred in law and in fact by maliciously ignoring all evidence and demanding extra taxes than the ones the valuation department deemed the value of the goods.

Appellant’s Case 12. The Appellant’s case is set on the following:a.The Statement of Facts dated 13th August 2021 and filed on the same dayb.The witness statements of Moses Muthuri Marete and Francis Mutinda both dated and filed on 13th August, 2021 and which were both admitted in evidence on oath on the 12th September, 2022 and with the witnesses cross-examined.c.The written submissions dated 5th October, 2022 and filed on the 6th October, 2022

13. The Appellant raised 3 issues for determination in support of its case:

a. Whether the Tribunal has the requisite jurisdiction to hear and determine the matter 14. The Appellant states that the Respondent had claimed that the Tribunal did not have the jurisdiction to deal with the matter before it by virtue of the provisions of Section 229 (1) of ECCMA. On this the Appellant submitted that it received a demand notice vide a letter dated 26th March 2021 being on tax due and owing by the Appellant after an alleged desk audit.

15. That this prompted the Appellant to put an application for review of the decision of the Commissioner vide a letter dated 1st April 2022 stating clearly that it objected and that it did not agree with the findings of the letter. That this led to several meetings between the parties and in the first meeting, agenda number 1 thereof, was to review the letter issued to the importer .

16. The Appellant submitted that the action by the Appellant amounts to an application for review and hence complies with the provisions of Section 229 (1) EACCMA 2004.

17. That after the said review and correspondence between the parties, the Respondent proceeded to send a further demand to the Appellant of ksh.12,125,286. 00 and the Appellant averred that it objected to the second decision of 7th July 2021 but got no response and therefore decided to appeal.

18. That the matter, consequent to the lodging of the Appeal was subjected to Alternative Dispute Resolution and which process was unsuccessful and the Appellant submitted that in the circumstances all the available mechanisms as per Section 229 (1) EACCMA have been exhausted and the Tribunal has the jurisdiction to hear and determine the matter.

b. Whether the Respondent used the correct valuation method. 19. The Appellant averred that the transaction value of similar goods method used by the Respondent during the post clearance audit was not the lawful method to be used.

20. That this is based on the reason that in the application of the transaction value of similar goods, the customs administration shall, wherever possible, use similar goods at the same commercial level and in substantially the same quantities as the goods being valued. That where no such sale is found, a sale of similar goods that takes place under any of the following 3 conditions may be used:a.A sale at the same commercial level but in different quantitiesb.A sale at a different commercial level but in substantially the same quatities; orc.A sale at a different commercial level and in different quantitiesThat the above is provided for under the Fourth Schedule to the EACCMA 2004 (1) (B)

21. That the Respondent in its response to the Appeal stated that after the audit, it proceeded to adjust the FOB value of the imports by the Appellant to USD 0. 464 per yard. That this was as per Section 122 (1) and Part 1 and 11 of the Fourth Schedule of EACCMA which the Respondent stated as allowing him to use the transaction value of similar goods to determine the customs value where the Appellant has under-declared.

22. The Appellant averred that during a meeting held on 26th May 2021 ,the post clearance audit team informed the Appellant, that they are allowed to use the other methods of valuation to determine the customs value of goods, when the value of the imports cannot be determined using the first method of the transaction value. That during the cross examination of the Respondent’s witness, they contradicted their own Statement of Facts, by providing that they used the transaction value method instead of similar goods,as they had indicated in the Statement of Facts. The Appellant submitted that going by the statement of the Respondent’s witness it had cleared all the taxes as demanded by the customs valuation team during the making of the entry and clearing stage of the cargo.

23. That the Respondent also raised the issue with regard to one of the invoices for the entry number 20211CD269829 as having an FOB rate of USD 22. 5 per yard to the one attached to the Bureau Veritas (BV) certificate of conformity portal having a rate of USD 47. 7 per 100 yards. The Appellant averred that all its imports were done over the FOB rate and the same can be attested to by looking at all the declarations made by the importer. The Appellant submitted that it attached the invoice with the FOB rate of USD 47. 7 during declaration and the invoice attached to the certificate of conformity is foreign to it and it was not put forward during the post clearance audit for it to respond to.

24. The Appellant also submitted that the contracts between it and the suppliers were oral and the same are binding and valid. The Appellant relied on the cases of Charles Mwirigi Miriti Vs Thananga Tea Growers Sacco Ltd & Another[2014]Eklr and Ali Abid Mohamed Vs Kenya Shell & Company Ltd [2017] Eklr to support the submission that an oral contract is valid in law and that there was indeed a valid contract between it and the suppliers contrary to what the Respondent’s first witness stated in the cross examination.

c) Whether the customs valuation method used was in conformity with the principles of an efficient tax system. 25. The Appellant averred that the method did not adhere to the principles of an efficient tax system which includes neutrality, efficiency, certainty and simplicity, effectiveness, fairness and flexibility. That the claim in this system violated the certainty and simplicity principle and the effectiveness and fairness principle.

26. The Appellant averred that a simple tax system makes it easier for individuals and businesses to understand their obligations and entitlements. That the Respondent’s witness in cross examination by the Appellant’s Advocate stated that there is a confidentiality clause with regard to the values imported by the other importers importing similar goods to those of the Appellant and they could not provide the basis they used to come up with the taxes being demanded. That this becomes difficult for the tax payer to defend themselves in the case.

27. The Appellant adds that the second principle being violated is that the system should be effective and fair. That the taxation should produce the right amount of tax at the right time while avoiding double taxation and unintentional taxation.

28. The Appellant averred that the decision by the Commissioner vide the letter dated 7th July 2021 amounts to double taxation contrary to the principle of effectiveness and fairness.

29. That the basis of the claim of the taxes by the Respondent was the total payments made by the Appellant to the foreign suppliers. The Appellant submitted that during the audit it provided evidence and explained to the audit team that there were payments made to the suppliers but the goods were yet to be delivered and in particular one Brijlall Shivnath was paid ksh.4,854,000. 00 and the Appellant is in the process of recovering its money from him.

30. The Appellant also averred that it paid ksh.4,500,000. 00 to one LMC Global Pvt Ltd which made one shipment delivery dated 4th September 2020 and the taxes were paid for the same but is yet to get two other deliveries still pending. That there were also some goods yet to be delivered from Tarachad at the time of the post clearance though it had been paid ksh.3,278,050. 00.

31. The Appellant submitted that the two imports were delivered and cleared by the Respondent after the demand of the taxes was issued and if the demand is upheld this will amount to double taxation.

Appellant’s Prayers 32. The Appellant prays that the demand of ksh.12,125,286. 00 and interest and penalties accruing thereon be set aside.

Respondent’s Case 33. The Respondent’s case is set on:a.The Statement of Facts dated 15th September 2021 and filed on the same dateb.The Respondent’s witness’sstatement of Jane Karen Kigoro dated the 4th February, 2022 and filed on the 8th February, 2022 that was admitted in evidence on oath on 12th September 2022 with the witness cross-examined.c.The written submissions dated 5th October 2022 and filed on 6th October 2022

34. The Respondent in its submissions raised 2 issues for determination and addressed the same as hereunder:-

a. Whether the Respondent’s tax demanded were proper and justified in law. 35. The Respondent submitted that the assessments were raised after desk audits of the total supplier remittances against the declared CIF values raised significant variances. That the Appellant was unable to explain the variances despite the opportunity given to do so thereby failing to discharge its burden and prove the Respondent wrong and in so failing contravened the provisions of Section 235 of EACCMA. On the same issue the Respondent relied on the case of R VS KRA Ex Parte Cooper K-Brands Ltd [2016]Eklr.

36. The Respondent further submitted that the Appellant provided invoices that did not reflect the transaction value of the Appellant’s import. That ass a result, the Respondent had used the transaction value of similar goods to determine the customs value where the Appellant under declares the relevant transaction value as per the provisions of Section 122 (1) as read with Part 1 and 11 of the fourth Schedule of EACCMA.

37. The Respondent averred that subsequently the parties held meetings wherein the Appellant provided bank statements showing the payments made to the suppliers for the supply of the hessian jute cloth. That the Respondent then used the transaction value method to compute the taxes of ksh.12,125,286. 00. The Respondent averred that contrary to the Appellant’s assertions that it was not provided with the audit report on how the taxes were computed, the Respondent did not rely on the audit report but the bank statements provided by the Appellant.

38. The Respondent submitted that it was guided by the World Trade Organization Valuation Agreement Guidelines in making the decision to adjust the FOB value of the 45”9Oz jute hessian cloth to USD 0. 464 per yard. That therefore the tax assessed was not excessive but commensurate with the ones borne by importers of similar goods as per the relevant law.

39. The Respondent averred that it is not bound by the Appellant’s returns information of self-assessments (which in this case were wrong) and it is empowered to vary the demand using any available information in the Respondent’s possession as provided under Section 236 of EACCMA.

40. The Respondent submitted that the Appellant’s first witness was unable to explain the variances in the two invoices dated 29th December 2020 and the second witness disowned the invoices and yet the same invoice was uploaded by the Appellant in the Simba system.

41. The Respondent argued that the invoice uploaded by the Appellant on the Simba system was not signed by the supplier which raises issues on its authenticity. Further, that the Respondent explained in its demand of 7th July 2021 on paragraph 4 that the Appellant paid its suppliers (LMC Global) ksh.3,247,380. 00 ,against a declared CIF of ksh.1,552,524. 00 for entry number 2019ICD115155. That this shows that the CIF value per yard of the Appellant’s consignment of 9oz45” should have been an average of USD 0. 5412 and not the declared value of USD 0. 225.

42. The Respondent submitted that the Appellant failed to provide all the documents required and on cross examination the witness conceded to not having provided written contracts and RTGS slips as requested by the Respondent.

43. The Respondent therefore concluded that the Appellant failed to discharge the burden of proof as per Section 235 of EACCMA and that its demands are valid and that the Appellant was under declaring its products in order to evade taxes.

b) Whether the Appellant objected to the Respondent’s demand dated 7th July 2021. 44. The Respondent stated that the Appellant failed to object to the tax demand dated 7th July 2021 thereby making the Appeal before the Tribunal premature as per Section 229 (1) EACCMA.

45. The Respondent argued that the Appellant did not exhaust all available avenues for appeal before approaching the court process for redress and therefore cannot lodge a valid appeal and on this issue relied on the case of R Vs Secretary County Public Board & Another Ex Parte Hulbai Gedi and Kotile General Contractors Co.Ltd Vs Commissioner Of Domestic Taxes [2020].

46. The Respondent added that as the Appellant having failed to make an application for review, the Appellant acceded to the Respondent’s demands.

Respondent’s Prayers 47. The Respondent in the circumstances prays for;a.The upholding of the decision dated 7th July 2021b.Dismissal of the Appeal with costs.

Issues for Determination 48. The Tribunal upon considering the pleadings, evidence adduced and the parties’ submissions lodged in the matter is of the view that there are two issues to be determined as laid out hereunder:a.Whether the Appeal was prematurely filedb.Whether the Respondent’s assessments are correct

Analysis And Findings a. Whether the Appeal was prematurely filed 49. The Respondent submitted that there is no valid appeal as the Appellant failed to exhaust all the available avenues before proceeding to the Tribunal for redress.The Respondent stated that the provisions of Section 229 (1)EACCMA require the Appellant to make an objection upon receiving the Respondent’s decision on the taxation through an application for review.The Section states as follows:-“A person directly affected by the decision or omission of the Commissioner or any other officer on matters for review or relating to customs shall within thirty days of the date of the Commissioner’s decision or omission lodge an application for review of that decision or omission”.

50. The Respondent further argued that its supposed to make a decision on the application for review within thirty days after which the Appellant if still not satisfied by the review decision can now approach the Tribunal on appeal. The Section 229 (4) of EACCMA states 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”.

51. The Appellant on the other hand argued that it did make an application for review on 1st April 2021.

52. On perusal of the letter dated 1st April 2021, the same reveals that the Appellant was replying to the Respondent’s audit findings as per the Respondent’s letter dated 26th March, 2021. The letter had indicated the audit findings and invited the Appellant to respond to the same.

53. The Appellant in its reply indicated that it did not agree with the findings as outlined in the Respondent’s letter dated 26th March 2021, demanding taxes amounting to ksh.9,572,503. 00,as per the Respondent’s audit findings. The Appellant’s letter was also seeking time within which the Appellant could make an appropriate response and giving the reasons for the same.

54. The Respondent replied to the letter on 7th April 2021 giving an extension of 14 days for the Appellant to respond to the demand. It also indicated the documents required including bank statements, supplier’s ledgers and cheque book counterfoils.

55. The parties thereafter held meetings on 1st April 2021,10th May 2021 and 26th May 2021 and the Appellant presented the bank statements and gave the reasons as to why the other documents could not be availed.

56. Thereafter, the Respondent issued the desk audit demand on 7th July 2021 assessing additional duties, taxes and interest amounting to ksh .12,125,286. 00. The letter indicated that the Respondent had taken into consideration the remitted documents, analysed the same and concluded that the aforesaid taxes were due for payment and demanded the same.

57. The Appellant stated in its submissions that it appealed against the letter dated 7th July 2021 by objecting to the same but that it received no response from the Respondent.

58. On analysing the process of the matter, it is a fact that the Respondent made the tax demand of 7th July 2021 after holding several meetings with the Appellant and receiving the documents from the latter. The Appellant ought therefore to have applied for the review of the tax demand. The Appellant averred that it did object to the same but has neither indicated the date the same was done nor attached a copy of the application for review to its pleadings filed with the Tribunal

59. The Appellant’s letter of 1st April 2021, which the Appellant argued was an application for review does not amount to that. The letter though objecting to the audit findings sought time to give reasons for the objection.

60. Taking into consideration the provisions of Section 229 (1) of EACCMA,the Tribunal notes that the Appellant failed to comply with the same. The Tribunal’s resolve in the matter is cemented in the light of the fact that Section 229 (1) of EACCMA is cushioned in mandatory terms hence the same has to be strictly complied with.

61. The Tribunal has also taken into consideration the holding in the case of W.E.C. Lines Ltd Vs The Commissioner Of Domestic Taxes [Tat Case No.247 Of 2020] on the issue of observing procedures and set statutory timelines where it was held in Paragraph 70 and 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 process of making an application for review upon receiving the Respondent’s decision.”

62. A similar holding, with regard to the issue of observing rules was made in the case of Nicholas Kiptoo Arap Korir Salat v IEBC & 6 Others [2013] eKLR, where the court held that;-“This Court, indeed all courts, must never provide succor and cover to parties who exhibit scant respect for rules and timelines. Those rules and timelines serve to make the process of judicial adjudication and determination fair, just, certain and even-handed. Courts cannot aid in the bending or circumventing of rules and a shifting of goal posts for, while it may seem to aid one side, it unfairly harms the innocent party who strives to abide by the rules. I apprehend that it is in the even-handed and dispassionate application of rules that courts give assurance that there is a clear method in the manner in which things are done so that outcomes can be anticipated with a measure of confidence, certainty and clarity where issues of rules and their application are concerned.

63. The Tribunal upon taking into consideration the procedure for application for review of tax demands and appeal against any review decision and the law in issue finds that the Appellant failed to comply with the specific procedure set out in Section 229 (1) EACCMA and accordingly determines that the matter must fail as the same was prematurely lodged.

64. In the circumstances the Tribunal will not delve into the other issue raised as it has been rendered moot..

FINAL DECISION 65. The upshot of the foregoing analysis is that the Appeal is incompetent and unsustainable in law and the Tribunal accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

DATED and DELIVERED at NAIROBI on this 26th day of May, 2023………………………ERIC N. WAFULACHAIRMAN…………………CYNTHIA MAYAKA…………………MEMBERGRACE MUKUHAMEMBER…………………ABRAHAM KIPROTICHMEMBER…………………JEPHTHAH NJAGIMEMBER