[2023] KETAT 936 (KLR)

Omnispace Limited v Commisstoms and Border Controlsioner of Customs and Border Control (Tax Appeal 780 of 2022) [2023] KETAT 936 (KLR) (Civ) (20 December 2023) (Judgment)

Neutral citation: [2023] KETAT 936 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal 780 of 2022

RM Mutuma, Chair, W Ongeti, M Makau, EN Njeru & BK Terer, Members

December 20, 2023

Between

Omnispace Limited

Appellant

and

Commissioner of Customs and Border Control

Respondent

Judgment

Background 1. The Appellant is a limited liability Company duly incorporated and registered under the Companies Act within the Republic of Kenya. Its main form of business is in the provision of events, conferencing and meeting facilities, accessories and services, and event management.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5 (2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent carried out a desk review audit on the Appellant and found that the Appellant had classified its importation of aluminium maxiflex structure under H.S Code 7610. 10. 00 instead of HS Code 9406. 90. 90 stating that the imports are maxiflex parts, glass walls and glass doors and windows.

4. The Respondent applied the Tariff 9406. 90. 90 which attracts an import duty of 25% together with 16% VAT.

5. Consequently, on 20th April 2022, the Respondent issued a demand notice to the Appellant for Kshs. 13,463,585. 00.

6. The Appellant applied for a review vide a letter dated 17th May 2022 which resulted in the Respondent upholding its position on the reclassification of the tariff vide a review decision dated 13th June 2022.

7. Being dissatisfied with the objection decision, the Appellant filed the current Appeal.

The Appeal 8. In its Memorandum of Appeal dated 20th July 2022 and filed on 27th July 2022, the Appellant premised its Appeal on the following surmised grounds.a.The Respondent erred in law and fact by levying customs tax on an aluminum structure, erroneously claiming that it is a fabricated structure.

The Appellant’s Case 9. The Appellant set down its case in itsa.Statement of Facts dated 25th July 2022 and filed on 27th July 2022; andb.Written submissions dated 24th March 2023 and filed on 8th April 2023.

10. The Appellant reiterated the background of events and stated that the aluminum structure for use as a storage facility was correctly classified on tariff subheading 7610 imported for use as a basic structure for storage of company equipment with a weight of 45 tons and that this is not a structure that can be moved around.

11. The Appellant averred that the shipment only included aluminum parts of structures and doors and windows and their frames, all of which are covered under the Heading 7610, not including flooring, walls, or other elements that would be expected parts of a fabricated building.

12. It stated that the manufacturer makes both prefab buildings and aluminum storage structures, but the manufacturer’s prefab structures include walls and flooring etc, which the subject shipment did not thus the subject structure does not meet the criteria for a prefab structure or an exhibition tent as described by the Respondent.

13. It stated that there was confusion since the manufacturer makes products that fit both classifications, but the prefab structures come fully fitted with lighting and a floor and their exhibition tents are lighter frames and are built for ease of assembly and disassembly.

14. It averred that it has imported prefabricated structures of lower and greater value from the same manufacturer and has always classified them correctly paying taxes in full. As such, the Appellant would have no reason to vary the submission and for prefab structures, shipments have included walls, flooring, and roofing components which the subject shipment did not include.

15. It averred that proper inspection was done by the Commissioner at the port and classified correctly changing the classification after 3 years and now claiming an astronomical amount is punitive to the Appellant and will negatively affect the Appellant to the point of possible bankruptcy. It added that the Respondent has no right to willfully change its mind after many years and demand almost double the original sum in additional taxes that will result in the Appellant closing its operations after approving the initial classification.

16. It averred that it employs 50 jobless youth from Baba Dogo slums who have been trained by the Appellant enabling the youth to make a living and support their families and the actions of the Respondent would not only have a disastrous effect on the Appellant but on the youth who are its employees.

17. On whether the demand notice was based on grounds that the aluminum structure was misclassified under Tariff Code 7610, the Appellant submitted that the Respondent has not provided a basis of turning around after two and a half years to reclassify and refer to its shipment as a prefabricated building. It reiterated that the shipment only included aluminum parts of structures, doors, and windows and their frames, all of which are covered under Heading 7610 and did not include flooring, walls, or other elements that would be expected parts of a prefabricated building.

18. The Respondent contended that the structure was imported to be used as a basic structure for storage of the company’s equipment and the weight of the structure is 45 tons making it impossible to be used as an exhibition tent because it will be hard to move around.

19. The Appellant submitted that the manufacturer makes both prefab buildings and aluminum storage structures thus there was confusion since the products fit both classifications. It maintained that the manufacturer’s prefab structures come fully fitted and built for ease of assembly and disassembly.

20. The Appellant asserted that proper inspection was done by the Respondent at the point of entry and correctly classified thus changing the classification after two and a half year’s and now claiming an astronomical amount is not only punitive to the company but will also lead to closure of the operations and the subsequent loss of jobs for the employees and tax revenues to the Respondent.

21. It argued that having inspected the goods at the point of import and the relevant charges paid by the Appellant under the said code, there was a legitimate expectation on the Appellant’s part that the Aluminum structure was imported in compliance with the correct tariff and that no further claims should arise from the Respondent having cleared the import.

22. It relied on the cases of Republic vs. Kenya Revenue Authority Ex Parte M-Kopa Kenya Limited; and Republic vs. Kenya Revenue Authority Ex Parte Shajke Distributors Limited HC Misc. Civil Application No. 359 of 2012 to argue that the Respondent violated its right to legitimate expectation by reneging from the earlier classification and reclassifying the aluminum structure.

The Appellant’s Prayers 23. The Appellant subsequently prayed for the following from the Tribunal.a.The demand notices for additional tax amounting to Kshs. 13,463,585. 00 (together with penalties and interest) by the Respondent were unlawful and improperly assessed and as such the same should be set aside.b.The Appeal herein be allowed with costs in favour of the Appellant.c.Any other remedy that this Honourable Tribunal deems just and reasonable.

The Respondent’s Case 24. The Respondent’s case is premised on its:a.Statement of Facts dated 25th August 2022 and filed on 26th August 2022. b.Written Submissions dated 2nd May 2023 and filed 16th May 2023.

25. The Respondent averred that it operates a self-declaration regime where the Appellant was allowed to make a declaration and pay taxes on the items, it import which creates an expectation that the taxpayer will pay the correct taxes due and the Respondent is mandated to undertake post-clearance audit as defined in the World Customs Organization Guidelines of Post Clearance Audit to verify the information provided during the clearing.

26. The Respondent asserted that it undertook a desk review of all aluminum products imported by the Appellant and established that the maxiflex with glass wall and glass door used in the entertainment service were prefabricated buildings and the same were wrongly classified as aluminum structures.

27. It cited Tariff Codes 7610. 90. 00 and 9406 and contended that the Appellant was informed via the tax demand notice of 20th April 2022 that the maxi flex parts glass wall and glass door the Appellant imported was an exhibition tent and therefore classifiable under Tariff 9406.

28. The Respondent relied on the GIRs EAC/CET and Article 7 Paragraph 5 of the World Customs Organization TFA on Post Clearance Audit mandate, and reiterated that it demanded short-levied taxes under Sections 135 and 249 of the EACCMA.

29. It further relied on GIR 1 and contended that the most specific description of a product is found from the scientific analysis of the product or physical analysis of the produce and the Appellant imported the item maxi flex parts with glass walls and glass door which was described by the Commercial invoice of the importation as “Exhibition Tent”. It added that an exhibition tent is a prefabricated product that is manufactured and consists of factory-made components or units that are transported and assembled on-site to form the complete building which are used in the event organization like the one the Appellant is involved in.

30. The Respondent stated that HS 7610 which covers aluminum structures specifically excludes prefabricated buildings of Heading 9406.

31. The Respondent contended that the Second Rule of the GIR requires persons to take into account the essential character of the article when deciding on the proper classification of the goods and the essential character of the imports was that it was an exhibition tent as captured in the invoice and that it was a maxi flex with glass doors and glass windows which make it a prefabricated building to be used in the events organized by the Appellant in their core business.

32. It referred to the Explanatory Notes on tariff Subheading 9406 and maintained that apart from the Import Declaration Form where the Appellant is required to provide the full description of the applicable standard, the Appellant described the exhibition tents as Maxi flex 40. 5/400 by 40M with glass wall and glass door (2 set) which is the essential character of the articles and constitutes a prefabricated building.

33. The Respondent averred that taking into account the purpose for which the article was being imported, it is to be used in events and the exhibition tents were prefabricated buildings and correctly classifiable under HS 94. 06.

34. It stated that per the Third Rule of the GIR Rules, in as much as the two classifications are not of equal merit as Heading 7601 excludes prefabrication. It added that the application of Rule 3, HS 94. 06 occurs the last in the numerical order and the most appropriate.

35. It maintained that in an application of the GIR Rule 1 on the most specific description, the essential character of the article and Rule 3 on the Heading that occurs last, the most appropriate classification for the exhibition tents: maxiflex with glass doors and glass windows is HS 94. 06.

36. It contended that 25% was chargeable on the prefabricated building that the Appellant had imported thus making them subject to the payment ofImport duty of 25% and VAT obligation of 16% in line with Section 135 of the EACCMA.

37. It asserted that based on the information provided, the item imported was a complete building only that it was unassembled at the time of importation for ease of transportation, it is a prefabricated building and this expressly excluded from HS 7610 which had been used by the importer.

38. The Respondent submitted that the subject of classification are the exhibition tent: maxiplex with glass wall and glass door used in the entertainment service and are prefabricated buildings. It added that the commercial invoice used to clear the goods by the Appellant captured that what was ordered from the supplier was the exhibition tent.

39. The Respondent quoted the definition of transportable homes per the Transportable Home Finance retrieved on 2008-11-26 and submitted that the Appellant admits in its submissions that the documents provided by the supplier indicate that what was manufactured were prefab buildings but opt to state that the same was a confusion on the part of the manufacturer.

40. On the applicable legal regime, the Respondent reiterated verbatim the averments in its Statement of Facts, and further asserted that the Appellant conceded that the structures imported were above 45 tons and incapable of being exhibition tents and blamed the manufacturer for describing them as such but there was no evidence availed as to the error on the part of the manufacturer.

41. It relied on the cases of Francis Otile vs. Uganda Motors Kampala HCCS No. 210 of 1989; Mohammed & Another vs. Haidara [1972] E.A 166; Edward Muriga Through Stanley Muriga vs. Nathaniel D. Schulter Civil Appeal No. 23 of 1997; and CMC Aviation Ltd. Vs. Cruisair Ltd (No. 1)[1978] KLR 103; [1976-80] 1KLR and argued that averments in pleadings are not evidence.

42. The Respondent further relied on the cases of Motex Knitwear Limited vs. Gopitex Knitwear Mills Limited Nairobi (Milimani) HCCC No. 834 of 2002 where the court approvingly cited the case of Autar Singh Bahra and Another vs. Raju Govindji, HCCC No. 548 of 1998; and Trust Bank Limited vs. Paramount Universal Bank Limited & 2 Others Nairobi (Milimani) HCCS No. 1243 of 2001 together with Section 223 of the EACCMA to buttress its position that the responsibility to provide evidence to contradict the Respondent's position is on the Appellant who has failed to discharge the burden of proof that the review decision herein is incorrect.

43. On whether the Respondent is properly mandated in law to carry out Post Clearance on goods. The Respondent submitted that its customs declaration system is a self-declaration system where the importer declares its imported goods and the classification for the goods with the Respondent only verifying the accuracy of the declarations. It relied on the World Customs Organization Guidelines’ definition of Post Clearance Audits.

44. The Respondent asserted that Border Controls have a part to play in modern customs service but excessive time-consuming checks at the point of clearance can be counterproductive as modern commerce works with tight deadlines and national economic benefits can be derived as a result of smooth and timely clearance of goods and the majority of international trade involves large corporations with global networks and complex business systems and supply chains.

45. The Respondent reiterated that the limited documentation required to be produced at the time of importation does not provide the whole context of a commercial transaction which is necessary to properly determine the correct customs value, classification and entitlement to preferential origin and most of the time it becomes unfeasible for customs to make conclusive decisions regarding duty liability in the narrow timeframe available.

46. It maintained that by application of a post-clearance risk-based approach, customs are able to target their resources more effectively and work in partnership with the business community to improve compliance levels and facilitate trade.

47. The Respondent cited the definition of Post Clearance Audit under the Kyoto Convention and submitted that Post Clearance Audits assist the implementation of the customs valuation control in accordance with the World Trade Organization Valuation Agreement and verification of the value and detection and prevention of fraud but other types of fraud like misclassification, misdescription of quantity and origin can be detected.

48. It cited Sections 235 and 236 of the EACCMA together with the case of Kenya Revenue Authority Ex Parte Bata Shoe Company (Kenya) Limited [2014] eKLR and reiterated that Post Clearance Audits are properly anchored in law and the Respondent is empowered to audit previous entries made by an importer to verify if the same was properly declared and classified.

49. The Respondent further submitted that the desk audit it carried out was focused on the entries for the period between September 2015 to August 2020 culminating to a demand of Kshs. 4,1183,470. 00 as tax arrears due from the Appellant.

50. It cited Section 135 of the EACCMA and asserted that it sought to establish through the Post Clearance Audit whether the Appellant had correctly classified the apparatus under dispute and the issue of legitimate expectation does not arise as the Post Clearance Audit was carried out within the allowed time. It added that no expression had been previously made to the Appellant that their classification was correct.

51. The Respondent relied on the case of Republic vs. Kenya Revenue Authority Ex Parte Shake Distributors Ltd [2012] eKLR and reiterated that no expression was ever made by the Respondent to the Appellant and for an expectation to be legitimate, it must be founded upon a promise or practice by a public authority that is expected to be fulfilled.

52. The Respondent submitted that a taxpayer cannot grant itself legitimate expectation by virtue of the fact that they have been importing under a tariff that the Respondent later on through Post Clearance Audit realizes is not the correct tariff.

53. It argued that the Appellant declared the electrical extension cables under Tariff Code 8536 does not mean that the Respondent created a legitimate expectation to the Appellant that is correct tariff and at the point of post clearance verification, the classification was found to be erroneous and legitimate expectation cannot override the clear provisions of the law.

54. It reiterated that the Respondent is clothed with jurisdiction to carry out a post-clearance audit and the fact that the goods have been allowed to leave the Port at the first instance, does not create any expectation that the declarations made by the importers are correct.

The Respondent’s prayers 55. The Respondent, therefore, prayed for orders that the Tribunal to find that:a.The Respondent’s decision of 13th June 2022 and tax demand was properly issued as provided under law.b.This Appeal be dismissed with costs to the Respondent as the same is without merit.

Issues for Determination 56. After perusing the Memorandum of Appeal and parties' Statements of Facts together with their submissions and documentation attached therewith, the Tribunal presents the following as the issues for determination:a.Whether there was a competent Appeal on record.b.Whether the Respondent was justified in reclassifying the Appellant’s goods.

Analysis and Findings 57. The Tribunal wishes to analyze the issues as hereinunder.

a. Whether there was a competent Appeal on record. 58. The Tribunal noted that the Notice of Appeal was lodged on the 27th July 2022 stemming from the grievance with the Respondent’s review decision issued on 13th June 2022.

59. For a Notice of Appeal to be deemed as competently lodged, the same ought to be made and/or lodged within the prescribed timelines as set out under Section 13 (1) (b) of the Tax Appeals Tribunal Act, which states as follows;-“A notice of appeal to the Tribunal shall—

(b) be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner.” 60. Section 13 (3) of the Tax Appeals Tribunal Act, provides the remedy to any party who wishes to lodge an Appeal beyond the statutory timeframe, such party may seek leave of the Tribunal in writing as per the provisions of Section 13 (3) which reads as follows:-“(3) The Tribunal may, upon application in writing, extend the time for filing the notice of appeal and for submitting the documents referred to in subsection (2).”

61. The Appellant should have lodged this Appeal to the Tribunal within thirty days of the Respondent’s review decision, which would have been on or before the 13th July 2022.

62. This Appeal was lodged on 27th July 2022, 14 days late without leave of the Tribunal.

63. The Tribunal finds that the Appeal herein was lodged beyond the statutorily prescribed period and is therefore incompetent and untenable in law.

64. The Appeal is therefore not validly and properly before the Tribunal.

65. The Tribunal having ascertained that there is no proper and/or valid Appeal before it, it shall not delve into the residue issue for determination as the same has been rendered moot.

Final Decision 66. The upshot to the foregoing is that the Appeal is incompetent, and the Tribunal consequently makes the following Orders; -a.The Appeal be and is hereby struck out.b.Each party bears its own costs.

67. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF DECEMBER, 2023ROBERT M. MUTUMA............CHAIRPERSONDR. WALTER ONGETI................MEMBERMUTISO MAKAU.........................MEMBERELISHAH N. NJERU......................MEMBERBONIFACE K. TERER....................MEMBER