[2024] KETAT 268 (KLR)

Profile International Kenya Limited v Commissioner for Customs & Border Control (Tax Appeal 1054 of 2022) [2024] KETAT 268 (KLR) (23 February 2024) (Judgment)

Neutral citation: [2024] KETAT 268 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1054 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, SS Ololchike & AM Diriye, Members

February 23, 2024

Between

Profile International Kenya Limited

Appellant

and

Commissioner for Customs & Border Control

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya whose principal business activity is the importation and sale of television sets, Vision Plus brand.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of the laws of Kenya. Under Section 5(1) of the Act, the Respondent 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 Respondent is mandated to administer and enforce all provisions of the written laws as set in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenue in accordance with those laws.

3. The Respondent conducted a Post Clearance Audit (PCA) for the goods imported by the Appellant between 2018 and 2020, communicating the findings of an additional assessment of Kshs. 46,561,229. 46 with the Appellant through a letter dated 3rd June 2022, and consequently issued a demand notice of Kshs.72,428,405. 95 inclusive of interest through a letter dated 28th June, 2022. The Appellant objected to this demand on 15th July 2022 and sought a review.

4. Through its letter dated 12th August 2022, the Respondent issued its review decision confirming tax of Kshs. 72, 428,405. 95 inclusive of interest.

5. Aggrieved by the Respondent’s decision, the Appellant lodged its Notice of Appeal dated 9th September, 2022 and filed on 23rd September 2022.

The Appeal 6. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 22nd September, 2022 and filed on 23rd September, 2022:a.That the Respondent erred in law and in fact in relying on erroneous information that does not reflect the purchase price of goods bought by the Appellant.b.That the Respondent’s assessment is in breach of the Appellant’s right to fair administrative action guaranteed under Article 47 of the Constitution of Kenya, 2010 (hereinafter ‘the Constitution’).

The Appellant’s Case 7. In its Statement of Facts filed on 23rd September, 2022, the Appellant contended that the Respondent ought to have used the purchase price of the imported goods and not comparative prices from similar goods.

8. The Appellant averred that other than one document that is not under its control, it provided enough copies and original of all the documents requested by the Respondent. These documents are verifiable and sufficient to allow the Respondent determine the cost of the goods, adding that it pays for all the television sets in good time and sometimes makes payments in bulk.

9. The Appellant contended that the Respondent did not list the price it used per item to determine the value of the goods or specify what comparative brands or units that were used to arrive at its preferred purchase price.

10. It’s the Appellant position that the Respondent could not have any other comparative price used other than the price it purchased since it is the only licensed importer of Vision Plus television sets in the country as supported by the import license from Kryptonite limited who is the registered trademarks owner.

11. The Appellant further stated that it is the largest importer of Tier three (3) television sets in the Country, and therefore gets preferential pricing from the manufacturer based on the volumes it imports into the Country.

12. The Appellant asserted that the Vision Plus television sets it imports is a tier 3 and has a lower market price than the more established brands of television sets, and therefore protests why the Respondent used a pricing module for Tier 1 television sets as a benchmark which cannot be termed as “similar” goods with Tier 3 as the two are different both in quality wise and pricewise.

13. The Appellant relied on Section 4 (1) (a) of East African Community Customs Management Act, 2004 (hereinafter ‘EACCMA’) of the Fourth Schedule which states:“the transaction value of similar goods in a sale at the same commercial level and in substantially the same quantity as goods being valued shall be used to determine the customs value.”

14. The Appellant claimed that the consignments that were uplifted accounted for less than 5% of all consignments it imported into the Country within the same period and therefore for the Respondent to go ahead and re-assess the taxpayer was malicious, because the fact that it uplifted some Appellant’s consignment before does not grant it the option of uplifting every other consignment imported by the Appellant, adding that this argument does not have any standing in law and is not a reasonable practice which will bring about matter of fair administration of justice.

15. The Appellant insisted that the valuation stage done for each consignment takes in to consideration all information on the system to arrive at a purchase price suitable for tax and criticized the Respondent’s change of the valuation four (4) years after the goods were cleared.

Appellant’s Prayers 16. The Appellant prayed that: -a.This Appeal be allowed.b.This Tribunal be pleased to:i.Set aside and annul the review decision dated 12th August, 2022 issued by the Respondent; andii.Order that the Respondent pays the cost of this Appeal.(c)Make such other orders that it may deem appropriate

The Respondent’s Case 17. The Respondent addressed the Appellant’s grounds of Appeal through its Statement of Facts dated 9th November, 2022 and filed on even date.

18. The Respondent stated that it received a profile on the Appellant from its PCA Unit highlighting a possible undervaluation of television sets imported by the Appellant. The Respondent professed that this was from a market survey and information from its Valuation Section of the Customs and Border Control Department.

19. The Respondent averred that it is empowered under Sections 235 and 236 of EACCMA to conduct inspection or audit as a measure to satisfy itself as to the accuracy and authenticity of declarations through examination of relevant records held by persons concerned. It contended that the audit exercise was done to ascertain compliance with the law and payment of all taxes due is thus well within the law. Further that Article 7 of the World Trade Organisation (hereinafter ‘WTO’) Trade Facilitation Agreement (hereinafter ‘TFA’) on clearance of goods also allowed Customs authorities to set up PCA.

20. The Respondent asserted that the fact that several of the Appellant’s consignments were flagged for under valuation was an indication that there was a risk of under valuation. Further the Appellant was given a chance to provide documents to allow the use of the transaction value method as declared, however it failed to avail all the documents despite reminders to that effect. It reiterated that it involved the Appellant in all steps in the audit process, thus it was not true that its actions violated the Appellant’s right to fair administrative action.

21. It was the Respondent’s assertion that it is empowered to demand for additional assessment under Section 135 of EACCMA where a PCA audit reveals taxes are short levied. It averred that it also used the WTO Valuation Agreement to arrive at the values used as the basis for the uplift. The Respondent contended that it is not true that the Appellant provided all requested documents in support of the transaction value method as the records it requested through its letter of 16th March 2022 were not provided. It therefore applied the Comparative values from similar importations in determining the value of the television sets imported by the Appellant.

22. The Respondent stated that the WTO Customs Valuation Agreement at Text 1. 2 of Article 17 affirms that the transaction value is the primary basis of valuation but recommends that as a first step, Customs should ask the importer to provide further explanations that the declared value actually represents the Transaction value. It contended that to date no further documentary evidence has been provided to the Respondent to support the Appellant’s’ declared transaction value.

Respondent’s Prayers 23. The Respondent prayed that this Tribunal considers the case and finds that:a.The additional assessment was proper in law.b.The additional assessment subject of the Appeal amounting to Kshs. 72,428,405. 95 was due and payable by the Appellant.c.That the Appeal herein be dismissed.d.That the Respondent is entitled to the costs of the Appeal.

Parties Submissions 24. In its written submissions filed on 5th April, 2023, the Appellant raised three issues for determination:

a. Whether the Respondent erred in law and fact by departing from the transaction value of the goods. 25. The Appellant submitted that contrary to the Respondent’s assertion, it provided the following documents through electronic mail correspondence on 18th February 2021 and 22nd September 2021:i.Audited financial statements for the years 2018-2020ii.Supplier agreements and financial contractsiii.Purchase journals for the years 2018 – 2020iv.Purchase ledgers for the years 2018 – 2020v.Sales journals for the years 2018-2020vi.Sales ledgers for the years 2018 – 2020vii.Certified bank Statements for years 2018 – 2020viii.Invoices.

26. The Appellant further submitted that the documents it provided to the Respondent clearly indicated the price it paid for the goods at the point of import.

27. The Appellant averred that the only document it had challenges in availing was the telegraphic transfers which the bankers failed to avail as shown in the email correspondence with the bankers, further adding that the information the Respondent sought, mainly the proof of payment to the suppliers was contained in the bank statements which it had already provided to the Respondent.

28. The Appellant submitted that Section 122 of EACCMA as read together with the Fourth Schedule of EACCMA are the instructive provisions of law that the Respondent should have relied on in determining the customs value of imported goods. It further submitted that the Fourth Schedule provided for six methods of valuation in determining customs value of imported goods which must be applied in their sequential order.

29. The Appellant submitted that pursuant to Section 122 of the EACCMA, the Fourth Schedule is the reference point in determining the value of imported goods liable to ad valorem import duty, and that it provides for six methods of valuation in determining customs value of imported goods, namely:i.The Transaction value method (method 1/the primary Method).ii.The transaction value of identical goods method (Method 2).iii.The transaction value of similar goods method (Method 3).iv.The deductive value of method (method 4).v.The computed value method (Method 5).vi.The fall-back value method (Method 6).

30. The Appellant stated that the Respondent’s decision to compute the customs value of the imported goods failed to follow the sequence outlined above, and therefore contravenes Section 122(1) of EACCMA and Paragraph 2(1) and 9 of the Fourth Schedule of EACCMA.

31. The Appellant stated that the Respondent had not established a basis for departing from the transaction value and that in the absence of such a basis the Respondent’s purported departure from the transaction value has no legal basis and is therefore null and void.

32. The Appellant contended that the market survey report the Respondent used to determine the recommended television unit prices has not been shared with the Appellant and as such the Appellant does not understand where the Respondent’s values have been plucked from, referring to Text 1. 2 of the Article 17 of the WTO Customs Valuation Agreement which provides that whence Customs doubts the value of the goods, even after documents have been provided to Customs, it must communicate its reasoning to the taxpayer.

b. Whether the Respondent erred in law and in fact in using goods that are not similar or identical in attempting to re-value the goods. 33. It was the Appellant’s assertion that Note 1 of Paragraph 3 of the Interpretative Notes of the Fourth Schedule to EACCMA provides that in applying the transaction value of identical goods, Customs shall wherever possible, use a sale of identical goods at the same commercial level and in substantially the same quantities as the goods being valued. It submitted that the values relied upon by the Respondent do not represent the values of similar/ identical goods.

34. The Appellant submitted that it is the sole and exclusive distributor of Vision Plus television sets in Kenya and that the Respondent has clearly not considered that there are different commercial consideration and quantities between the values selected by the Respondent and those of the Appellant.

35. The Appellant relied on the findings in the case of BASF East Africa Limited vs Commissioner of Customs and Border Control (2021) eKLR where the Tribunal stated as follows:“Therefore, it is logical to conclude that the Appellant and the third-party customers operate at different commercial levels and that the Appellant imports significantly higher quantities of the products compared to quantities previously imported by the individual third-party customers. It is the view of the Tribunal that the sale of identical goods did not take place at the same commercial level and in substantially the same quantities as the goods being valued.”

36. It was the Appellant’s argument that the Respondent did not consider the fact that Vision Plus televisions are a lower tier television that do not have the same quality and price like higher quality television sets. Further that the Respondent has not provided the basis for the values it deems to be identical goods, or similar goods to the Appellant’s goods.

c. Whether the Respondents assessment is in breach of the right to fair administrative action guaranteed under Article 47 of the Constitution. 37. The Appellant submitted that the Respondent is required to provide it with reasons for the proposed administrative action as an administrative body and pursuant to Article 47 of the Constitution as read together with Section 4(3) (a) of the Fair Administrative Actions Act No. 4 of 2015. It further submitted that in the Respondent’s preliminary finding, demand, and confirmed demand, it did not provide the Appellant a detailed summary of the similar goods that it referred to and just referred to sweeping statements, which is an affront to the right to fair hearing as the taxpayer is not equipped with sufficient documents to respond to the case.

38. In its written submission filed on 28th April 2023, the Respondent raised a sole issue for determination;

d. Whether the Respondent applied the correct valuation methodology with respect to the goods imported subject to the demand. 39. The Respondent submitted that it granted the Appellant sufficient opportunity to challenge the basis upon which the demand was premised. It submitted that while the Appellant provided copies of bank statements, financial statements, sales and purchase ledgers, the following documents requested vide the letter dated 16th March, 2022, were very crucial in proof of the value of the goods:-i.Suppliers contracts and agreementsii.Trial Balances for relevant periodsiii.Evidence of payment to foreign supplier, i.e telegraphic transfer slips.

40. That however, the Appellant responded on 20th March 2022 providing one document “an approval for a credit facility”, which was not one of the documents requested by the Respondent.

41. The Respondent averred that it considered the Appellant’s position and undertook a thorough review as demonstrated by the various correspondence between the parties culminating into the review decision confirming the taxes. To buttress the fact that the burden of proof lay with the Appellant to produce evidence to demonstrate the transaction value of the good in question, the Respondent relied on the following cases;a.National Social Security Fund Board of Trustees vs Commissioner of Domestic Taxes, Key Revenue Authority (2016) eKLRb.CMC Aviation Ltd vs Cruisair Ltd (1) (1978) eKLR 103.

42. The Respondent submitted that Section 122 of EACCMA as read together with the Fourth Schedule of the Act places an obligation on it to satisfy itself that the said declaration, statement or document is truthful or accurate for valuation purposes. Further that the PCA herein was informed by a market survey from its Valuation Office on similar imports which highlighted the Appellant’s undervaluation of its imports of television sets.

43. It was the Respondent’s submission that where the value of the imported goods was brought into question as the present case, before application of any of the valuation method as enumerated under the Fourth Schedule of EACCMA, it was important that the documents in support of the value of the imports is properly interrogated and answered by production of relevant documents. It submitted further that it was incumbent upon the Appellant to demonstrate by production of relevant evidence in sufficient proof of the purchase price of the goods to satisfy the requirement of Section 122 (4) of EACCMA.

44. The Respondent argued that from the record and pleadings, it was clear that the Appellant had been engaged in long term business transactions with its suppliers from 2018 and it should have been easy for the Appellant to provide evidence of payments for the goods. The fact that it failed to provide the information requested and did not demonstrate what hardship or prejudice it faced, placed the burden of proof on it to demonstrate why production of the required information is such an onerous burden on its part.

45. The Respondent relied on the following cases to buttress its argumenti.Commissioner of Domestic Taxes vs Galaxy Tools Ltd (2021) eKLR (Income Tax Appeal No. E 088 of 2020).ii.Osho Drapers Ltd vs. Commissioner of Domestic Taxes (2022) eKLR (Income Tax Appeal No. E147 of 2020).iii.Kenya Revenue Authority vs Man Diesel & Turbo Se, Kenya (2021) eKLR.iv.Gira Enterprises vs. Commissioner of Customs on 23 August, 2005 (Customs, Excise and Gold Tribunal- Mumbai).

46. The Respondent submitted that whereas the transactional value method is first in the hierarchy of valuation methodologies, it did not prevent it from departing from that methodology. In this case, it stated that by application of Section 112(4) of EACCMA, there was a doubt of the transaction value based on previous identical imports by the importer. As a consequence, it used the second valuation method and that the sequence exists for a reason where the Respondent is dissatisfied with the transactional value method.

Issues For Determination 47. The Tribunal has considered the parties’ pleadings, submissions and documentation availed and is of the considered view that this Appeal distils into two issues for determination namely:i.Whether the Respondent applied the correct valuation methodology with respect to the goods imported.ii.Whether the demanded tax is due and payable.

Analysis And Findings 48. The Tribunal will now proceed to analyse the two issues as herein under:

i. Whether the Respondent applied the correct valuation methodology with respect to the goods imported. 49. Section 122 of EACCMA 2004 stipulates how to determine the ad valorem import duty for imported goods. It provides as follows:“Where imported goods are liable to import duty ad valorem, then the value of such goods shall be determined in accordance with the Fourth Schedule and import duty shall be paid on that value.”

50. The Interpretative Notes in Part 11 of the Fourth Schedule stipulates the applicability of the valuation methods, importantly, that they must be applied in their sequential order. Note 2 in particular prescribes how to proceed should the first method deem unusable. It provides as follows:“Where the customs value cannot be determined under the provisions of paragraph 2, it is to be determined by proceeding sequentially through the succeeding paragraphs to the first such paragraph under which the customs value can be determined. Except as provided in Paragraph 5, it is only when the customs value cannot be determined under the provisions of a particular paragraph that the provisions of the next paragraph in the sequence can be used.”

51. The Tribunal notes that in raising the demand for short levied taxes on the Appellant, the Respondent had argued that the Appellant had indicated lower unit prices which may not have been the actual unit prices for the television sets. The Appellant on its part argued that it has had a very long business relationship with its suppliers and that at most times it buys in bulk and therefore enjoys discounted prices, which was the transactional value it applied in valuing its imported television sets.

52. The Tribunal further notes that the Appellant argued that it is the only licensed importer of Vision Plus television sets in the Country, a fact that is supported by the import licence from Kryptonite who is the registered trade mark owner, hence the Respondent cannot have another comparative price to use other than the price it purchased the television sets.

53. As stated at paragraph 47 herein above, determination of the value of imported goods liable to ad valorem import duty ought to be applied sequentially. The Tribunal also notes in this case that the Respondent applied the third valuation method (transaction value of similar goods method) but did not provide the rationale for its choice to convince the Tribunal on the justification for its application.

54. In its submissions, the Respondent had stated that the PCA herein was informed by a market survey it carried out on similar imports which highlighted the Appellant’s undervaluation of its imports of television sets. The Tribunal observes that the said report was neither shared with the Appellant nor availed to the Tribunal to determine if indeed the prices the Respondent applied are comparable to the Appellant’s goods taking into consideration the commercial levels, the quantities of the goods being valued and the period of the market survey.

55. In the circumstances, the Tribunal finds that the Respondent did not apply the correct valuation methodology with respect to the goods imported.

ii. Whether the demanded tax is due and payable. 56. In the course of the PCA, the Appellant stated that it availed documents which included certified bank statements for the years 2018 -2020, supplier agreements and financing contracts to prove the pricing and payments made. On the other hand, the Respondent, vide a letter dated 16th March 2022, requested for the following documents which in its view were very crucial in proof of the value of the goods: -a.Suppliers contracts and Agreements.b.Trial Balances for the period 2018 to date.c.Evidence of payments to foreign suppliers i.e. telegraphic transfer slip.

57. The Tribunal has gleaned through the Appellant’s bundle of documents and has sighted the electronic mail correspondence forwarding the documents to the Respondent, as well as electronic mail correspondence between the Appellant and its bankers requesting the telegraphic transfer slips. It is the Tribunal’s considered view that the certified bank statements together with the supplier agreements and financing contracts provided by the Appellant would have sufficed to prove the value of the goods. It is worth noting that as can be discerned from the electronic mail correspondence, the Appellant tried to obtain the telegraphic transfer slips from its bankers who in this case were not able to provide the same at the time they were requested. It would therefore be unfair to penalise the Appellant for a matter that was beyond its capability.

58. In view of the foregoing, it is the Tribunal’s considered view that more consideration was required in determining whether the demanded tax was justifiably due and payable.

Final Decision 59. The upshot of the foregoing is that the Appeal partially succeeds and the Tribunal accordingly proceeds to make the following final Orders:-a.The Appeal be and is hereby partially allowed.b.The Respondent’s review decision dated 12th August, 2022 be and is hereby set aside.c.The Respondent to undertake a fresh assessment in compliance with Section 122 of EACCMA as read together with the Fourth Schedule of EACCMA and which assessment is to be undertaken within Ninety (90) days of the date of delivery of this Judgment.d.Each party to bear its own cost.

60. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 23RD DAY OF FEBRUARY, 2024. ERIC NYONGESA WAFULA - CHAIRMANDELILAH K. NGALA - MEMBERCHRISTINE A. MUGA - MEMBERGEORGE KASHINDI - MEMBERSPENCER S. OLOLCHIKE- MEMBERMOHAMED A. DIRIYE- MEMBER