[2023] KETAT 606 (KLR)

Paper Systems Ltd v Commissioner of Customs & Border Control (Tax Appeal 196 of 2022) [2023] KETAT 606 (KLR) (29 June 2023) (Judgment)

Neutral citation: [2023] KETAT 606 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 196 of 2022

RM Mutuma, Chair, D.K Ngala, EN Njeru & RO Oluoch, Members

June 29, 2023

Between

Paper Systems Ltd

Appellant

and

Commissioner of Customs & Border Control

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act. Its principal business is the importation and sale of printing papers.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act Cap 469 laws of Kenya. Under Section 5(1) of the Act, Kenya Revenue 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), it 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, accounting for all revenue in accordance with those laws.

3. The Respondent conducted a desk review of custom entries of the Appellant for the period 2nd August 2018 to 7th February 2022 vide a letter dated 7th February 2022, the Respondent issued a demand notice to the Appellant requiring the Appellant to pay short levied taxes of Kshs 6,632,169. 00.

4. The Appellant’s consignment of paper and paperboard products under tariff code 4802. 56. 00 had applied import duty at the rate of 10%. However, the Respondent claimed that duty rate had been increased from 10% to 25% vide East African Gazette Notice No. EAC/112 /2018, hence the demand for short levied tax.

5. The Appellant objected to the demand vide its letter dated 16th February, 2022. It then proceeded to file its Memorandum of Appeal and Statement of Fact dated 23rd February, 2022 on 25th February, 2022.

The Appeal 6. The Appeal is premised on the following grounds: -a.That there is no law which imposed a duty rate of 25% on paper and paperboard products in the period between 2nd August 2018 and 27th January 2022. b.That even if it were to be said arguendo that some law exist which imposed a duty rate of 25% on paper and paperboard products imported under H.S Code 4802. 56. 00 as aforesaid (which is denied); and even if it were to be said arguendo that the Respondent is lawfully entitled to administer and enforce such law (which is also denied); it would still be illegal and unconstitutional for the Respondent to make and/or enforce compliance with the impugned decision or to issue the impugned demand notice.

7. The Appellant therefore prays that the Tribunal: -a.Allows this Appealb.Annuls the impugned decision as well as the impugned demand noticesc.Award the cost of this Appeal to the Appellant.

The Appellant’s Case 8. The Appellant stated that by a Gazette Notice No. EAC/21/2014 dated 20th June, 2014, the East African Council of Ministers (Council) reduced the tariff rate for paper and paperboard products imported under HS Code 4802. 56. 00 from 25% to 10%. However, vide legal Notice No. EAC/85/2017 the EAC Secretariat mistakenly indicated a tariff rate of 25% for paper and paperboard products. The Appellant contended further that vide paragraph 2 of the legal Notice No EAC/69/2018 dated 30th June 2018, the Council purported to reduce the tariff code 4802. 56. 00 from 25% to 10%. Upon realising the mistake, the Council deleted the Paragraph 2 through Legal Notice No. EAC/112/2018 dated 2nd August 2018. The effect of this is that this deletion of Paragraph 2 did not have any impact at all on the tariff rate for HS Code 4802. 56. 00 because this had never been formally reviewed since 2014.

9. The Appellant asserted that it was in fact the Respondent who applied the duty rate of 10% on all paper and paperboard products by configuring its Tradex System(Simba System) with the duty rate of 10%.Further it was the Respondent’s ICT officers who approved the online Form C.17B custom entries that had indicated 10% as the mandatory duty rate for paper and paperboard products imported under HS Code 4802. 56. 00. Consequently, the Respondent cannot find a cause of action against the Appellant from their own actions.

10. It was the Appellant’s contention that it was the Respondent who instructed its customs and valuation officers tasked with the responsibility of verifying and approving the correctness of import duty charged and paid with respect to paper and paperboard products imported under HS Code 4802. 56. 00 to insist on payment of duty at the rate of 10% before such goods could be allowed to leave the port of entry.

11. The Appellant contended further that it was unconstitutional illegal, unfair, irrational, capricious, in bad faith and abuse of office for the Respondent to encourage, induce and coerce the Appellant into paying duty at the rate of 10% for goods which the Respondent knew, or ought to have known, were meant to be sold out to third parties, only for it to subsequently demand for short levied tax for applying an incorrect rate of 25% long after the goods had been sold. At which point the Appellant cannot recover the uplifted duty from the third party purchasers.

12. It was the Appellant’s argument that the fact that the Respondent holds different views with regards to the effect of the deletion of Paragraph 2 of the Legal Notice No. EAC/69/2018 from a previous holder of the same office should have no effect whatsoever on the Appellant’s tax liabilities. Further that Section 135 of EACCMA was intended to deal only with situations where the tax paid is less than what was genuinely due and payable not what a subsequent holder of the Respondent’s office views the previous occupant ought to have collected more tax.

13. The Appellant contended that the Respondent was guilty of inordinate delay in carrying out the Post Clearance Audit whose decision to issue the impugned notice was activated by malice, bad faith and improper motive.

14. The Appellant asserted that having been issued with tax compliance certificates by the Respondent, it was therefore estopped from changing its position and now averting as against the Appellant that it has outstanding taxes. The Appellant therefore implored the Tribunal to allow the Appeal and grant the reliefs sought therein.

The Respondent’s Case 15. The Respondent addressed the Appellant’s grounds of Appeal through its Statement of Facts dated 24th March, 2022 and filed on 25th March 2022. In its response the Respondent stated;a.That the Appeal is premature before the Tribunal as the Commissioner was yet to issue its decision as provided for in Section 229(4) of EACCMA, and as such, the Appeal herein does not have stilts to stand on until the decision is issued.b.That the Legal Notice No. EAC/112/2018 dated 2nd August 2018 clearly provided for the import duty rate of 25% to be applied when dealing with goods imported under tariff 4802. 56. 00. Further that for a duty rate to be changed, the same must first be changed by operation of the law and in return the Appellant herein being an importer ought to have known the laws and the legislations which govern its operations and therefore ignorance of the law is not a defence.c.The Respondent continued to state that the East African Community Secretariat published EAC Gazette Notices on EAC website and are available to the public. These notices highlight changes effected by the Council of Ministers and usually indicate the date the legal notices come into effect, hence the taxpayer’s claim that there was no law that imposed a rate of 25% on paper and paperboard products is false. The Respondent maintained that failure to capture the amendments in the system does not take away the fact that taxes are due and payable by law as the duty to pay the proper tax falls on the Appellant herein.d.The Respondent contended that it is empowered under Sections 135, 235, 236, and 249 of EACCMA 2004, to conduct a Post Clearance Audit to assess and demand for the short levied taxes within five years of importation. Further, that in order to facilitate trade, its officers conduct due diligence before releasing the goods, provided that the importation documents correspond to the imported goods, and provided that the goods are not restricted goods or prohibited goods. That subsequently a Post Clearance Audit is conducted post the importation with an aim of verifying the accuracy of the entry of goods and determining that the correct taxes are paid.e.The Respondent concluded by stating that it does not instruct any of its officers to approve online C.17B custom entries as all the entries are processed at the Data Processing Centre by customs officers.

16. Reasons wherefore the Respondent prays that this Honourable Tribunal do find: -a.That the Appellant’s Appeal filed on 25th February 2022 be found to be premature and struck out with costs to the Respondent as it lacks merit.b.That the matter be referred back to the Respondent for determination.

Submissions Of The Parties 17. In its Written Submissions dated 4th January 2023 and filed on 13th January 2023, the Appellant has submitted on one main issue and preferred legal arguments on both the main issue and subsidiary issues:Whether there is any law that fixed the duty rate for paper and paperboard products classified under tariff Code 4802. 56. 00 at 25%

18. The Appellant submitted that for any law to be legally binding it ought to be enacted and promulgated. In this instance, the East African Community Council of Ministers holds the mandate to amend or review the laws that govern classification for the East African Community Partner states. It stated that Legal Notice No. EAC/21/2014 dated 20th June 2014 set the duty rate of paper and paperboard products at 10% and that no other legal notice during the period under review amended or changed the duty rate for paper and paperboard products.

19. The Appellant asserted that any statements, proposals, suggestions or other communications posted on the EAC website by EAC Secretariat which have not been passed by the EAC Council of Ministers and which purports to indicate a different duty rate for paper and paperboard products have no legal force and cannot be implemented or enforced by the Respondent. Further that the Legal Notice No. EAC/85/2017 merely authorized the harmonization of the EACCET with the WCOCET and did not review or change the tariff rate for paper and paperboard products.

20. The Appellant submitted that under Article 12(3) of the Protocol for Establishment of the EAC Customs Union, the Council of Ministers of the EAC may review tariff rates for customs duty chargeable by member states. The law states that:-“The Council may review the common external tariff structure and approve measures designed to remedy any adverse effects which any of the Partner states may experience by reason of the implementation of this part of the Protocol or, in exceptional circumstances, to safeguard Community interests”

21. That the Council as established under Chapter 5 of the EAC Treaty therefore is recognised as the policy organ of the Community that ensures any changes are published in the EAC Gazette before they can come into force and the gazette notice must indicate the date when such directive came into force.

22. The Appellant submitted that apart from the Legal Notice No. EAC/21/2014 where the Council of Ministers had fixed duty rates for paper and paperboard products at 10%, no other decision, directive or regulation has been issued by the EAC Council of Ministers increasing the duty rate for paper and paperboard products from 10%.

23. In submitting for the subsidiary issues, the Appellant asserted that the doctrine of precedent governs administrative decision-making just as it governs judicial decision-making. That it was therefore not legally possible for the Respondent to adopt one interpretation of a revenue legislation today and purport to resile from that interpretation and to embrace yet a different interpretation of the same law in other times. It stated therefore, that precedent binds administrative bodies such as the Respondent and to depart from it would be an act of collective irrationality by the Respondent.

24. On the issue of whether the Respondent can punish taxpayers for trusting the Respondent’s Simba System/Tradex, the Appellant submitted that having configured its digital revenue collection infrastructure to collect duty for paper products at 10% the Respondent is estopped from alleging that the duty rate should have been 25% instead of 10%. There is therefore no rational explanation why the Respondent did not reflect the change on its system, hence it cannot punish a taxpayer for being compliant with the terms on the system.

25. The Appellant submitted that the fact that the Respondent is empowered by law to carry out its mandate does not grant it the right to violate the Appellant’s right to fair administrative action. The Respondent’s powers to conduct Post Clearance Audit and therefore demand short levied tax does not ipso facto mean that a purported exercise of such power cannot be challenged and invalidated for violation of the right to fair administrative action.

26. On the issue of whether the Respondent was guilty of inordinate delay, the Appellant submitted that the mere fact that the Respondent is permitted by Section 135 of EACCMA to conduct Post Clearance Audit within five (5) years does not mean that it is lawful and proper for it to conduct the audit after four (4) years in the circumstances where it has become impossible for the Appellant to recover the additional taxes as the subject goods have since been sold and even consumed by third parties.

27. On whether this Appeal is prematurely before the Tribunal, the Appellant submitted that Section 229 of EACCMA sets forth the timelines within which the Respondent should render its decision. It submitted further that its Notice of Objection was dated 16th February 2022, and that it had to approach the Tribunal vide a certificate of urgency application dated 3rd June, 2022 seeking orders to prevent the Respondent from enforcing any actions against the Appellant. That this was agreed by mutual consent of the parties. It was the Appellant’s contention that the Respondent has not issued its objection decision arising from its notice of objection dated 16th February, 2022.

28. On its part, the Respondent’s Written Submissions dated 29th December, 2022 and filed on 3rd January 2023 raised two issues for determination.a.Whether there is a proper and competent Appeal for determination before the Honourable Tribunal.

29. The Respondent submitted that having filed an Appeal on 25th February 2022, the Appellant proceeded and filed a Notice of Withdrawal dated 14th April 2022 and the same was served upon the Respondent on 20th April 2022. That the Appellant’s attempt of reversing the withdrawal via a Notice of Cancellation of Withdrawal is alien in law and of no legal consequence. It submitted further that the alleged reinstatement of the Appeal by Notice of Cancellation of Withdrawal equally does not merit under Article 159(2)(a) of the Constitution and that procedural fairness mandates proportionality between the litigants’ compelling interests.

30. The Respondent submitted that there is no proper Appeal for determination before the Tribunal and prays that this Appeal be dismissed for reasons that: -a.The Notice of Cancellation of Withdrawal filed by the Appellant in this Appeal is alien in law and is of no legal consequence.b.The Appellant filed an Appeal prior to the Respondent having issued its review decision and as such the Appeal was prematurely filed.c.Section 27 of the Tax Appeals Tribunal Act, which the Appellant relied upon to terminate the Appeal does not provide for reinstatement in instances where an Appellant exercises its absolute right to withdraw a suit.d.The Appellant ought to have filed a fresh Appeal once it noted that the filed Notices of withdrawal were not merited.b.Whether the Respondent was proper in conducting the post clearance audit and whether the resultant findings and demand for taxes was justified

31. The Respondent submitted on this issue that it is empowered under Sections 235 and 236 of EACCMA, 2004 to carryout post clearance audits within 5 years of importation and that on 27th January 2022 it directed that an audit on products imported under imports classified under HS Code 4802. 56. 00 be carried out after which a desk audit was done on the Appellant’s imports, which revealed a short levy on the part of the Appellant.

32. It reiterated that the Post Clearance Audit was carried out in accordance with the set law and in furtherance of its statutory mandate of ensuring that all the taxes due and owing have been assessed and paid. Further that the periods covered by the audit and the subsequent demand letter are within the 5-year limit prescribed by law and were carried out within the statutory timelines as provided by law.

33. The Respondent submitted that the Council of Ministers vide Legal Notice No. EAC/21/2018 dated 20th June, 2014 decreased the duty rate for paper and paperboard products from 25% to 10%. That however, on 7th October, 2014 the Council of Ministers vide Legal Notice No. EAC/57/2017 revised the duty rate for print material under HS Code 4802. 56. 00 from 10e% to 25%.

34. It submitted further that on 30th June 2018 a Legal Notice No. EAC/69/2018 purported to amend Legal Notice No. EAC/85/2017 in respect of HS Code 4802. 56. 00 from 25% to 10%. That however the Council of Ministers amended the purported change of tariff for HS Code 4802. 56. 00 via Legal Notice No. EAC/69/2018 by deleting item No 2 therein. That this had the effect that the duty rate was in fact 25% and not 10%.

Issues for Determination 35. Having considered the pleadings, documentation availed and the parties’ submissions, the Tribunal is of the considered view that this Appeal distils into two issues for determination.a.Whether there is a valid Appeal before the Tribunalb.Whether the Respondent’s demand for short-levied tax is proper in law

Analysis and Findings 36. Having established the two issues for determination, the Tribunal will proceed to analyse them as herein under.a.Whether there is a valid Appeal before the Tribunal

37. In its submissions, the Respondent raised the issue of validity of this Appeal stating among other issues that the Appellant lodged this Appeal prematurely before receiving the Respondent’s review decision following its notice of objection dated 16th February, 2022. Section 229(1)(4) of the East African Community Customs Management Act (EACCMA) 2004,prescribes the statutory timelines when seeking and receiving a review decision. It provides as follows: -(1).”A person directly affected by the decision or omission of the Commissioner or any other officer on matters relating to Customs shall within thirty days of the date of the decision or omission lodge an application for review of that decision or omission(4)The Commissioner shall, within a period not exceeding thirty days of 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”

38. Section 230 (1)(2) of EACCMA prescribes the procedure for lodging an Appeal to the Tribunal. It provides as follows:(1)“A person dissatisfied with the decision of the Commissioner under section 229 may appeal to a tax appeals tribunal established in accordance with section 231(2)A person intending to lodge an appeal under this section shall lodge the appeal within forty-five days after being served with the decision, and shall serve a copy of the appeal on the Commissioner”.

39. The chronology of events indicate that the Respondent issued its demand for short-levied tax vide its demand letter dated 7th February, 2022. The Appellant applied for a review of the decision vide its letter dated 16th February, 2022. As per Section 229(4) of EACCMA, the Respondent was required to respond to this application within a period not exceeding thirty days of receipt of the application, that would place the date at around 16th March 2022. However, from the documentation availed, the Appellant filed this Appeal on 25th February, 2022 before receiving the Respondent’s review decision.

40. The Tribunal guided by the ruling of the Court of Appeal in the case of Speaker of the National Assembly v James Njenga Karume [1992] eKLR where the Court of Appeal stated as follows:“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 procedures.”

41. In its response to the Appellant’s grounds of Appeal, the Respondent had stated that this Appeal is prematurely before the Tribunal as it was yet to issue its decision as provided for under Section 229(4) of EACCMA. The Tribunal is also guided by the authority in the case of Owners of Motor Vessel “Lillian S” v Caltex oil (Kenya) Ltd [1989] eKLR where the Court stated as follows: -“I think it is reasonably plain that a question of jurisdiction ought to be raised at the earliest opportunity, and the court seized of the matter, is then obliged to decide the issue right away on the material before it. Jurisdiction is everything. Without it, a court has no power to make one more step. Where a court has no jurisdiction, there would be no basis for continuation of proceedings pending other evidence. A court of law downs tools in respect of the matter before it the moment it holds the opinion that it is without jurisdiction…..Where a court takes which it upon itself to exercise jurisdiction which it does not possess, its decision amounts to nothing. Jurisdiction must be acquired before judgement is given”

42. Consequent to the above analysis, the Tribunal finds that this Appeal is prematurely before it for want of an appealable decision and is therefore not valid.b.Whether the Respondent’s demand for short-levied tax is proper in law

43. Having established that this Appeal is invalid, the Tribunal will not delve into the second issue as the same has been rendered moot.

Final Decision 44. The upshot of the above is that the Appeal is prematurely before the Tribunal, and it will therefore proceed to make the final Orders.a.The Appeal be and is hereby struck out.b.Each party to bear its own costs

45. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 29TH DAY OF JUNE 2023. ROBERT M. MUTUMA - CHAIRPERSONDELILAH K. NGALA - MEMBERELISHAH N. NJERU - MEMBERRODNEY O. OLUOCH - MEMBER