[2015] KEHC 3820 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT KISUMU

JUDICIAL REVIEW NO. 26 OF 2009

REPUBLIC

VERSUS

THE COMMISSIONERS OF DOMESTIC TAXES......................RESPONDENT

(Large Tax payers Office)

EXPARTE

AGRO-CHEMICAL AND FOOD CO. LTD.......................................APPLICANT

J U D G M E N T

INTRODUCTION

1. The ex- parte' applicant, Agro-Chemical and Food Company Limited filed a Judicial Review application seeking the following orders:

An order of Certiorari to remove into the High Court for purposes of its being quashed the decision and order of the Commissioner of Domestic Taxes dated October 6th 2009 and consequently the demand dated 16th March 2007 and 2nd December 2004.

An order of Prohibition to prohibit the Commissioner of Domestic Taxes from demanding payments of excise duty on the basis of its decision dated 6th October 2009 and consequently the demand dated 16th March 2007 and 2nd December 2004.

FACTUAL BACKGROUND

2. The basic facts precipitating the Judicial Review application herein are fairly undisputed.

Agro-Chemical and Foods Co. Ltd(ACFC) is a company involved in the manufacture of various grades of spirits such as Rectified Spirit(RS), Neutral Spirit(NS), Industrial Methylated Spirit(IMS)and Kenya Methylated Spirit. Some of the spirits manufactured by ACFC are potable meaning they are orally consumable whereas others such IMS and Kenya Methylated Spirits are non-potable meaning they cannot be orally consumed because they contain an additive known as a denaturant which renders them toxic for human consumption.

3. Under the Customs and Excise Duty Act Cap. 472 of Laws of Kenya(hereinafter "the Act"), excise duty is chargeable on potable spirits whereas none is chargeable for non-potable spirits. Prior to its revision in the year 2012, the Act also prescribed the amount of denaturant to be used in the denaturing process. Section 106(1) of the Act is to the effect that spirits shall not be denatured for sale as denatured spirits except in accordance with the Customs & Excise Regulations.

4. The then Regulation 203 stipulated that spirits can only be denatured by mixing them with the denaturants set out in the Third Schedule to the Act and in accordance with the appropriate formula set out in the said schedule. The formula for specially denatured spirits such as IMS at the time was that for every 95 parts volume of spirit, 5 parts volume of denaturant were to be used in the denaturing process. The denaturant in use at the time was wood naphtha.

5. On 11th February 2004, the Kenya Revenue Authority Investigative Department issued a notice to ACFC requesting it to produce specific documents which were required to carry out an audit on the plant's accounts. The audit revealed that during the period between August 2002 and August 2004, ACFC failed to use the prescribed 5 parts volume of wood naphtha and instead it was using 11/2 parts. During that period, ACFC purportedly produced 1,896,330 litres of IMS using 18,963 litres of wood naphtha instead of 97,095 litres as per the stipulated formula. The amount of denaturant used could only be used to denaturize 379,266 litres of spirit had the right formula been applied.

6. Following such revelation, the respondent on 2nd December 2004 raised a demand, under Section 106 of the Act and Regulation 203 to the Third Schedule of the Act, for the sum Kshs. 229,517,721 being excise duty for the spirit sold in excess of 379,266 litres claiming that the same was Neutral Spirit and excise duty ought to have been charged.

7. On 14th December 2004, the respondent withdrew the demand notice until the audit team met with the ACFC's management to discuss the contents of the audit report. The audit team met with ACFC's representatives on 20th January 2005 wherein ACFC through its representatives explained to the team the reason why it was using a lesser amount of wood naphtha to denature spirits. It stated that due to the poor quality of wood naphtha which was the denaturant specifically prescribed by the Act, it had to use a lesser amount as a larger quantity caused the final product to be coloured and the ACFC's customers would not accept a coloured product. ACFC's explanation was recorded and it did not receive any further communication from the respondent. However on 16th March 2007, more than two years after the withdrawal of the demand notice, the respondent wrote to ACFC demanding payment of the excise duty earlier claimed and reviving the demand notice.

8. ACFC held several meetings with the respondent and its official in a bid to resolve the issue to no avail. Being aggrieved by the respondent's decision, ACFC moved to court seeking Judicial Review orders of certiorari and prohibition.

ACFC'S CASE

9. ACFC's case is contained in the Notice of Motion dated 27th October 2009, the verifying Affidavit sworn on 7th October 2009 by Caleb Oguya, ACFC's marketing manager and written submissions .

10. Mr. Oguyo began by setting out the steps followed in the denaturing processes from the time a customer makes an order to ACFC for IMS to the time it is delivered at its door step. He contended that the whole process is supervised by an officer of KRA stationed there by the Respondent. He averred that for ACFC to supply IMS to any of its customers, it had to be issued with a permit(form 10) by the respondent through the officer stationed at the plant and then fill out a declaration contained in form 15 which had to be approved by the officer before any denaturant or spirit could be released for the denaturing process. That both forms 10 and 15 clearly stated the amount of denaturant that ACFC intended to use and ACFC could only access the denaturant once the officer had authorised and approved the quantity of spirit and denaturant to be used and issued a permit for the same. That consequently, the respondent was always aware of the amount of denaturant that ACFC used.

11. Mr.Oguyo further argued that the reason why ACFC was using less wood naphtha than prescribed was that the prescribed denaturant which was wood naphtha was of such poor quality. He averred that, whenever ACFC used the right amount of denaturant, the denatured spirit would have a milky appearance and would be rejected by its customers. That ACFC had raised a complaint with regard to the quality of wood naphtha which could only be sourced from India in a meeting held between ACFC, the respondent and other stakeholders on 18th September 2002 and as such the respondent was well aware that there was a problem as regards suitability and availability of wood naphtha.

12. ACFC faulted the respondent for assuming that part of the spirit sold out of the 1,896,330 litres was undenatured spirit and it thus attracted excise duty. Mr. Oguyo argued that having acknowledged in its audit that the ACFC had denatured 1,896,330 litres of IMS, it was wrong to later treat part of the spirit as undenatured just because the right measure of denaturant was not used. He argued that once a denaturant is added to spirit it becomes toxic and cannot be consumed, such spirit can therefore not be classified as undenatured and thus dutiable. He proceeded to annex a toxicology report from Jomo Kenyatta University of Agriculture which supported his argument that denaturing using 11/2 parts volume of wood naphtha translated to a methanol level of 8732 ppm which according to the safety data sheet would definitely be toxic.

13. Finally Mr. Oguso averred further that, because denatured spirits are strictly controlled, ACFC's customers have to be issued with permits(form 139) by the respondent which are only valid for 3 months. They state the purpose for which the spirits are to be used. Once the denatured spirit arrive at the customer's premises, the quantity received by a customer is entered in a register and before a fresh permit is issued, the respondent's officers have to ascertain that all the denatured spirit was properly used and for the purpose intended.

14. ACFC also filed written submissions highlighted by its Counsel Mr. Ojiambo. It argued that though it was true that it had not used the prescribed measure of denaturant, the respondent had not carried any form of laboratory analysis to establish that the spirit so produced was not denatured. The respondent thus had no basis to demand excise duty.

15. ACFC further submitted that the respondent was at all times through the different officers stationed at the ACFC's plant in control of the whole denaturing process and was also well aware that ACFC was using less denaturant due to its poor quality and he allowed the same. Consequently ACFC had a legitimate expectation that it was allowed to use less denaturant and the respondent is thus estopped from claiming payment of duty.

16. In conclusion, ACFC argued in the alternative that Section 106(2) of the Act provides that a person who contravenes the section is guilty of an offence and any plant, spirit or material in respect of which such offence has been comitted shall be liable to forfeiture. Counsel argued that the section does not state that the spirit will be treated as undenatured and duty charged. He therefore urged this Court to allow the application as prayed.

RESPONDENT'S CASE

17. The case for the respondent is set out in the affidavit of Anne Irungu filed on 18th February 2010 in reply and opposition to the application, and written submissions.

18. Ms. Irungu averred that Section 106(2) of the Act creates an offence for failure to follow section 6(1). ACFC violated section 6(1) and KRA, did not, as an organization endorse or authorize the illegal under-denaturing. That the actions of an officer alone in an organisation are not enough to prove that the organisation authorized the actions, especially when the actions are contrary to the law. That the Respondent's resident officers who were involved in the unauthorised actions have since been dismissed from KRA's employment.

19. Ms. Irungu further averred that the audit done by the Respondent showed that 1,527,064 litres of spirit being released from ACFC's plant were neutral spirits. That they were considered as such by the respondent because either they were not denatured at all, or their percentage of denaturant did not qualify then to be IMS. She further argued that ACFC never made any formal request to the Respondent to be allowed to use wood naphtha at proportions less than 5 parts.

In the written submissions, the respondent reiterated the contents of the verifying affidavit of Ms. Irungu. It argued that several audits done by KRA revealed that ACFC was denying KRA revenue by selling undenatured spirits as denatured one.

20. On the issue of legitimate expectation, it was argued that Under Section 3 (2) of the Act, the respondent is empowered to authorize any officer to exercise any of the powers conferred upon him by the Act, however, the commissioner has no power under the Act to vary the formulae prescribed by the law. He therefore could not confer such powers upon the officers who were resident at the ACFC's plant. The respondent relied on the case of R vs. KRA ex-parte Aberdare Freight Services Ltd. NRB Misc. Civil App. No. 946 of 2004 where the court held that "there cannot be estoppels against a public authority's exercise of its statutory powers even in the face of error"

21. The respondent concluded by arguing that ACFC was allowed a fair hearing through the various meetings held between them and as such the orders sought should not be granted.

ANALYSIS AND DETERMINATION

22. The application herein raises two major issues for determination as outlined below:

Whether ACFC had a legitimate expectation that it was allowed to use lesser volume of denaturant than the one previously prescribed in the Act.

Whether ACFC has established a case for Judicial Review orders

Legitimate Expectation

23. It is ACFC's claim that during the whole period that it used a lesser volume of denaturant on spirits, the respondent was always aware. The respondent's officer was stationed at the plant responsible for supervision of the whole denaturing process. He was the custodian of the keys to the padlocks used to lock the tanks carrying the denaturant and at no one given time could the employees of ACFC access the tanks without the consent of the respondent's officer.

24. That once a customer made an order for IMS, the respondent's officer issued a permit(form 10) ACFC allowing them to denature the amount of IMS required by a customer. The permit indicated the volume of spirit to be denatured and the volume of denaturant to be used. The officer then appended his signature and a KRA rubber stamp indicating that he was satisfied with the contents of form 10. During the period between August 2002 and August 2004, ACFC always used a lesser amount of denaturant. The different officers always approved the process by appending their signatures in both Form 10 and 15. None of the officers ever raised a question and ACFC expected that the respondent knew that they were using lesser denaturant due to the fact that they had previously held a meeting with the Respondent where ACFC raised issues of the poor quality and the unavailability of wood naphtha the denaturant prescribed by the Act.

25. On the other hand the respondent argued that the resident officers were acting on their own whims and not on behalf of the respondent. The respondent did not authorize any one of them to approve the use of denaturant in contravention of the Act and those officers had since been dismissed from KRA's employment. It was the respondent's case that ACFC never made any formal application to be allowed to use lesser volume of denaturant and it cannot therefore rely on the actions of the respondent's rogue officers.

26. In Keroche Industries Limited V Kenya Revenue Authority & 5 Others [2007] eKLR Nyamu J. while quoting R (BIBI) v NEWHAM LONDON BOROUGH COUNCIL stated as follows:

“Schieman LJ gave a set of three practical questions for the Court to pose in ascertaining whether a claim based on legitimate expectation is properly grounded and these are:

What has the public authority, whether by practice or by promise committed itself;

Whether the authority has acted or proposes to act unlawfully in relation to its commitment;

What should the court do.”

27. From the pleading it is obvious that the respondent had assigned several resident officers at ACFC's plant and they all allowed it to continue using a lesser denaturant. ACFC had also held meetings with the respondent in which it raised issues of the quality and unavailability of wood naphtha.It is therefore only logical that ACFC assumed that the applicant knew of what was happening on the ground.

28. Under Section 3(2) of the Act, the Respondent is allowed to authorize any officer to exercise any of the powers conferred by the Act upon him. The Section provides as follows:

“The Commissioner may authorize any officer to exercise any of the powers conferred by this Act upon the Commissioner subject to such limitations as the Commissioner may think fit”.

29. It can therefore be safely assumed that resident officers acted on behalf of the respondent and under his authorization. This I find a typical case of master and servant responsibility. The respondent authorised the resident officers to act on his behalf and he cannot now deny their actions now that they were involved in some “illegal“ activities.

30. The court of Appeal for East Africa inMungowe – vs- Attorney-General of Uganda [1967] EA 17, while dealing with the issue of master and servant stated as follows:

“The test of a master’s liability for the acts of his servant does not depend upon whether or not the servant honestly believes that he is executing his master’s orders. If that were so the master would never be liable for the criminal act of the servant, at any rate when the criminal act is towards benefiting the servant himself. ………………”

31. Each case must depend on its own facts. All that one can say, as I understand the law, is that even if he is acting for his own benefit, nevertheless if what he did was merely a manner of carrying out what he was employed to carry out then his acts are acts for which his master is liable.”(Emphes mine).

The resident officers of the respondent were acting in line of their duty. They were busy issuing permits and authorizations on behalf of the respondent albeit against the law. The respondent cannot therefore deny liability. Through its officers, the respondent committed itself to allowing ACFC to use lesser denaturant than is prescribed by the law. I find that the respondent is estopped from going back on its commitment by demanding payment of excise duty.

A Case for Judicial Review?

Section 106 of the act stipulates that a formula is to be used in denaturing of spirits and makes it an offence for any person who fails to use the stipulated formula. The Section provides as follows:

“1) No spirits shall be denatured for sale as denatured spirits except in accordance with a formula prescribed by regulations for either methylated spirits or specially denatured spirits:

Provided that spirits shall, where imported, be denatured prior to release from the port of importation, or, if locally manufactured, prior to release from the premises of the distiller.

2) A person who contravenes this section shall be guilty of an offence and liable to imprisonment for a term not exceeding three years or to a fine not exceeding five hundred thousand shillings or to both; and any plant, spirit or materials in respect of which such offence has been committed shall be liable to forfeiture......”

34. ACFC in denaturing spirits failed to use the prescribed formula. The respondent carried out an audit on ACFC's account and established that the amount of IMS that could result from the denaturant used ought to have been much lesser. They came to the conclusion that "the volumes of spirits which were being released from the applicants factory were neutral Spirits" and ought to be charged excise duty. In a subsequent report, the respondent reached the conclusion that:

"There are indications that a fraud has been going on over a long period of time. It is evident that the denaturing procedure was deliberately flouted to evade excise duty possibly for the benefit of some customers who were aware and the resident officers were possibly equally aware and allowed sale of undenatured spirit. The benefit to them can only be implied."

35. From the foregoing it is obvious that the respondent is convinced that the ACFC passed off un-denatured spirits as IMS thus denying KRA revenue. But how can this be ascertained? Unlike ACFC, the repondent did not annexe any toxicology report to show that when 11/2 parts volume was used the undenatured spirit turned into neutral spirits which as the respondent argues attracts duty. On the other hand ACFC annexed a toxicology report done by Jomo Kenyatta University showing that when 11/2 parts of denaturant were used the spirit turned toxic. It is therefore difficult to establish the respondent's claim that undenatured spirit was sold as denatured spirit in the absence of a toxicology report.

36. Equally, as already stated section 106(2) makes it an offence to use less denaturant than is prescribed in the Act. A person who is found guilty is liable to imprisonment or fine and any plant in respect of which such offence has been committed shall be liable to forfeiture. I will agree with ACFC that, nowhere does the Act state that excise duty shall be charged for such under-denatured spirit. It is clear that once the respondent found out that the ACFC was violating section 106,it should have sought redress in the criminal justice system. The respondent overstepped its mandate by claiming payment of excise duty instead of following what the Act stipulates.

Has ACFC established a case for Judicial Review?

37. In the Uganda case of Pastoli vs. Kabale District Local Government Council and Others [2008] 2 EA 300, the Court citing Council of Civil Unions vs. Minister for the Civil Service[1985] AC 2 andAn Application by Bukoba Gymkhana Club [1963] EA 478 at479held:

“In order to succeed in an application for judicial review, the applicant has to show that the decision or act complained of is tainted with illegality, irrationality and procedural impropriety...Illegality is when the decision-making authority commits an error of law in the process of taking or making the act, the subject of the complaint. Acting without jurisdiction or ultra vires, or contrary to the provisions of a law or its principles are instances of illegality. It is, for example, illegality, where a Chief Administrative Officer of a District interdicts a public servant on the direction of the District Executive Committee, when the powers to do so are vested by law in the District Service Commission... Irrationality is when there is such gross unreasonableness in the decision taken or act done, that no reasonable authority, addressing itself to the facts and the law before it, would have made such a decision. Such a decision is usually in defiance of logic and acceptable moral standards...Procedural Impropriety is when there is a failure to act fairly on the part of the decision-making authority in the process of taking a decision. The unfairness may be in non-observance of the Rules of Natural Justice or to act with procedural fairness towards one to be affected by the decision. It may also involve failure to adhere and observe procedural rules expressly laid down in a statute or legislative Instrument by which such authority exercises jurisdiction to make a decision.”

The scope of the remedies of judicial review continue to expand, as was stated by G V Ondunga J. in the Republic vs. The Commissioner General, KRA NRB JR NO. 340 OF 2012 while quoting Re Bivac International SA (Bureau Veritas) [2005] 2 EA 43that “like the Biblical mustard seed which a man took and sowed in his field and which is the smallest of all seeds but when it grew up it became the biggest srrub of all and became a tree so that the birds of the air came and sheltered in its branches, judicial review stems from the doctrine of ultra vires and the rules of natural justice and has grown to become a legal tree with branches in illegality, irrationality, impropriety of produce and has become the most powerful enforcer of constitutionalism, one of the greatest promoters of the law and perhaps one of the most powerful tools against abuse of power and arbitrariness. It has been said that the growth of judicial review can only be compared to the never-ending categories of negligence after the celebrated case of Donoghue vs. Stephenson in the last century.”

It is therefore my view that the conduct of the respondent in allowing ACFC to continue using a lesser volume of denaturant for a period exceeding 2 years and then turning around to demand excise duty was unreasonable in the circumstance. Also, choosing to demand excise duty for such under-denatured spirit was arbitrary and contrary to section 106(2).

40. In fact from the applicant's pleas through various correspndences this matter ought to have been dealt with administratively without taking the 7 years in our courts. A case in point for example is an internal memo from (Resident Officer ACFC to Senior Assistant commissioner (Western Region) dated 9. 9.2004 under the heading

“Control of spirit at the Agro Chemical and food Co. Ltd”in which a Mr. Frank Ndichu stated as follows:-

“I would wish to add here that movement of spirits at the factory is done with the full knowledge and authority of the resident officer.

This is done through daily spirit movement reports, daily tank dips and supervision/confirmation of all loadings, which are logged in my daily dispatch of spirits register. To the above existing practice all the tanks are opened and closed by the resident officer/the proper officer whose custody the key are kept. I would therefore wish to allay any fears to the movemement of spirits within the Muhoroni factory. The existing company procedures with regard to production and storage of the spirits may not allow for any malpractices given the strong internal control as witnessed during the visits by M/s. Okoni Njuguna respectively.”

41. Consequently it is difficult for the respondent to argue that whatever its officers were doing was illegal since they were acting at its behest. There is no complicity by the applicant shown at all. If there was such fraud as claimed by the respondent then they should have been able to have taken a Criminal angle as per Section 106(2) of the Act.

42. In light of the above observation I find that the application by the applicant is meritorious. The Respondent rested on its laurell. It infact permitted the applicant to go that far for a period of two years only to turn back and blame it for the alleged illegality. I dare to say that if there was such a fraud then the same was perpetrated by both parties. Again as stated earlier, the question of fraud ought to be specifically proved and not mere phraseology. The application dated 27. 10. 09 is allowed with costs to the applciant.

Dated, signed and delivered this 2nd day of July, 2015.

H. K. CHEMITEI

JUDGE