[2024] KETAT 1016 (KLR)

Pharmacor Limited v Commissioner of Customs and Border Control (Tax Appeal E505 of 2023) [2024] KETAT 1016 (KLR) (12 July 2024) (Judgment)

Neutral citation: [2024] KETAT 1016 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E505 of 2023

RM Mutuma, Chair, M Makau, EN Njeru, B Gitari & AM Diriye, Members

July 12, 2024

Between

Pharmacor Limited

Appellant

and

Commissioner Of Customs And Border Control

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated under the Companies Act of the laws of Kenya, whose principal activity is dealing in distribution of pharmaceutical products.

2. The Respondent is a principal officer appointed as such pursuant to Section 5 (1) of the Eat African Customs Management Act, 2004, as read together with Section 13 of the Kenya Revenue Authority Act, and is mandated with the responsibility of the assessment, collection and accounting of customs revenue as an agent of the Government of Kenya, and the responsibility of the administration and enforcement of the customs laws.

3. The dispute subject of this Appeal emanated from the declaration by the Appellant through its clearing agent on 27th February 2023 of a consignment of pharmaceutical products under entry number 23NBOIM402274510 upon which it paid customs duty in the sum of Kshs. 87,128. 00.

4. The Respondent indicated that the declared unit value of FOB USD 0. 34 per pack of 30 pcs was low and a recommendation of FOB USD 3. 65 per pack of 30 pcs was made. The Respondent further indicated that this was arrived at after a market survey indicating a retail value of Kshs. 1,200 per pack of 30 pcs. Consequently, the Respondent uplifted the value from Kshs. 560,493. 00 to Kshs. 5,692,526. 00 and made an assessment of Kshs. 795,465. 00 in additional duties and Kshs. 413,643. 00 in penalties.

5. The Appellant disputed the uplift and assessment and the Respondent forwarded the matter to the Valuation and Tariff Unit on 7th March 2023.

6. The Respondent’s Valuation Unit rejected the transaction value for the reason that the terms of payment on sale agreement indicated a payment period of 180 days while the invoice indicated 210 days. The sale agreement and price list presented indicated terms of payment as FOB while the sales invoice indicated cost and freight.

7. Consequently, the Respondent assessed and computed additional duty and penalties payable at Kshs. 1,209,108. 00 and demanded payment for the same prior to release of the goods.

8. The Appellant requested to be allowed to put a bank guarantee on 16th March 2023 to secure the release of the goods which request was granted, but later on 23rd March 2023 the Appellant’s clearing agent requested to pay under protest.

9. An offence was raised under Ref. F71/0001631/2023 and order made, and a request for settlement of the case under the provisions of Section 219 of EACCMA, 2004, and a mitigation made by the clearing agent on behalf of Appellant was made, a payment of Kshs. 795,465. 00, Kshs. 413,365. 00, Kshs. 87,128. 00 and a fine amounting to Kshs. 397,733. 00, and penalty of Kshs. 15,910. 00 paid on 27th March 2023.

10. The Appellant dissatisfied with the Respondent’s decision to uplift the value of its consignment declared on FOB value of Kshs. 560,493. 00 to Kshs. 5,692,526. 00, subsequently filed its Notice of Appeal dated and filed on 23rd August 2023, appealing against the uplifted value and additional assessments.

The Appeal 11. The Appellant filed its Memorandum of Appeal dated and filed on 23rd August 2023 and set out the following grounds of appeal;a.That the Commissioner erred in law and in fact in failing to explain to the Appellant in writing, pursuant to Section 122 (2) of EACCMA of how the customs value of its goods was determined.b.That the Commissioner erred in law and in fact in uplifting the value of the consignment on entry NO. 23NBOIM402274510 to Kshs. 5,692,526. 00 in lieu of the FOB value provided for in the importation documents as the transaction value and the basis for levying duty.c.That the Commissioner erred in law and in fact in failing to consider the international the FOB value of Kshs. 560,493. 00 of entry No. 23NBOIM402274510 as provided for in the importation documents as the transaction value and the basis for levying duty.d.That the Commissioner erred in fact for failing to consider the international retailing market price of the commodity contained in entry No. 23NBOIM402274510 which is independent and verifiable in several platforms.e.That the Commissioner erred in fact in raising the value uplift to Kshs. 5,692,526. 00. f.That the Commissioner erred in law and in fact by purporting to issue the Decision outside the provisions of EACCMA.g.That the Honourable Tribunal has jurisdiction to hear and determine this Appeal.

The Appellant’s Case 12. The Appellant’s case is set out on its;a.Statement of Facts dated and filed on 23rd August 2023 together with the documents attached thereto; and,

13. The Appellant did not file its written submissions by the due date of 30th May 2023.

14. The Appellant stated that it has been importing Gemcal tabs into the country for as back as 2019 without any challenges and or value uplifts by the Respondent since it gained presence in Kenya.

15. It stated that prior to the decision to uplift the value of the Appellant’s consignment, it had imported identical goods in previous consignments into the country without any disputes with the Respondent.

16. The Appellant stated that on or about February 2023, it imported into Kenya Gemcal tabs (30) on customs entry No. 23NBOIM402274510 from Alkema Laboratories based in India. It stated that the declared FOB value for the consignment was Kshs. 560,493. 00.

17. The Appellant further stated that upon arrival into the country it was informed by its clearing agent, Najmi Clearing & Forwarding Ltd that the Respondent had detained the goods on disputed valuation and incurred demurrage charges and storage costs.

18. It further stated that consequently the Respondent arbitrarily, capriciously, clandestinely and without affording the Appellant an explanation as required by law, uplifted the initial declared FOB value of Kshs. 560,493. 00 to Kshs. 5,692,526. 00, which meant that the Appellant was obliged to pay additional customs taxes of Kshs. 795,465. 00 and additional penalties of Kshs. 413,643. 00.

19. The Appellant also stated that as a consequence of the foregoing, extra storage charges amounting to Kshs. 668,361. 25 arose due to the act of the Respondent detaining the goods and the Appellant was obliged to pay the extra charges to forestall other costs.

20. It stated that through its clearing agent, Najmi Clearing & Forwarding Ltd, it appealed against the value uplift vide a letter dated 10th March 2023.

21. It stated that upon review of the Appeal and supporting documents, the Respondent made a finding that;i.The price list provided annexed to the letter dated 16th June 2021 shows Alkem to Pharmacor Transfer price of FOB USD contrary to the invoice indicated CFR.ii.The terms of payment on the sale agreement indicated 180 days TT while the invoice indicated 210 days.

22. Consequently, the Respondent assessed and computed additional duty and penalties payable at Kshs 1,209,108 and demanded payment for the same prior to uplifting of the goods.

23. The Appellant further averred that it paid for the uplifted value of the consignment albeit under protest to secure the release of the consignment in a bid to cut down on the increasing demurrage charges and stall further costs to the business. It also averred that it paid an extra Kshs. 668,361. 00 to Africa Flight Services being port handling charges prior to the uplifting of the goods.

24. The Appellant further averred that it lodged an application for review of the Respondent’s decision vide its letter of 19th May 2023, and in its response to the application for review, the Respondent cited Section 229 (1) of EACCMA citing statutory timelines and refrained from relooking at the facts and documents attached to the application. The Appellant contended that the response was made outside the 30 days window as it was made and received on 9th June 2023.

25. The Appellant contended that it made the application for review of the Respondent’s decision pursuant to the provisions of EACCMA faulting the value of the uplifts and the ensuing tax liability and attached to its application all the necessary documents but the Respondent declined to set aside and or vary its decision to uplift the value and maintained the additional demand for taxes.

26. The Appellant further averred that prior to the dispute herein, it has shipped a consignment of identical goods in 2019, 2020, 2021 and 2022 from the same supplier and other finished pharmaceutical products and the Respondent has not objected at any border control points into Kenya with the entries being approved by the Respondent without any extra charges, taxes or levies.

27. It contended that failure by the Respondent to take account of the foregoing smacks of irrationality, mala fides and capricious.

28. It further stated that the Respondent failed to offer any plausible explanation to the Appellant of how the uplifted customs value of the goods was determined despite numerous follow up communication contrary to the provisions of Section 122 (2) of EACCMA.

29. It also stated that the value uplift by the Respondent is unjust, speculative, presumptuous, arbitrary, unfair, unreasonable, high handed, contrary to fair administrative action, offensive to the provisions of the law and unlawful. It further stated the decision to uplift the value was capricious, irregular, ill -founded and has no basis in law.

30. The Appellant contended that it had supplied the Respondent with all the necessary information laying basis on the valuation of its goods to enable the Respondent review its decision but the Respondent refrained from reviewing its decision making the efforts of the Appellant hit a dead-end thus prompting the appeal herein.

31. It averred that the additional demand for taxes aforecited and the additional port charges is unlawful harassment and blatant disregard of the principle of legitimate expectation.

32. The Appellant contended that the Respondent did not respond to the Appellant’s application in time within the timeframe required under Section 229 (4) of EACCMA despite being furnished with documentation to support the FOB declared value.

33. It further contended that the Respondent erred in law and fact by purporting to issue the decision out of time whose effect is that the application was deemed allowed by operation of the law and the Respondent enjoined to refund the additional taxes and charges paid to it by the Appellant.

34. The Appellant further averred that the Respondent was enjoined to uphold the FOB value of Kshs. 560,493. 00 of the consignment as it failed to supply any cogent reason to sustain or to disclose the evidence it had in its possession on the veracity of the documents supplied to it.

35. The Appellant in conclusion averred that it is tax compliant and has always been tax compliant including the period of importation of the consignment herein.

Appellant’s Prayers 36. By reason of the foregoing, the Appellant prayed the Honourable Tribunal to;a.Allows the Appeal herein;b.Set aside or vacate the Review Decision(s);c.Order the Respondent to refund the Appellant excess tax and charges amounting to Kshs 1,877,469. 62; and,d.Award the costs of and incidental to this appeal to the Appellant.

The Respondent’s Case 37. The Respondent’s case is premised on its;a.Statement of Facts dated and filed on 20th September 2023;b.Written submissions dated and filed on 30th May 2024; and,c.The Respondent’s witness statement by Raymond Kipkoech signed & dated 26th February 2024 and filed on 6th March 2024 together with the documents attached thereto, and adopted in evidence in chief by the Tribunal on 15th May 2024.

38. The Respondent stated that the Appellant through its clearing agent lodged an entry number 23NBOIM402274510 on 25th February 2023 and paid a total of Kshs. 87,128. 00. It further stated that it noted that the declared unit value of FOBV USD 0. 34 per pack of 30 pcs was low and a recommendation of FOB USD 3. 65 per pack of 30 pcs was made, and it was arrived at after a market survey indicating retail value of Kshs. 1,200. 00 per pack of 30 pcs. As a result, an assessment of extra taxes of Kshs. 795,465. 00 was made.

39. The Respondent further stated that its valuation unit rejected the transaction value for the reason that the terms of payment on sale agreement indicated a payment period of 180 days, while the invoice indicated 120 days. Also, the sale agreement and price list presented indicated terms of payment as FOB while sales invoice indicated cost and freight.

40. It was also stated that the Appellant requested to pay the extra taxes under protest on 23rd March 2023 and the Respondent granted the request.

41. The Respondent also stated that an offence was raised under reference F71/0001631/2023 and an order made. The request for settlement of the case under the provisions of Section 219 of EACCMA, and a mitigation done on behalf of the Appellant, and fines of Kshs. 397,733. 00, and penalties amounting to Kshs. 15,910. 00, paid on 27th March 2023. The additional taxes in the sum of Kshs. 795,465. 00 was also paid.

42. The Appellant subsequently sought to appeal through letters dated 3rd May 2023 and 19th May 2023, and thereafter filed its Appeal on 23rd August 2023 against the uplifted values.

43. The Respondent in its Statement of Facts, stated that it shall raise a preliminary objection to the Memorandum of Appeal dated 23rd August 2023 filed herein and urged the same to be struck out on the grounds;a.Under Section 219 (3) (e) of EACCMA, a compounding order is final, not subject to appeal, and enforceable as an order of the High Court, and accordingly the Appellant paid extra taxes, fines and penalties.b.The consequence of the foregoing is that the Tribunal lacks jurisdiction to delve into a matter surrounding an admission of an offence and subsequent compounding order made under Section 219 of EACCMA.

44. The Respondent averred that in this dispute it relied on the provisions of Section 122 read together with the Fourth Schedule paragraph 2 and paragraph 6 part 1 of EACCMA in determination of the customs value of imported goods.

45. The Respondent further stated that it may apply the transaction value of the goods or subsequently apply other methods of valuation when method 1 is inadmissible.

46. It stated that it departed from method 1 for the following reasons;i.The sales agreement and price list presented indicated terms of payment as FOB while the sales invoice indicated cost and freight.ii.The terms of payment on sales agreement indicated payment period of 180 days, while the invoice indicated 210 days.iii.The Respondent’s arrived value was derived from a market survey.iv.The Appellant did not provide any documents to controvert the Respondent’s position.

47. The Respondent averred that the Appellant sought to settle the dispute within the provisions of Section 219 of EACCMA, and its action of lodging an Appeal therefore is an attempt to reopen a dispute where the offence is already and long admitted and effectively closed by dint of Section 219 of EACCMA.

48. The Respondent averred that the assertion of a second Appeal is misconceived as a dispute settled Section 219 is deemed closed. In the absence of an order from the High Court setting aside the admission of offence and subsequent compounding order made under Section 219 of EACCMA, the prevailing status quo must be maintained.

49. The Respondent contended that the Honourable Tribunal lacks jurisdiction to entertain, determine or set aside the admission of an offence.

50. The Respondent in its submissions contended that it raised a preliminary objection on the basis that under Section 219 (3) (e) of EACCMA, the compounding order is final, and not subject to appeal and enforceable as an order of the High Court and accordingly the Appellant paid extra fines and penalties.

51. It submitted that as a consequence of the foregoing, the Tribunal lacks jurisdiction to delve into a matter surrounding the admission of an offence and subsequent compounding order made under Section 219 of EACCMA.

52. The Respondent further submitted that the Appellant has pleaded that it made payment under protest to secure the release of the goods, and no mention of offence and compounding by its clearing agent. It submitted that a perusal of the documents annexed at the Statement of Facts provides a chronological analysis of events relating to this dispute, and the Appellant has not controverted the documents produced by the Respondent.

53. The Respondent also submitted that only the High Court and not the Tribunal that has jurisdiction to set aside a decree/or order which is deemed to have been issued by the High Court pursuant to Section 219 (3) of EACCMA.

54. It also submitted that in the absence of an order from the High Court setting aside the admission of an offence and subsequent compounding order made under Section 219 of EACCMA, the prevailing status quo must be maintained, to the effect that there indeed exists an admission of offence and subsequent compounding order, which is yet to be set aside or varied.

55. It was submitted that the Tribunal has had an opportunity to determine the implication of an admission of offence and subsequent compounding order, made under a tax law in the case of Ndumu Plastics vs. Commissioner of Domestic Taxes (TAT No. 1513 of 2022), and Cipla Kenya Ltd vs. Commissioner of Domestic Taxes (TAT No. 1133 of 2022) , wherein the Tribunal correctly found that no Appeal can be filed once the admission of offence and subsequent compounding order is made since there cannot be an appealable decision in that respect. Consequently, the Tribunal found that it had no jurisdiction to entertain the Appeal.

56. It was further submitted that the Appellant having clearly foregone its right of any appeal by dint of the execution of form C-40, the Appellant cannot even be allowed to steal the match by rushing to lodge an Appeal by way of an application for review in order to defeat the very purpose and effect of Section 219 of EACCMA.

57. The Respondent submitted that after an admission of an offence and subsequent compounding order as is in the instant case, any subsequent processes including the purported application for review, and any Review Decision done are deemed non-existent.

58. It was a submission of the Respondent that an Appeal before the Tribunal is barred by operation the law. It is illegality and void ab initio immediately the Appellant admitted the offence, there is in fact no dispute and the Appeal does not have any leg on which to stand on.

59. The Respondent also submitted that having compared the value of comparable goods based on market survey, it was established that the Appellant indeed undervalued its consignment, accordingly the Respondent departed from the transactional value method and applied the value of identical items as comparable to the Appellant’s imported consignment.

60. The Respondent stated that the definition of identical goods is provided for under part 1 of the fourth schedule of EACCMA.

61. It also relied on the case of Gira Enterprises vs. Commissioner of Customs (Customs, Excise & Gold Tribunal – Mumbai) 2005, where it was stated;“when the declared value is ridiculously low compared to the ordinary competitive price of comparable goods contemporaneously imported, such declared values cannot be adopted as customs value. In such cases, the transaction value method is clearly inapplicable as the declared value does not conform to the requirement of the said section 14 (1). Valuation by adopting value of comparable goods contemporaneously imported is an equally efficacious method of valuation.”

Respondent’s Prayers 62. By reason of the foregoing, the Respondent prayed that this Honourable Tribunal;a.Upholds that the Respondent’s decision to uplift taxes was proper and in conformity with the provisions of the law; and,b.The Appeal be dismissed with costs.

Issues for Determination 63. The Tribunal having carefully considered the filings and the submissions made by the parties is of the considered view that the Appeal distils into two issues for determination as follows:i.Whether the Tribunal has the jurisdiction to entertain the Appellant’s Appeal herein; and,ii.Whether the Respondent’s decision to uplift the value of the Appellant’s consignment was justified.

Analysis And Determination 64. The Tribunal having identified the issues for determination, shall analyze the same as herein under;

i. Whether the Tribunal has the jurisdiction to entertain the Appellant’s Appeal herein. 65. The dispute subject of this Appeal emanated from an import declaration entry number 23NBOIM402274510 made by the Appellant’s clearing agent on 27th February 2023 in respect of a consignment of pharmaceutical products, upon which it paid customs duty in the sum of Kshs. 87,128. 00.

66. The Respondent has submitted that the declared unit value of FOB USD 0. 34 per pack of 30 pcs was low and made a recommendation of FOB USD 3. 65 per pack of 30 pcs. The Respondent submitted that this was arrived at after a market survey indicated a retail value of Kshs. 1,200. 00 per pack of 30 pcs.

67. On the foregoing basis the Respondent uplifted the value of the consignment from the declared value of Kshs. 560,493. 00 to Kshs. 5,692,526. 00, and assessed the underdeclared duty in the sum of Kshs. 795,465. 00, and penalties in the sum of Kshs. 413,643. 00.

68. The Appellant appealed the valuation to the Respondent’s valuation unit, but the valuation was upheld.

69. Subsequently an offence was raised under Ref. F71/0001631/2023, and the Appellant applied for compounding of the offence, and made a mitigation under Section 219 of EACCMA. An order of settlement was made and the Appellant paid fines of Kshs. 397,733. 00 and penalties amounting to Kshs. 15,910. 00 on 27th March 2023, in addition to the additional duties in the sum of Kshs. 795,465. 00 paid.

70. The Respondent has submitted that subject to Section 219 (3) (e) of EACCMA, the compounding order is final, and not subject to appeal and enforceable as an order of the High court, upon which the Appellant paid extra taxes, fines and penalties. Premised on this, the Respondent asserted that this Tribunal does not have jurisdiction to entertain the Appellant’s Appeal.

71. The Tribunal has not had the benefit of submissions or pleadings addressing this point of law from the Respondent.

72. Section 219 (3) (e) of EACCMA, upon which this preliminary objection is anchored, provides:“(3)Where the Commissioner makes any order under this section –(e)the order shall be final and shall not be subject to appeal and may be enforced in the same manner as a decree or order of the High Court.”

73. The Tribunal notes that the Appellant through its clearing agent was issued a charge sheet, and offence report, and applied for compounding of an offence and settlement by signing and lodging the form C35 under Section 219 of EACCMA. An order for settlement was issued and the penalties and fines paid.

74. The foregoing connotes in essence that the Appellant admitted to the offence, which was compounded by the Respondent and the case settled under Section 219 of EACCMA conclusively.

75. The Tribunal therefore takes the view that pursuant to Section 129 (3) (e) of EACCMA a compounding order is final and conclusive as an order of the High Court, and therefore not appealable at the Tribunal, nor can it be reviewed by the Tribunal.

76. The principle guiding jurisdiction of courts was laid down in the locus classicus decision in Owners of the Motor Vessel “Lillian S” vs. Caltex Oil (Kenya) Ltd (Civil Appeal No 50 of 1989) where it was held;“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 a continuation of proceedings pending other evidence. A court of law must down tools in respect of the matter before it the moment it holds the opinion that it is without jurisdiction.”

77. In view of the foregoing the Tribunal finds and holds that it has no jurisdiction to entertain or determine the Appellant’s Appeal, thus downs its tools.

78. The Tribunal having determined that it is not clothed with jurisdiction to entertain the Appeal herein, it shall not delve into the second issue as the same has been rendered moot.

79. The upshot of the foregoing is that the Appellant ‘s appeal is not successful.

Final Determination 80. The Appellant’s appeal having failed, the Tribunal makes the following orders;a.The Appellant’s Appeal be and is hereby struck out.b.Each party to bear their own costs.

81. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF JULY 2024ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERELISHAH N. NJERU - MEMBERBERNADETTE M. GITARI - MEMBERABDULLAHI M. DIRIYE - MEMBER