[2024] KETAT 162 (KLR)

Ripple Pharmaceuticals Limited v Commissioner of Customs & Border Control (Tax Appeal 776 of 2022) [2024] KETAT 162 (KLR) (9 February 2024) (Judgment)

Neutral citation: [2024] KETAT 162 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 776 of 2022

Grace Mukuha, Chair, G Ogaga, E Komolo, Jephthah Njagi & T Vikiru, Members

February 9, 2024

Between

Ripple Pharmaceuticals Limited

Appellant

and

Commissioner of Customs & Border Control

Respondent

Judgment

Background 1. The Appellant is a company incorporated in Kenya carrying on the business of sourcing, storing, distribution and marketing pharmaceutical products.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and KRA is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent in a Post Clearance Audit carried out a desk audit in order to assess the Appellant’s operations with a view to checking compliance with the customs procedures covering the period of 2017 to 2022.

4. The audit established that during the period 2017-2022 there was a short levy of Excise duty by the Appellant and the specific Excise duty rates for the said consignments were summarized in the desk audit demand made.

5. On 20th May 2022, the Respondent issued a demand notice of Kshs 5,916,000. 00 to the Appellant after the audit on its importation of electronic cigarettes and cartridges under tariff identification number 8543-70. 00.

6. The Appellant did not object the desk audit demand within the stipulated period and on 20th July 2022, the Respondent issued a notice of enforcement on the outstanding tax of Kshs. 6,330,120. 00 and referenced the demand made on 20th May 2022.

7. The Appellant vide a letter dated 21st July 2022 admitted the delay in responding to the demand of 20th May 2022 and objected to the enforcement.

8. On 22nd July 2022, the Respondent replied to the Appellant confirming the earlier issued desk audit demand which showed the Appellant's short levy of Excise duty and penalties and interests amounting to Kshs. 6,330,120. 00.

9. The Appellant being dissatisfied with the decision of the Respondent preferred an appeal against the same and filed it on 27th July 2022.

The Appeal 10. The Appeal is premised on the Memorandum of Appeal dated 25th July 2022 and filed on 27th July 2022 raising the grounds stated hereunder:a.That the impugned tax decision is illegal as the Respondent erred in failing to recognize that electronic cigarettes and cartridges are classified under HS Code 8543. 70. 00. b.That the impugned tax decision is arbitrary and erroneous, and the Respondent lacks legal or factual basis as the Appellant has duly paid all taxes due between 2017- 2022 as per the duty rate computed by the Respondent's Tradex System (otherwise known as Simba System).c.That the Respondent erred in law by purporting to impose additional taxes upon the Appellant without justification contrary to the law and in breach of the Appellant's legitimate expectation.d.That in issuing the impugned demand notice as well as the impugned decision, the Respondent acted ultra vires its mandate under the Kenya Revenue Authority Act.e.That by issuing the impugned demand notice as well as the impugned decision, the Respondent has acted unreasonably and failed to take into account proper considerations.f.That the impugned tax decision violates the Appellant's Constitutional right to transparency, accountability, legitimate expectation, fair administrative action in tax administration all contrary to Articles 10, 47 and 48 of the Constitution of Kenya.

The Appellant’s Case 11. The Appellant’s case is premised on the documents hereinbelow shown:a.The Appellant's Statement of Facts dated 25th July 2022 and filed on 27th July 2022. b.The written submissions dated 29th September 2023 and filed on 10th October 2023.

12. The Appellant in its arguments raise four issues for determination as hereunder:a.Whether the Appellant raised a valid objection to the Respondent's impugned demand and impugned decision.b.Whether the Respondent can demand the short levied taxes having configured its digital revenue collection infrastructure (Tradex/Simba System) to pick the duty rate of 10% and VAT at 16%.c.Whether KRA is guilty of inordinate delay by purporting to collect alleged short levied taxes after 4 years where it failed to offer clarity to the Appellant when requested.d.Whether any purported exercise of power by the Respondent can be challenged for violation of the right to fair administrative action under Article 47 of the Constitution and/or the right to legitimate expectation.

13. The Appellant averred that on 20th May 2022, the Respondent issued it with a desk audit demand notice for the sum of Kshs. 5,916,000. 00 based on Sections 235 and 236 of the EACCMA as well as the Excise Duty Act, 2015 for the period of 2017 to 2022.

14. That subsequently on 20th July 2022, the Respondent issued a notice of enforcement for the alleged outstanding taxes of Kshs. 6,330,120. 00 and on 21st July 2022, the Appellant wrote to the Respondent in response to the foregoing letters objecting to the enforcement of the outstanding tax of Kshs.6,330,120. 00.

15. The Appellant acknowledged the delay on its part with reference to the letter dated 20th May 2022 and gave reasons for the delay in line with Section 229(3) of the EACCMA and which was owing to the time taken in retrieving documentation for the period under review and referring to previous correspondence on the same subject.

16. That without prejudice to the foregoing, the Appellant submitted that for all intents and purposes the notice of enforcement is a tax decision within the definition under Section 3 of the Tax Procedures Act.

17. That a notice of enforcement is a valid tax decision and the Appellant having responded to the same within a day lodged a valid objection against the Respondent's notice.

18. That this is premised on the fact that on 20th July 2022 the Respondent in its letter confirmed Kshs. 6,330,120. 00 was payable as per the notice of enforcement which the Appellant validly objected to.

19. The Appellant submitted that following the decline by the Respondent to set aside the notice of enforcement, then the Appellant dissatisfied with the decision was well within its right to lodge an appeal to the Tribunal as per Section 230 of the EACCMA.

20. The Appellant submitted that taxes are payable to the Respondent as per the HS Code of a product which is computed by the Tradex system/Simba system of the Respondent and which system is from time to time reconfigured to capture the various changes in tax policies or laws.

21. That the Respondent having configured its digital revenue collection infrastructure to collect duty at the rate of 10% for Customs duty and 16% for VAT for the Appellant’s goods it was impossible for any importer of such products to pay any other rate.

22. That the Respondent in the impugned demand noted that pursuant to the Excise Duty Act, 2015 the duty rate was adjusted for the Appellant's products under H.S Code 8543. 70. 00.

23. That the Respondent admitted that the changes were made on diverse dates between 2018 and 2021 and that despite this, the Respondent refused and/or negligently failed to make the changes on its system.

24. The Appellant also submitted that on various occasions in 2018 it sought clarity from the Respondent on any changes on the H.S Code but the Respondent never said what the proper duty was for years, and also failed to indicate any new changes in the tariff on the Simba system.

25. The Appellant noted that the Tradex/Simba System is an automated tax collection and import clearance system, which ascertains the applicable rate of duty, and this is what informs the tax payable by importers such as the Appellant. That if the system reflects the rate of 10% it is only fair, just and reasonable for the Appellant to pay the tax thereon and which the Appellant did.

26. The Appellant argued that the Respondent has not controverted the evidence before the Tribunal seeking clarity on the applicable rate and therefore that it is extremely unreasonable and without legal merit for the Respondent to purport to punish the taxpayer for its error and fault in purportedly claiming for short levied taxes.

27. The Appellant also argued that KRA is guilty of inordinate delay by purporting to collect alleged short levied taxes after 4 years where it failed to offer clarity to the Appellant when requested. That the effect of such delay ought not to be visited upon the Appellant as this would be in violation of its right to fair administrative action under Article 47 of the Constitution and its right to legitimate expectation.

28. The Appellant relied in support of its arguments on the holdings in the cases of KRA vs Universal Corporation Ltd [2020] Eklr, KRA vs Export Trading Co. Ltd [2020] and Krish Commodities Ltd vs KRA [2018] amongst others.

Appellant’s prayers. 29. The Appellant prayed that the Tribunal:a.Allows the Appealb.Annuls the impugned decision as well as the impugned demand Noticec.Awards the costs of the appeal to the Appellant.

Respondent’s Case 30. The Respondent’s case is premised on the hereunder filed documents: -a.The Respondent’s Statement of Facts dated and filed on 19th August 2022. b.The Respondent’s written submissions dated and filed on 18th September 2023.

31. The Respondent in response to the 1st ground of Appeal, stated that the issue is about uncollected taxes due to failure to reconfigure the Simba System and not a tariff identification dispute as alluded in the Appeal.

32. That the desk audit carried out by the Respondent was on the Appellant's importation of electronic cigarettes and cartridges under the tariff identification number 8543. 70. 00 and established the short levy of Excise duty.

33. That the Excise Duty Act, 2015 Section 5 (2) requires the collection of Excise duty at specific rates and that the desk audit review revealed a short levy of Excise duty at a specific rate of Kshs 3,000. 00 and Kshs 2,000. 00 per unit for the year 2018 in line with Excise duty Act, 2015. That this was not effected in the customs system leading to the imports being released at a lower Excise rate.

34. The Respondent averred that the Appellant failed to prove the illegality of the tax decision and error in failing to recognize that electronic cigarettes and cartridges are classified under HS Code 8543:70. 00 in the desk audit assessment leading to the tax decision and demand.

35. That in response to the second ground of Appeal, the Respondent reiterated that the Appellant failed to show that the tax decision was arbitrary and erroneous and that the Respondent lacked legal or factual basis on the same.

36. The Respondent also averred that the Appellant failed to state precisely which Section of the law the Respondent has violated, and on the other hand the Respondent demonstrated the law relied upon and informed the Appellant all the steps it undertook before taking the measures it did.

37. The Respondent also stated that it had a legal duty to ensure collection and administration of revenue according to the relevant laws and can review tax systems to ensure compliance. That conducting a desk audit on the Appellant's importations of cigarette and cartridges was neither arbitrary nor erroneous as the Respondent discovered a short levy in the process.

38. That in regard to the third ground of Appeal, the Respondent argued that EACCMA in Sections 235 and 236 gives the Commissioner powers to call for documents and conduct a Post Clearance Audit (PCA) on the import and export operations of a taxpayer within a period of five years from the date of importation or exportation.

39. That the Respondent conducted this assessment within the five-year window provided- for by the law and therefore no legitimate expectation on the part of the taxpayer was breached.

40. The Respondent also argued that the Appellant failed to object to the demand issued on 20th May 2022 in line with Section 229 EACCMA without any justifiable cause as the reasons and actions by the Appellant are not sufficient to warrant a valid late objection as provided by the law. Thus there is no decision to be challenged at the Tribunal.

41. The Respondent further argued that the Appellant did not show that it had any intention of filing the objection as it only did so after the Respondent issued it with a notice of enforcement. That the Respondent therefore submitted that its decision was lawful and justified.

42. The Respondent further averred that Section 135 EACCMA empowers the Respondent to demand any duty that has been short levied or erroneously refunded.

43. That in light of the above and legal provisions it is evident that the Respondent’s actions are justifiable as he did not erroneously impose additional taxes but carried out a desk audit and noticed the duty had been short levied in the relevant periods and informed the Appellant of the errors made, due to the failure to reconfigure the Simba system.

44. That the Appellant has also failed to prove how its legitimate expectation was breached given the above illustrations.

45. In response to the 4th and 5th grounds of Appeal the Respondent stated that its main mandate as highlighted in Section 5(1) of the KRA Act is the collection and receipt of all tax revenue.

46. That it operates a self-declaration regime whereby, the taxpayers make declarations and pay taxes on the items that they import themselves or through their agents. That this creates a legitimate expectation to the Respondent that the taxpayer will pay the correct taxes.

47. In response to the 6th ground of Appeal, the Respondent reiterated that the Appellant failed to show how its Constitutional rights of fair administrative action, legitimate expectation, transparency and accountability have been breached. The Respondent added that its actions were within its Constitutional mandate, procedurally fair and transparent.

48. The Respondent in support of its case relied on the holdings in Jumbo Steel Mills Ltd vs Commissioner of Customs and Border Control [TAT Appeal No. 11 of 2021];AirKenya Express Ltd vs Commissioner of Customs and Border Control [TAT No.170 of 2020] and Republic vs Commissioner General Kenya Revenue Authority Ex Parte Mount Kenya Bottlers Ltd & Another [2016] Eklr amongst others.

Respondent’s prayers 49. The Respondent prayed that the Tribunal do:a.Uphold the Respondent’s demand notice dated 20th May 2022b.Dismiss the Appeal with costs to the Respondent

Issues For Determination 50. After perusing the pleadings, evidence and documentation produced before it, the Tribunal is of the view that there are two issues for determination as hereunder set out.a.Whether the Appeal before the Tribunal is validb.Whether the Respondent’s assessment of the Appellant’s imports on Excise Duty were jusified

Analysis And Findingsa)Whether the Appeal before the Tribunal is valid 51. The Respondent issued to the Appellant a demand notice pursuant to Section 135 of the EACCMA dated 20th May 2022 requiring the taxpayer to pay the short levied taxes of Kshs. 5,916,000. 00.

52. The Appellant did not respond to the demand notice and consequently on 20th July 2022 the Respondent issued it with a notice of enforcement on outstanding tax together with penalties and interest.

53. The Appellant at this point did a notice of objection to enforcement on outstanding tax dated 21st July 2022 objecting to both enforcement notice and the demand notice of 20th July 2022.

54. It is not in dispute that the Appellant did not object to the demand notice issued to it on 20th May, 2022 but tried to address the same in the letter dated 21st July 2022. The letter was actually headed as “Notice of objection to enforcement on outstanding tax …”

55. The Respondent considered the letter and issued the Appellant with the letter dated 22nd July 2022 whose part of the same stated as follows:“Kindly note that upon due consideration, your request has not been granted as you have not met the requirements for consideration of objection as stipulated in Section 229 of the East Africa Community Management Act 2004”.

56. The Tribunal notes that the Appellant failed to adhere to the provisions of Section 229 (1) of EACCMA which provides as follows:“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 the decision or omission.”

57. The law also provides for taxpayers who are unable to make applications for review within time to apply for time extension, with reasons, to enable them make applications outside the set time and the same is provided for under Section 229 (3) of EACCMA which states as follows:-“Where the Commissioner is satisfied that, owing to absence from the Partner State, sickness or other reasonable cause, the person affected by the decision or omission of the Commissioner was unable to lodge an application within the time specified in subsection (1), and there has been no unreasonable delay by the person in lodging the application, the Commissioner may accept the application lodged after the time specified in subsection (1).”

58. The Tribunal further noted that the reasons given by the Appellant for failing to object in time were not convincing to the Respondent or were not considered to be reasonable to warrant extension of time to file the objection.It is also noteworthy the fact that the Appellant only objected upon being notified of imminent enforcement and the letter seeking extension is headed as “Notice of objection to enforcement…”

59. It is therefore a fact that no application for review was made by the Appellant and the Appeal before the Tribunal having not satisfied the requirements under Section 2229(1) of EACCMA is improperly filed and therefore invalid. It also follows that there being no application for review the Respondent proceeded to issue the notification for enforcement.

60. The Appellant has also argued that the notice of enforcement is a tax decision as per Section 3 of the TPA capable of being objected to and being appealed against. The notice of enforcement flowed from the failure of the Appellant to object to the assessment but was not a determination per se.

61. The Tribunal has also noted that the tax decisions capable of being appealed against as per the Appellant’s arguments in paragraph 21 of its submissions and the provision of Section 3 TPA do not include a notice of enforcement literally or by implication.

62. Its trite law that the legal procedures have to be followed when pursuing appeals and the Tribunal has also on many occasions determined that where specific procedures for redress have been set out the same have to be adhered to. This was the holding in the case of W.E.C. Lines Ltd vs. The Commissioner of Domestic Taxes, where it was stated as thus:-“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 special procedures. The relevant procedure here is the process of opposing an assessment by the Commissioner.”

63. Based on the foregoing, the Tribunal finds that there is no valid Appeal before it and will not therefore delve into the second issue as the same is rendered moot.

Final Decision 64. The upshot of the foregoing is that the Appeal is incompetent and therefore fails. The Tribunal accordingly proceeds to issue the following final Orders:a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

65. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF FEBRUARY, 2024GRACE MUKUHA - CHAIRPERSONGLORIA A. OGAGA - MEMBERDR. ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBERTIMOTHY VIKIRU - MEMBER