[2022] KEHC 11634 (KLR)

Menengai Oil Refineries Limited v Commissioner of Domestic Taxes (Tax Appeal E003 of 2021) [2022] KEHC 11634 (KLR) (Commercial and Tax) (3 June 2022) (Judgment)

Neutral citation: [2022] KEHC 11634 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Tax Appeal E003 of 2021

A Mabeya, J

June 3, 2022

Between

Menengai Oil Refineries Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

((Being an appeal against the Judgment of the Tax Appeals Tribunal delivered on 25th June, 2021 in Nairobi Tax Appeal No. 408 of 2020))

Judgment

1. The appellant is a private limited liability company whose principal activity involves manufacturing and distributing edible cooking oil, soap and industrial detergents. The respondent is a principal officer of the Kenya Revenue Authority, an agency of the Government of Kenya established under the Kenya Revenue Authority Act, responsible for the assessment, collection and accounting for all revenues that are due to the government.

2. The respondent conducted a post clearance audit of the appellant’s import operations and/or custom procedures for the period January 2015 to December 2019. Thereafter, on May 18, 2020, he demanded from the appellant, the immediate payment of taxes in the sum of Kshs 221,976,911 on account of import duty, value added tax (VAT) and interest. The same allegedly arose from misclassification and/or wrong declaration of tariffs for constituent parts of a machine imported by the appellant.

3. Subsequently, the appellant sought a review of the additional assessment vide a letter dated June 18, 2020. The respondent declined the same in his review decision of July 17, 2020. He explained that whereas part 40(b) of the appellant’s customs entry forms C17B clearly indicate that the items imported were partial shipments of constituent parts of machinery, it wrongly used the tariff codes of a fully assembled machinery at part 40(c) thereof. He further noted that the appellant did not make a written request/application under Additional note 2 to section XVI of the East African Community Common Exernal Tariff (‘EACCET’) to be allowed to declare the constituent parts under the same tariff heading or subheading as the fully assembled machine.

4. Aggrieved thereby, the appellant filed an appeal in the Tax Appeals Tribunal (“the tribunal”). In its judgment delivered on June 25, 2021, the tribunal narrowed down its determination to the issue of the appellant’s compliance with the requirement under Additional Note 2 of section XVI of the EACCET. It held that there was no compliance in that respect and upheld the respondent’s demand and review decision. This is what triggered the present appeal.

5. This being a first appeal, the court is enjoined to review and re-evaluate the evidence tendered before the tribunal and come to its own independent conclusion and findings. See Selle &anorvAssociated Motor BoatCoLtd& others [1968] EA 123.

6. The appellants case before the tribunal was that it imported constituent parts of a boiler over a period of time. That at the time of such importation, it declared the same under the tariff codes for a fully assembled boiler. That the said constituent parts were thereafter fully assembled and the boiler commissioned into operation. That on presenting its import declaration forms at the port of entry, the respondent’s officers did not either question or correct the appellant. That in the premises, the appellant legitimately believed that it had made the correct declaration as the respondent had confirmed during physical inspection at the appellant’s establishment that all the constituent parts were used for the now fully assembled boiler.

7. On the part of the respondent, he contended that since the tariff codes used were for a fully assembled boiler, the same was not correct as what was imported were constituent parts thereof. That the appellant had not applied under Additional Note 2 to section XVI of the EACCET to be allowed to declare the constituent parts under the same tariff heading or subheading as the fully assembled machine. That the reclassification of the tariff codes was in order.

8. In its memorandum of appeal dated August 4, 2021, the appellant set out a total of 11 grounds of appeal. In summary, the appellant was aggrieved that the tribunal erred in:a)Its interpretation of sections 135(1), 235(1), 236 and 249(1) of theEACCMA, 2004 and Additional Note 2 of section XVI of the EACCET, 2017;b)Its interpretation of the respondent's duty to give proper guidance on tariff identifications in accordance with the General Interpretation Rules (GIR) under the EACCMA, 2004and its protocols; in confirming the respondent's assessment;c)failing to find that at the point of declaration, the appellant submitted documentation to the respondent akin to the application required under Additional Note 2 of section XVI of the EACCET, 2017; failing to find that the appellant had a right to rely on a legitimate expectation from the respondent's actions, through the proper officer at the port;

9. The respondent opposed the appeal vide his statement of facts dated January 20, 2022. He maintained that his reclassification of the constituent parts of the machine under the correct tariff and subsequent assessment of additional taxes was in accordance with the law. Further, that although the consignments were cleared and approved based on the information provided by the appellant at the time of clearance, he reserved the right to conduct a post clearance audit pursuant to sections 235 and 236 of EACCMA, 2004 to verify the accuracy of the declarations made by the appellant. In his view therefore, legitimate expectation could not arise in the circumstances since the doctrine cannot override the law.

10. The court has carefully considered the record, and the parties’ respective submissions. The two issues that arise for determination are: whether there was misclassification of tariffs in respect to constituent parts of a machine imported by the appellant; and, whether the demand for additional taxes by the respondent breached the appellant’s legitimate expectation?

11. In determining the twin issues, the court must remind itself that under section 56(2) of the Tax Procedures Act, 2015, its jurisdiction is restricted to questions of law only.

12. On the first issue, the appellant submitted that it had clearly declared in writing that it was importing a boiler in a disassembled or unassembled state in partial shipments over a period of time. That this was necessary for convenience of transport owing to the size of the boiler. It contended that the respondent verified this fact both physically and through the relevant documentation submitted during the post clearance audit. Further, that the respondent was complacent since he had allowed the appellant to claim an investment deduction allowance on account of the same. In the appellant’s view therefore, the respondent’s reclassification of the partial consignments as spare parts was a ploy to deny it the tax benefit accorded by the law to importers of manufacturing machineries and/or plants under chapters 84 and 85 of the EACCET 2012 and 2017.

13. On his part, the respondent submitted that, the tariff classification was determined by the nature of the goods at the point of entry or arrival. That what arrived at the port of entry were constituent parts which are ordinarily classified under the tariff codes of spare parts that attract both import duty and VAT.

14. The court has considered the record. The appellant produced an import declaration form No E1701493932 indicating that it was importing a new Thermax boiler of HS Code number 8402. 12. 00 from Thermax Limited in Pune, India. In the various custom declaration/entry forms C17B and commercial invoices, the different constituent parts of the boiler were duly described as partial shipments.

15. These were cleared at the point of entry. The respondent did not dispute having established that the appellant had indeed used these constituent ports to install the new boiler at its factory in Nakuru. The appellant’s decision to transport the boiler in a disassembled state was obviously necessitated by its bulky nature. Such practice of importation of bulky machines in a disassembled state is recognized under Additional Note 2 of part XVI of the EACCET, 2012 and 2017 which deals with importation of plant, machinery & equipment of chapter 84 & 85 such as the boiler herein. It 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.”

16. In his submission, the respondent reiterated that the appellant would only have qualified to classify the constituent parts under the tariff codes of a full boiler if it had sought and obtained the approval of the Commissioner of Customs and Border Control by submitting a written application under Additional Note 2 of part XVI of EACCET, 2017. He submitted that if the appellant was unsure about the correct tariff classification, it ought to have sought clarification by applying to the commissioner for an advance binding ruling on the same in terms of section 248 of EACCMA, 2004.

17. On the appellants’ part however, it was submitted that, the declarations made in the import declaration forms, forms C17B, commercial invoices and other documentation submitted and approved by the respondent’s proper officers during clearance were in full compliance with the aforesaid provision. To the appellant therefore, the failure to make a separate prior written request does not change the nature of the goods imported from constituent parts of a new boiler to spare parts of an existing machine. In any event, the law does not prescribe a penalty for such omission.

18. From the record, it is evident that the appellant had not sought prior approval of the Commissioner of Customs and Border Control for the classification of the constituent parts of the new boiler under the tariff codes of a fully assembled machine. However, there is no doubt that a boiler consists of several parts designed as a single unit and can only function as such when all the parts are assembled together. That being the case, it would be illogical to insist that the constituent parts of the boiler, which were clearly declared as partial shipments in the clearance documentation, should be classified as spare parts rather than parts of the whole machine.

19. The partial consignments were physically inspected and the clearance documentation presented by the appellant scrutinized by the respondent’s custom officers before being released to the appellant. This happened for all the partial shipments which arrived on different dates between 2014 to 2017. The respondent through his proper officers at the port never raised any questions regarding the absence of the approval of the Commissioner of Customs and Border Control allowing the appellant to declare the partial consignments under the same tariff heading as the fully assembled boiler.

20. Since the boiler was imported in a disassembled manner, there was misclassification of tariff codes. This is so because the appellant had not obtained the prior approval of the Commissioner of Customs and Border control.

21. On the second issue, the appellant contended that the respondent, had created a legitimate expectation that the appellant had made proper declaration since it had disclosed the nature of the goods being imported. On the other hand, the respondent submitted that where the words of a statute are clear and express, they must override any expectation to the contrary that anybody may claim to have.

22. The evidence on record shows that the importation took place over a period of time. The appellant had disclosed that it was importing constituent parts of a boiler. However, it erroneously entered the tariff code for a whole boiler. This was all there in the importation documents which the respondent approved through his proper officer at the point of entry. What the appellant had communicated to the respondent was that it was importing a whole boiler but in a disassembled form.

23. This must have created a legitimate expectation in the appellant that the tariff classification applied was correct and it would not be required to pay further taxes in respect thereof. That being the case, the respondent cannot renege on the said legitimate expectation by purporting to reclassify the tariff codes of the constituent parts of the imported boiler as spare parts for purposes of additional tax assessment almost five years later.

24. In Export Trading Company v Kenya Revenue Authority [2018] eKLR, the court while handling a petition where re-classification of tariffs was in issue stated:“31. It is also worthy to note that the identification of the applicable rate of duty and assessment of duty payable was done by the Simba System which is owned and controlled by the respondent and that the petitioner had no role in declaring or setting the rate to be applied. I find that it is therefore unreasonable for the respondent to turn around and pass the blame to the petitioner by contending that it was, at all material times, aware of the right rate based on Legal Notice No EAC/10/2007 more so considering that the respondent’s own officers verified the entries made and even inspected the consignments.32. I further find that the respondent’s officers cannot be said to have been acting as a conveyor belt performing a perfunctory exercise while totally oblivious of their solemn duty to the public to furnish them with accurate information regarding the applicable taxation rate. It would appear that the respondent abdicated its duty to the taxpayers by remaining tight-lipped even upon being prompted by the petitioner, through the letter dated July 26, 2007, to declare the correct applicable tax rate, only to wake up from the slumber several years down the line and demand what it alleges is the under paid taxes. It is in the performance of their duty that the respondent was expected to verify the accuracy of the entries and the duty payable before clearance of the consignments in question. Having verified the entries in issue, rate applied and assessed duty as correct, I find that a legitimate expectation arose in favour of the Petitioner that the assessed duty was correct and the respondent cannot, in the circumstances of this case be seen to hide behind the provisions of EACCMA in making a belated demand for taxes.”

25. I would reiterate the foregoing here. Equity treats as done that which ought to be done. The appellant’s intention was to ultimately import the whole boiler. It could not do so due to transportation challenges. It decided to import the same in a disassembled form. It declared this fact to the respondent in its importation documents. It was there for all to see that what was being imported were constituent parts of the boiler. When they were fully imported, they were assembled and the boiler came to be. The respondent himself confirmed this fact during his visit to the appellant’s plant when carrying out the post importation audit. There was no allegation by the respondent that the constituent parts were used as spare parts elsewhere than as parts that ultimately formed the boiler he saw at the appellant’s plant.

26. While the statute has to be construed strictly, the intention of Parliament in legislating different tariff codes for spare parts and whole machines was to discourage importation of the former while encouraging the latter for production purposes.

27. The appellant’s intention and ultimate action was the importation of a whole machinery. There was no allegation that the appellant’s intention was to evade or avoid tax. In my view, although the appellant indicated a tariff code for a whole boiler other than the constituent parts, it declared that it was importing its constituent parts. The respondent having approved the same not once, not twice but several times over a period of 3 years, a legitimate expectation arose on the part of the appellant that the respondent would not later turn around and insist on a prior permission under Additional Note 2 aforesaid.

28. In view of the foregoing, the respondent was in breach of the appellant’s legitimate expectation by its demand for additional taxes. I find that the present appeal has merit.

29. Accordingly, the appeal is allowed in the following terms: -a. The Tax Appeals Tribunal’s decision of June 25, 2021 is hereby set aside in its entirety.b. The respondent’s review decision of July 17, 2020 and demand notice of May 18, 2020 and agency notices of July 2, 2021 are hereby quashed and set aside.c. The respondent shall bear the costs of the appeal.It is so decreed.

DATED AND DELIVERED AT NAIROBI THIS 3RD DAY OF JUNE, 2022. A MABEYA, FCIArbJUDGE