[2023] KETAT 307 (KLR)

Safqa Limited v Commissioner of Customs & Border Control (Appeal 388 of 2022) [2023] KETAT 307 (KLR) (Civ) (26 May 2023) (Judgment)

Neutral citation: [2023] KETAT 307 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 388 of 2022

RM Mutuma, Chair, E.N Njeru, RO Oluoch, D.K Ngala & EK Cheluget, Members

May 26, 2023

Between

Safqa Limited

Appellant

and

Commissioner of Customs & Border Control

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act of the Laws of Kenya, whose principal business activity is the importation and sale of printing paper.

2. The Respondent is a principal officer duly appointed under Section 13 of the Kenya Revenue Authority Act, and the Kenya Revenue Authority is mandated with the responsibility for the assessment, collection, receipting and accounting for all tax revenue on behalf of the Government of Kenya and is also responsible for the administration and enforcement of the statutes set out in the schedule to the Act.

3. The Appellant’s imports for the period 2nd August 2018 to 8th February 2022 were subjected to a desk review audit by the Respondent, the results of which the Respondent stated revealed a short levy of taxes as a result of the application of a duty rate of 10% instead of 25%. The Respondent consequently demanded for the short-levied taxes from the Appellant in the sum of Kshs 273,323,646. 00 on 2nd February 2022.

4. The Appellant upon receipt of the demand applied for review pursuant to Section 229 of the EACCMA, 2004, and the Respondent rendered a review decision on 15th March 2022 in which the demand dated 2nd February 2022 was upheld.

5. Dissatisfied with the said decision the Appellant filed the Appeal herein on 14th April 2022.

The Appeal 6. The Appellant filed its Memorandum of Appeal on 14th April 2022 and set out the following grounds of appeal ;-i.That there is no law which imposed a duty rate of 25% on paper and paperboard products in the period between 2nd August 2018 and 27th January 2022, as particularized in reasons (a), through to (c) herein in the Memorandum of Appeal.ii.That even if it were to be said arguendo that some law exists which imposed a duty of 25% on paper and paperboard products imported under HS code 4802. 56. 00 as aforesaid (which is denied); and even if it were to be said arguendo that the Respondent is lawfully entitled to administer and enforce such; law (which is also denied); it would be illegal and unconstitutional for the Respondent to make and or enforce compliance with the impugned demand notice by virtue of the reasons particuclarized in the reasons (a) through to (m) herein in the Memorandum of Appeal.

7. By reason of the grounds aforesaid the Appellant prayed to the Honourable Tribunal to annul the impugned review decision and the demand notice, and allow the Appeal with costs to the Appellant.

The Appellant’s Case 8. The Appellant has set out its case in the Statement of Facts filed on 14th April 2022 and the Written Submissions filed on 15th December 2022.

9. The Appellant being dissatisfied with the Respondent’s decision to subject all paper and paperboard products imported into the Country between 2nd August 2018 and 27th January 2022, under Hs Code 4802. 56. 00 to a duty rate of 25%, the Respondent’s review decision dated 15th March 2022, confirming the demand for Kshs 273,323,646. 00 for short levied duties appealed against the said decision.

10. The Appellant stated that the liability to Customs duty for goods imported in to Kenya is governed by the East African Community Customs Management Act, 2004 (EACCMA). It stated further that Section 110 of EACCMA provides that the rates of duty payable shall be shall be specified in the protocol on the establishment of the East African Community Customs Union.

11. The Appellant also stated that Article 12(1) of the Protocol provides that the minimum rate shall be 0%, and that the middle rate shall be 10%, and that the maximum rate shall be 25%, while Article 12 (3) of the protocol provides that EAC Council of Ministers (the Council) shall review the common external tariff structure from time to time, and the reviewed tariff published in the EAC Gazette.

12. The Appellant stated that by a Gazette Notice No. EAC/21/2014, the Council reduced the tariff rate for paper and paperboard products imported under HS Code 4802. 56. 00, which was previously set at the maximum rate of 25% to the middle rate of 10%.

13. The Appellant also stated that on 30th June 2017 the Council, vide Legal Notice No. EAC/85/2017 reviewed and modified the EAC CET to model it along the lines of the- 2017 version of the Harmonized Commodity Description and Coding System version 2012 of the World Customs Organization, the purpose of the review being to merely harmonize the Commodity Description and Coding System of the EAC/CET with that of 2012 version of the World Customs Organization CET and no tariffs were reviewed, and the revision became the EAC/CET, 2017.

14. The Appellant further stated that in line with the Legal Notice No. EAC/85/2017- aforesaid the EAC Secretariat developed and published the 2017 version of the Harmonized Commodity Description and Coding System, which was modelled upon the 2012 version of the World Customs Organization. At page 221 of the 2017 version of the EAC/CET aforesaid the EAC Secretariat mistakenly indicated a tariff rate of 25% for paper and paperboard products imported under HS code 4208. 56. 00, without any approval of the Council and without any publication by the Council to that effect through the EAC Gazette Notice.

15. It was a contention of the Appellant that following the publication of the 2017 version of the EAC/CET and upon noticing the purported erroneous change in the tariff rate for HS code 4802. 56. 00, the Respondent deliberated on the question whether the tariff rate for HS code 4802. 56. 00 had been increased from 10% to 25% and resolved to consult the EAC Secretariat for clarification on the matter, whereupon the EAC Secretariat clarified to them that the Council had not increased the duty rate for HS code 4802. 56. 00, and that the tariff rate of 25% appearing against that tariff code was caused by a mistake which occurred during the transposition process when they were changing the EAC/CET to make it comply with the 2012 version of the WCO CET. The Appellant also stated that the clarification by the EAC Secretariat was contained in an email which was circulated by KRA’s Manager for Post Clearance Audit, Joab Omole, to Senior Customs Officers, in the same organization on 23rd February 2018.

16. The Appellant also stated the EAC Secretariat subsequently attempted to correct the mistake in the 2017 version of the EAC CET in connection with its code 4802. 56. 00 by causing the Council to reduce the rate from 25% to 10%, consequently, vide Paragraph 2 of the Legal Notice No. EAC/69/2018 dated 30th June 2018, the Council purported to reduce the tariff rate for HS code 4802. 56. 00.

17. The Appellant further contended that it later dawned on the EAC Secretariat and the Council that Paragraph 2 of the Legal Notice No. EAC/69/2018 aforesaid was itself published in error since it was purporting to reduce the tariff for HS code 4802. 56. 00 from 10% to 25% yet the said tariff had never been formally increased from 10% to 25% (as erroneously indicated on the 2017 version of EAC /CET), the Vouncil responded by publishing a Legal Notice No. EAC/112/2018 deleting Paragraph 2 of the Legal Notice No. EAC/69/2018. The deletion of Paragraph 2 of the Legal Notice No. EAC/69/2018 vide legal Notice No. EAC/112/2018 did not have any impact at all on the tariff rate for HS code 4802. 56. 00 because the tariff rate for HS code 4802. 56. 00 had never been formally reviewed since 2014.

18. The Appellant contended that, the Respondent being conversant with the foregoing, and influenced thereby, configured its Tradex System (Simba System) to collect duty under HS code 4802. 56. 00fed by the Respondent into the Simba system with the result that any person wishing to import any goods under HS code 4802. 56. 00 would simply enter the Hs code into the system whereupon both the duty rate and as well as the total tax payable would be given by the Simba system itself in the form of C17B customs entry.

19. In the circumstances, the Appellant asserted that it would be dishonest, callous, malicious and in extreme bad faith for the Respondent to allege that the rate of 10% was not the correct rate for HS code 4802. 56. 00; nor to accuse any clearing agent or importer of applying wrong rate since the rate of 10% was actually applied by the Respondent who fed it into their Simba system rather than by a clearing agent, who merely keyed in other details of the goods being cleared, leaving it entirely to the Simba System to give the applicable duty rate as well as the total duty payable.

20. The Appellant stated that on 27th January 2022, the Respondent, through a Memo issued by one John Gathatwa instructed customs officers to immediately conduct a post clearance Audit on all goods that were cleared under HS code 4802. 56. 00 between 2nd August 2018 to 27th January 2022 purportedly because the Respondent had just “discovered” that, first, the- Legal Notice NO.EAC/CET 112/2018 had deleted Paragraph 2 of the Legal Notice No. EAC/69/2018; Second, that the effect of the deletion was to impose the duty rate of 25% for HS code 4802. 56. 00; and finally, that clearing agents/importers had been applying the rate of 10% for HS Code 4802. 56. 00 instead of 25%.

21. The Appellant contended that the Respondent’s said Memo epitomized utmost dishonesty, callousness, malice and extreme bad faith to the extent that it purported to assert, on the one hand, that the Respondent was not aware that clearing agents / importers were applying a rate of 10% instead of 25%, and on the other hand, curiously instruct customs officers to update the customs system with immediate effect for tariff No. 4802. 56. 00 to pick import duty at the rate 25% (which actually amounts to an admission that up to that date, the customs system had been configured for tariff No. 4802. 56. 00 to pick import duty at the rate of 10%).

22. The Appellant further stated that the aforesaid Memo further ignored the fact that up to the date of the said Memo, the official position of the Respondent was that the tariff rate since 20th June 2014 when it was set at 10% and consequently the deletion of Paragraph 2 of the Legal Notice EAC/69/2018 had no effect whatsoever on the rate of duty for HS code 4802. 56. 00.

23. The Appellant stated that following the issuance of the said Memo, and in compliance therewith, KRA Customs Officers rushed to calculate duty rates for all consignments of goods that were cleared by the Appellant under Hs code 4902. 56. 00 between 2nd August 2018 and 27th January 2022, and proceeded to demand short levied duty in the sum of Kshs 273,323,646. 00.

24. In view of the foregoing, the Appellant contended that the reliefs sought should be granted on the following grounds;a.It is the Respondent (and not the Appellants or their clearing agents) who actually applied the duty rate of 10% on all paper and paperboard products imported into the country under HS code 4802. 56. 00 between August 2018 and 27th January 2022 by feeding into its Tradex system the duty rate of 10% as the mandatory duty rate that all importers had to pay.b.It is the Respondent who through its ICT officers approved online Form C17B customs entries that indicated 10% as the mandatory duty rate for paper and paperboard products imported under HS Code 4802. 56. 00. c.It is the Respondent who insisted on the payment of duty rate at 10% before such goods could be allowed to leave the port of entry.d.The impugned decision as well as impugned demand notice violates the Appellant’s right to fair administrative action, right to property, the right to access justice, and the right to the protection of the law.e.The Appellant had a legitimate expectation that the Respondent would not labour to put in place such expensive and tamper proof infrastructural, technological, administrative, surveillance and monitoring systems as were necessary for purposes of inducing, encouraging and coercing the Appellants into paying Customs Duty at the mandatory rate of 10% for all paper and paperboard products imported under HS code 4802. 56. 00, only to subsequently change their mind and punish the Appellant for having paid duty at the rate of 10% and not 25%.f.It is unconstitutional, illegal, unfair, irrational, capricious, in bad faith and abuse of office for the Respondent to encourage, induce and coerce the Appellant into paying duty at the rate of 10% for goods which the Respondent knew or ought to have known, were meant to be sold to third parties.g.The Respondent is institutionally bound by and cannot resile from its previous interpretation of the effect of the purported deletion of Paragraph 2 of the Legal Notice No. EAC/69/2018 which interpretation informed its decision to configure the Simba System to pick import duty for paper and paperboard products imported under HS code 4802. 56. 00 at the rate of 10%.h.The Appellant’s liability to tax cannot be made wholly dependent on the personal idiosyncrasies of the individual occupiers of the office of the Commissioner of Customs and Boarder Control as the Respondent seems to opine.i.Section 135 of EACCMA was intended to deal only with situations where the tax is paid less than what the Respondent honestly, sincerely, and for good reasons, believed to be due and payable at the time, and not as the case herein, save for the fact that the different occupant of the same office subsequently hold the view that the previous occupant of the same office should have collected more tax than he did,j.The Respondent has been guilty of inordinate delay in carrying out the post clearance audit.k.The Respondent’s decision to initiate a post clearance audit and to issue the impugned notice was actuated by malice-, bad faith and improper motive.l.By initiating a post clearance audit as aforesaid, the Respondent acted unreasonably, and took into account improper considerations while at the same time failed to take into account proper considerations.m.The Respondent having issued a tax compliance certificate to the Appellant is estopped from changing its position and now averring against the Appellant that it has outstanding taxes.

25. By reason of the aforesaid the Appellant prayed the Honourable Tribunal to grant the reliefs sought.

The Respondent’s Case 26. The Respondent has set out its response on the Statement of Facts filed on 13th May 2022, and the Written Submissions filed on 20th January 2023.

27. The Respondent stated that the Customs Post Clearance Audit Team conducted a desk review audit of customs entries of the importers of the items under the tariff code 4802. 56. 00for the period 2nd August 2018 to 8th February 2022 pursuant to Sections 235 and 236 of EACCMA, amongst them the Appellant.

28. The Respondent further stated that where a post clearance audit reveals that taxes were short levied, or erroneously refunded, Sections 135 and 249(1) empowers the Respondent to recover any such amount short levied or erroneously refunded with interest at a rate of two per cent per month from the period the taxes remain unpaid.

29. The Respondent also stated that it operates on a self-declaration regime whereby, the Appellant is required to make declarations and pay taxes on the items that it imports itself or through its agents. This created the legitimate expectation that the Appellant will declare and pay the correct taxes.

30. The Respondent asserted that in the event the taxpayer defaults in this expectation, the law under Sections 135, 235, 236 and 249 of EACCMA allows the Commissioner, within 5 years of importation, to assess and demand for the short-levied taxes.

31. The Respondent further stated that pursuant to Section 135 of EACCMA, it demanded for the short-levied taxes from the Appellant whose liability is Kshs 273,323,646. 00 Upon receipt of which the Appellant sought a review under Section 229 of EACCMA

32. It was a submission of the Respondent that there cannot be a breach of legitimate expectation where the Respondent has followed the mandatory statutory provisions. That the Appellant was required to pay the correct taxes. The Respondent to buttress the submission cited the case of Republic -vs- Principle Secretary, Ministry of Transport, Housing and Urban Development Ex parte Soweto Residents Forum CBO (2019) eKLR, where the court held;-“Additionally, statutory words override an expectation howsoever founded. Thus, a decision maker cannot be required to act against clear provisions of a statute just to meet one’s expectations otherwise his decision would be outrightly illegal and a violation of the principle of legality, a key principle of the Rule of Law. There cannot be legitimate expectation against the clear provisions of the law.”

33. The Respondent submitted that the EAC Secretariat publishes the EAC Gazette Notices on the EAC website and are available to the Public. That these notices highlight changes effected by the Council of Ministers to the East African Community Customs Management Act and the EAC/CET.

34. The Respondent also submitted that the EAC Gazette indicates the date when the legal notices come into force. That the Appellant’s claim that there was no law that imposed a rate of 25% on paper and paperboard products is unfounded.

35. It was the submission of the Respondent that item of the legal notice EAC/69/2018 dated 30th June 2018 had amended or changed the rate applicable for the HS code 4802. 56. 00 from 25% to 10%, and provided as follows :-“2. HS code 4802. 56. 00, changing the rate of 25% to 10%.”

36. The Respondent also stated that the EAC Legal Notice No. EAC/112/2018 dated 2nd August 2018 deleted item Paragraph 2 in the Legal Notice EAC/69/2018 dated 30th June 2018. That Paragraph 2 of the Legal Notice provides that;“A correction is hereby made to the EAC Gazette Vol. 2018, AT.1 dated 30th June 2018, in Legal Notice No. EAC/69/2018 by deleting item No. 2”.

37. The Respondent stated that the amendment effectively reverted the duty rate of items imported under HS code 4802. 56. 00 from 10% to 25%. That the Appellant is being dishonest to only recognize the notice which lowered the rates while not recognizing a similar notice by the very institution making correction to the earlier notice.

38. The Respondent submitted that Tariff 4802. 56. 00 covers :“Uncoated paper and paperboard, of a kind used for writing, printing or other graphic purposes, and non – perforated punch cards and punch tape paper, in rolls or rectangular (including square) sheets, of any size, other than paper of paper of heading 48. 01 or 48. 03 ; hand-made paper and paper board…weighing 40g/m2 or more but not more than 150g/m2, in sheets with one side not exceeding 435 mm and the other side not exceeding 297 mm in the unfolded state”.

37. It was the submission of the Respondent that the Customs Systems were not adjusted until the implementation of the provisions of Gazette EAC/112/2018 dated 2nd August 2018, resulting in short levied taxes. That the taxes were due and payable to the Respondent at the time of importation. That the Appellant’s products were correctly classified under HS code 4802. 56. 00 and subjected to duty rate of 25%.

38. The Respondent submitted that the assessment herein against the Appellant was made within the five-year window provided for by the law and therefore no legitimate expectation on the taxpayer was breached.

39. It was also a submission of the Respondent that the taxes demanded by the Respondent are due from the Appellant and that the taxes demanded were properly assessed in conformity with the existing laws.

40. By reason of the foregoing the Respondent prayed that the Honourable Tribunal dismisses the Appellant’s Appeal with costs.

Issues for Determination 37. The Tribunal having carefully reviewed the pleadings filed by the parties and the submissions made is of the considered view that the Appeal herein distils into two issues for determination ;i.Whether there existed a statutory provision imposing a duty rate of 25% on paper and paperboard products imported under HS code 4802. 56. 00 in the period 2nd August 2018 to 27th January 2022; andii.Whether the Respondent was justified in assessing and confirming the assessment for short levied duties against the Appellant.

Analysis and Determination i. Whether there existed a statutory provision imposing a duty rate of 25% on paper and paperboard products imported under HS code 4802. 56. 00 in the period 2nd August 2018 to 27th January 2022. 37. The bone of contention between the parties herein is the rate of duty applicable under HS code 4802. 56. 00 for imported paper and paperboard products during the period in issue.

38. Whereas the Appellant contended that the said duty rate was set at 10% by the EAC Council of Ministers vide Legal Notice No. EAC/21/2014 on 20th June 2014, on the other hand, the Respondent contended that the rate was increased to 25% vide EAC Legal Notice No. EAC/112/2018 dated 2nd August 2018 which it contended reverted the duty rate of products imported under HS code 4802. 56. 00 from 10% to 25%.

39. The EAC Gazette Notice Vol AT 1 – No. 8 of 20th June 2014 vide Legal Notice No. EAC/21/2014 set the rate of duty for products classifiable under HS code 4802. 56. 00 at 10% with effect from 1st July 2014. Therefore, it is important for the parties to adduce evidence of any changes effected thereafter, if any, in order to establish the prevailing rate during the period in issue.

40. The Tribunal has taken judicial notice of a communication adduced by the Appellant, in form of an email from the Customs Head of PCA to Senior Customs Officers. The email dated 23rd February 2018 apparently advises the Customs officers of an error in the subject Tariff HS CODE, as thus;“…Following consultations with the EAC Secretariat, I wish to confirm that the indication of the rate of 25% on Tariff 4802. 56. 00 is an error made during the transposition process. The rate was changed in 2014 from 25% to 10% and has not been amended by any subsequent Gazette Notice and therefore the rate of 10% is still applicable. Also note worthy is that the other partner states continue to apply 10%. The Transposition process is only meant to change the version from to comply with the WCO current version and is not expected to change any rates of duty-. Duty rates are only changed by Gazette notices approved by Council following the EAC budget process.”

37. The EAC Gazette Notice Vol AT 1- NO. 8 vide Legal Notice No. EAC/85/2017, the EAC Council of Ministers reviewed and modified the EAC Common External Tariff into a 2017 version in conformity with the Harmonized Commodity Description and Coding System version 2012 of the World Customs Organization and came into force on 1st July 2017. It is noteworthy that the duty rates were not changed by this process. However, in the transposition process an error in the Tariff code HS 4802. 56. 00 was occasioned with the erroneous indication of the rate thereon as 25% instead of 10%.

38. EAC Legal Notice No. EAC/69/2018 dated 30th June 2018 had amended or changed the rate applicable for the Hs code 4802. 56. 00 from 25% to 10%, which amendment was deemed to have come into force on 1st July 2017. This Legal Notice being a corrigendum meant that the intended purpose was to correct the error which indicated the rate as 25%, to the correct rate of 10% which had remained unchanged from 1st July 2014. This corrigendum was therefore not a reduction of the rate but a correction to state the correct rate.

39. However, the foregoing amendment under Legal Notice No. EAC/69/2018 was again amended vide Legal Notice No. EAC /112/2018 by deleting item No, 2 thereon which had made provision for the rate of duty at 10%, and the amendment took effect on 2nd August 2018.

40. By virtue of the EAC Legal Notice No. EAC/112/2018 amendment by deleting item No. 2 in the Legal Notice EAC/69/2018, the effect was that the Import Duty rate for HS code 4802. 56. 00 reverted to 10% as the previous rate of 10% in the pre- 2017 EAC/CET had not been increased by the Council of Ministers to 25% in the 2017 version as confirmed by the Gazette Notices, with effect from 2nd August 2018 and therefore remained at 10%.

41. The Tribunal having carefully considered the amendments made vide the various EAC Legal Notices, comes to the conclusion that rate applicable under the HS code 4802. 56. 00 for imported paper and paperboard products was at 10% effective 2nd August 2018. The rate had been changed from 1st July 2014 by a reduction from then 25% to 10%, which then became prevailing rate for the tariff, and had not been increased again to 25% as contended by the Respondent

42. In light of the foregoing the Tribunal determines and holds that there existed a statutory provision which imposed a duty rate of 10% on paper and paperboard products imported under the HS code 4802. 56. 00 in the period 2nd August 2018 to 27th January 2022.

ii. Whether the Respondent was justified in assessing and confirming the assessment for the short-levied taxes against the Appellant. 37. The Tribunal having determined the issue of the applicable rate of duty to be 10% which the Appellant had correctly declared, the issue that comes for determination is whether the Respondent was justified in confirming the assessment for short levied duties.

38. There is no evidence that the Appellant mis-declared its products or breached any such statutory requirements as alleged, to entitle the Respondent to target it for post clearance audit and assessment for short levied duties.

39. In light of the foregoing the Tribunal finds and holds that the Respondent was not justified in assessing and confirming the assessment for short levied duties vide its review decision dated 15th March 2022.

Final Decision 37. The upshot of the foregoing is that the Appeal is merited and the Tribunal accordingly proceeds to make the following Orders ;a.The Appeal be and is hereby allowed.b.The Respondent’s review decision dated 15th March 2022 be and is set aside.c.Each party to bear its own costs.

37. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 26TH DAY OF MAY, 2023………………………….ROBERT M. MUTUMACHAIRPERSON………………………ELISHAH N. NJERUMEMBER.................................RODNEY O. OLUOCHMEMBER………………................…………DELILAH K. NGALAMEMBER...................................EDWIN K. CHELUGETMEMBER