[2024] KETAT 1096 (KLR)

Tannaat Solutions Limited v Commissioner of Customs and Border Control (Tax Appeal E118 of 2024) [2024] KETAT 1096 (KLR) (12 July 2024) (Judgment)

Neutral citation: [2024] KETAT 1096 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E118 of 2024

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & T Vikiru, Members

July 12, 2024

Between

Tannaat Solutions Limited

Appellant

and

Commissioner of Customs and Border Control

Respondent

Judgment

Background 1. The Appellant is a private company incorporated in the Republic of Kenya.

2. The Respondent is a principal officer appointed pursuant to Section 13 of the Kenya Revenue Authority Act (KRA), Act No. 2 of 1995, and Kenya Revenue Authority is empowered to enforce and administer provisions of written laws set out in Section 5 as read together with the First Schedule of the KRA Act.

3. On 1st December, 2023, the Respondent issued a tax demand for short levied customs duty of Kshs. 7,438,975. 00.

4. On 7th December, 2023, the Appellant objected to the demand for taxes.

5. On 20th December, 2023, the Respondent issued its objection decision.

6. The Appellant being dissatisfied with the Respondent’s decision lodged this Appeal at the Tribunal on 30th January. 2024.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 30th January 2024 and filed on 31st January 2024:i.The Respondent erred in law and fact in finding that the Appellant has underpaid customs duty.ii.The Respondent erred in law and fact in construction and application of law relating to valuation methodiii.The Respondent erred in law and fact in the applicability of benchmark rules at the point of importation.iv.The Respondent erred in law and fact by applying the wrong rate for customs duty.v.The Respondent erred in law by acting ultra vires by failing to give proper guidance on the application of rates as per the EACCMA, 2004. vi.The alleged claim of underpayment of customs duty by the Respondent is inaccurate as the item in question was lawfully settled by the Respondent.vii.The Respondent erred in fact and in law by out rightly contravening the doctrine of legitimate expectation that rests the presumption on the Commissioner to follow certain procedures in arriving at the tax liability and the benefits that accrue from it.

Appellant’s Case 8. The Appellant’s case is premised on the following documents before the Tribunal:i.Its Statement of Facts dated 30th January 2024 and filed on 31st January 2024. ii.Its written submissions dated 27th February, 2024 and filed on 27th February, 2024.

9. The Appellant stated that contrary to the Respondent's allegations, the Appellant has duly paid all the taxes due for the period under review. That the decision to demand the said amounts is arbitrary and irrational.

10. That the entire assessment was based on uplifting of taxes post verification by the Respondent.

11. That the Appellant has been importing ready-made garments from 2016 to date and through engagements with other traders they had negotiated a benchmark applicable for the purposes of facilitating trade.

12. That the Respondent held one such Meeting with the Appellant and other traders on the 4th April, 2023. That during the Meeting a number of issues were discussed including quality declarations, verifications and valuation of goods. The Appellant stated that it attached the Minutes to its pleadings.

13. That subsequent to the above mentioned meeting the Respondent wrote to the Appellant and other traders vide a letter dated 24th May, 2023 reminding them of 1st June, 2023 as the implementation date of the agreed rates.

14. That at the meeting the Appellant, its representatives and the Respondent agreed on the sum of Kshs. 3,900,000. 00 as the duty payable on new clothes.

15. That the demand letter concerning the said consignment was issued after the clearance and assessment of subsequent consignments as follows; Custom Entry numbers 23MBAIM406238107, 23MBAIM406277393 and 23MBAIM406304127

16. The Appellant argued that the Respondent erred by applying the wrong valuation method as it is applying different standards for the same cargo described and imported by the Appellant.

17. That subsequent to the detention of the cargo under Customs Entry 23MBAIM406175026 the Respondent has continued to clear and release the Appellant’s other cargo under the same classification and description and allowed the Kshs. 3,900,000. 00 as the duty payable as can be seen from the import declaration forms that the Appellant attached to its pleadings.

18. That the Commissioner's basis for the additional assessment is erroneous based on the below grounds:i.Whether the goods compared to were of the same physical characteristics, quality and reputationii.Whether the goods compared to were produced by the same manufactureriii.Whether the goods compared to were from the same country of origin as the goods being valued

19. The Appellant was of the considered view that by the rules of valuation, the applicable benchmark rate was Kshs. 3,900,000. 00 for ready-made garments per 40 foot container.

20. The Appellant stated that it had a legitimate expectation in that after the Commissioner of Customs Policy office agreed at the numerous consultations the parties had had with the stakeholders, importers would be expected to pay Kshs. 3,900,000. 00 for new clothes. That therefore, the demand for duty arrears of Kshs. 7,438,975. 00 is not only a surprise but goes against legitimate expectation.

21. The Appellant submitted that there is no basis in law to demand additional tax as the failure by the proper officer of the Respondent to execute his mandate as provided by law should not be visited upon him.

22. That by and large, the Respondent has subjected the Appellant to unfair and improper computations to arrive at unlawful taxes for the Appellant.

23. That the Appellant had a legitimate expectation that tax issues should be handled fairly, and the Respondent still needs to meet this expectation.

Appellant’s Prayers 24. The Appellant prayed that the Tribunal grants the following orders: -i.A declaration that the Respondent's Objection decision dated 20m December 2023 is unjustified, unmerited and without any legal basis and is null and void.ii.An order setting aside and or vacating the Respondent's impugned decision.iii.An order quashing the Respondent's decision as in the letter dated 20th December, 2023. iv.An order for costs of the Appeal to be paid to the Appellant by the Respondent.

Respondent’s Case 25. The Respondent’s case is premised on the hereunder filed documents:-a.The Respondent’s Statement of Facts dated 29th February, 2024 and filed on 1st March 2024. b.The Respondent’s written submissions dated 16th March, 2024 and filed on 17th March, 2024.

26. The Respondent submitted that on 24th October, 2023 a team from the Respondent's office conducted an operation where by Customs Entry Number 23MBAIM406175026 was targeted with an intention to establish the accuracy of the declaration in regards to descriptions, quantities, tariffs and applicable values on imported readymade garments as compared to benchmark taxes of Kshs 3. 9 Million to enhance C&BC revenue.

27. That on 23rd October, 2023 Port Link Holding Limited declared the entry on behalf of the Appellant herein and the entry covered 1x40-ft container number TRHU7396356 said to contain 4 items in 170 packages having a gross weight of 26. 8 tonnes.

28. That the declared items were textile rolls, socks, men’s vests and underwear. That the consignment was imported from China with a declared customs value of Kshs. 5,987,999. 00 and the Appellant paid taxes amounting to Kshs. 3,901,860. 00 based on its declaration.

29. That the proforma invoice number was indicated as TAN230919 dated 19th September, 2023 which was issued by Jinhang Import & Export Co. Limited to Tanaat Solution Limited, and the goods description was given as textile rolls, socks, underwear and man vest with a total FOB value of the goods given as $17,400. 00.

30. That in the month of November 2023, the Respondent in the presence of the Appellant's verification findings, there was discrepancy in the quantities declared against the ones verified since the verification of the consignment indicated gross misdeclaration and undervaluation of items.

31. That on 14th November, 2023 and upon verification, the Respondent wrote to valuation and tariff office to establish the unit values of the goods and requested that they assess the quantities as seen and as such.

32. That on 17th November, 2023, the valuation and tariff office in their feedback recommended FOB adjustments on the verified consignment and recommended extra taxes amounting to Kshs. 7,438,975 as assessed and payable

33. The Respondent stated that it applied it best judgement in arriving at the decision to compute the taxes to Kshs 7,438,975 based on the information available to it. That the documents availed by the Appellant were not sufficient to demonstrate that the Customs duty employed by the Respondent was incorrect.

34. That The Respondent's actions were within the provisions of Section 122 (1)of EACCMA,2004 which reads:“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”

35. That The Fourth Schedule referred to in Section 122(1) above provide that the customs value of imported goods shall be determined using one of six methods of valuation. That in this regard, the Respondent upon scrutiny of the Appellant's Entry Number 23MBAIM406136353 established that the declaration did not reflect the correct transaction value of the imports.

36. That the Respondent in exercise of his rights under Section 122 (4) referred to its test values and database and found that the values were low thereby resulting in the uplift of values.

37. The Respondent relied on the pronunciation of the Courts in Gira Enterprises v Commissioner of Customs (Customs, Excise and Gold Tribunal - Mumbai) where that Tribunal held that:“when the declared value is ridiculously low compared to the ordinary competitive price of comparable goods contemporaneously imported, such declared values cannot be adopted as customs values.”

38. The Respondent argued that the benchmark rules are not methods of valuation but internal guidelines. That the same has been supported by the Appellant's Minutes of a purported meeting between the Respondent and traders where it was recognized that there are only six valuation methods.

39. The Respondent stated that on the issue of benchmarks, there is no written law or otherwise that states that bench mark values are applicable.

40. That the six methods of valuation are to be applied on a sequential basis as per Section 122 and the Fourth Schedule of East African Community Customs Management Act, 2004.

41. The Respondent contended that it is not restricted to accept documents provided by the Appellant by virtue of Section 122 (4) of the East African Community Customs Management Act, 2004. That under this provision, a customs officer the right to satisfy themselves as to the truth or accuracy of any statement, document, or declaration. That the same position has been supported in Text 1:1 of the commentary by the World Customs Organization (WCO), Technical Committee on Customs Valuation (TCCV).

42. The Respondent further contended that the onus in proving that the tax assessments were wrong lies with the Appellant. Section 56 (1) of the Tax Procedures Act. That the Section states as follows:“In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

43. That the Courts in Mulherin Vs Commissioner of Taxation (2013) FCAFC 115 stated that:“The Federal Court of Australia held that in tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge income tax assessment. The onus is on the taxpayer in proving that assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied."

44. The Respondent maintained that the Appellant did not provide any tangible proof to show that the Customs duty applied was incorrect.

45. That the Respondent has not contravened the Appellant's legitimate expectation. That it is the Respondent's position that for legitimate expectation to hold, it must be within the law.

46. The Respondent stated that it is mandated by the Kenya Revenue Authority Act, Cap 469 laws of Kenya to enforce several revenue statutes among them the East African Community Customs and Management Act,2004 and should the Tribunal allow this appeal, it will jeopardize the mandate of the Respondent to enforce the provisions of the East African Community Customs and Management Act and its future enforcement will be curtailed or rendered nugatory.

47. The Respondent relied on the following cases:-i.Kudheiha v. Kenya Revenue Authority and Others (2014)eKLRii.Cape Brandy Syndicate v. Inland Revenue Commissioner 121 1 KB 6iii.Republic vs Commissioner of Domestic Taxes and another, ex-parte Kenton College Trust [2013] eKLRiv.Justice Kalpana H Rawal v. Judicial Service Commission & 3 others [2016] eKLRv.Sethi Auto Service Station& Another. Delhi Development Authority & Others, (2009) 1 SCC 180

48. That the upshot of the foregoing is that the Respondent's valuation was legally and procedurally done and no cogent evidence has been adduced by the Appellant, as required by law to challenge the same.

Respondent’s prayers 49. The Respondent prayed that the Tribunal:i.Dismisses this Appeal with costs to the Respondent for lack of merit.ii.Upholds the Respondent’s decision dated 20th December, 2023

Issue For Determination 50. The Tribunal, having considered the pleadings, evidence adduced, and written submissions made by the parties, is of the considered view that the issue that crystalizes for its determination is: Whether the Respondent was justified in confirming the tax assessed upon the Appellant.

Analysis And Determination 51. The Tribunal having identified the issue that falls for its determination, proceeds to analyse it as hereunder.

52. The dispute at hand emanated from the Respondent’s review of the Appellant’s consignments which established that the Appellant had imported various items of clothing.

53. The Respondent stated that it received a report prepared by its Valuation and Tariff team on which basis the Respondent adjusted the Appellant’s FOB price resulting in a tax demand for short levied Customs duty of Kshs. 7,438,975. 00.

54. It was the Appellant's contention that readymade garments were to be subjected to a benchmark rate of Kshs. 3,900. 000. 00 that was agreed upon in a joint meeting of industry players and the Respondent.

55. The Appellant averred that the Respondent held a Meeting with industry stakeholders on 4th April 2023 and addressed the use of benchmark values and amounts payable for garments imported by the traders.

56. The Appellant further contended that the Respondent, vide a letter dated 24th May 2023, reminded the Appellant, together with the other traders who had attended the 4th April 2023 meeting, that 1st June 2023 would be the implementation date of the agreed rates.

57. The Tribunal perused the documents presented by the parties and noted that the Appellant provided the Respondent with Minutes and other documentation from a Meeting held between the Respondent, the Appellant and industry players to clear out any confusion arising on the rates and values to be taxed wherein they developed benchmark guidelines for the same.

58. The Respondent argued that the Minutes and correspondences referencing benchmark values agreed and the benchmark values for readymade garments as provided by the Appellant, were not supported under any law. That further, the Minutes were unsigned and therefore lacked credibility.

59. The Respondent further submitted that the benchmark rules are not methods of valuation but internal guidelines and that Section 122 and the Fourth Schedule of EACCMA, 2004 provided for six methods of valuation that are applied sequentially.

60. That specifically, Paragraph 1 of Part I of the Fourth Schedule on Interpretative Notes states as follows regarding the application of the methods of valuation:“Paragraph 2, 3, 4, 5, 6, 7 and 8 define how the customs value of imported goods is to be determined under the provisions of this Schedule. The methods of valuation are set out in a sequential order of application.”

61. This then raises the question as to the Respondent’s input into the drafting of the benchmark rules for traders when the Act was clear on the methods of valuation to be used in arriving at the Customs value of imported goods.

62. Section 122 (1) of the EACCMA provides as follows regarding the determination of the value of imported goods liable to ad valorem import duty:“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.”

63. Additionally, Paragraph 1(1) of Part 1 of the First Schedule defines “customs value of imported goods” to mean“the value of goods for the purposes of levying ad valorem duties of customs on imported goods”

64. A perusal of the Fourth Schedule of EACCMA, 2004 establishes that Paragraphs 2,3,4,5,6,7 and 8 provide the methods of Customs valuation that are used to determine the Customs value of imported goods. This methods are applied in a sequential manner other than methods 5 and 6 which can be interchanged on request by an importer.

65. Paragraph 2 (1) of Part 1 of the Fourth Schedule of the EACCMA provides as follows:“The customs value of imported goods shall be the transaction value, which is the price actually paid or payable for the goods when sold for export to the Partner State adjusted in accordance with the provisions of Paragraph 9 ... "

66. It follows that the Customs value shall be the transaction value which is the price actually paid or payable for goods when sold for export to the Partner State adjusted in accordance with the provisions of Paragraph 9.

67. The Interpretative Notes to Paragraph 2 of the Fourth Schedule to the EACCMA define the “price actually paid or payable” as the “total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods.”

68. Additionally, the paragraph provides exceptional circumstances where the transaction value shall not be the price actually paid. These are:i.Where there are restrictions imposed by the seller as to the disposition or use of the goods by the buyer;ii.Where the sale or price is subject to some conditions or consideration for which a value cannot be determined;iii.Where part of the disposal proceeds of subsequent resale of goods accrue directly or indirectly to the seller;iv.Where the buyer and seller are not related or where the buyer and seller are related, the TV may be used in circumstances prescribed in Paragraph 2(2) of the Fourth Schedule.

69. The Tribunal reviewed Customs import entries submitted by the Appellant and notes that the Appellant declared import duties at 35%, VAT at 16%, IDF at 2. 5% and RDL at 1. 5% in arriving at the duty payable.

70. The Tribunal notes that while the Respondent acknowledged the existence of the six methods of valuation, it neither provided reasons for departure from the values declared by the Appellant nor the method by which it arrived at its uplifted values.

71. Specifically, the objection decision provided a computation that delineated rates used in the uplift of Customs Entry Number 23MBAIM406175026 which was the basis of all other assessments as follows:a.Ready made garmentsi.Import duty - 35%ii.VAT - 16%iii.IDF - 2. 5%iv.RDL - 1. 5%b.Textile rollsi.Import duty - Specific duty rateii.VAT - 16%iii.IDF - 2. 5%iv.RDL - 1. 5%

72. Notably, the computations by the Respondent depict the same percentages for import duty, VAT, IDF and RDL applied by the Appellant other than where it used an undisclosed specific duty rate. It is apparent therefore that the Appellant applied the correct rates of the various taxes and levies in its Customs entries. Thus, these rates are largely undisputed.

73. Flowing from the above, it is only logical to conclude that the Respondent used different FOB values to compute the additional taxes but did not provide details of these new FOB values that it relied on as the base for computation of the said taxes.

74. Additionally, the Respondent did not provide reasons for its departure from the declared FOB values despite the same having been accepted by the Respondent prior to and subsequent to the imports under dispute for both the Appellant and other industry players’ imports as evidenced by the Appellant.

75. The Tribunal relied on the pronouncement by the Court in Standard Group Resource Ltd vs Attorney General & 2 others [2016] eKLR where it was held that:“where there is a line of consistency in the transaction documents descriptive of the imported goods, the tags on the goods and the declaration, there is absolutely no reason why the transaction value of the imported documents should be rejected.”

76. The Tribunal thus posits that the Respondent having elicited the Appellant’s legitimate expectation by accepting similar declared values for similar consignments by the Appellant, ought to have provided a basis for departure from the previously accepted F.O.B. and provided the method of valuation it used to arrive at the additional taxes.

77. As a result of the foregoing, the Tribunal finds that the Respondent was not justified in confirming the tax assessed upon the Appellant.

Final Decision 78. The upshot of the foregoing analysis is that the Appeal is meritorious and the Tribunal accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated December 20, 2023 be and is hereby set aside.c.Each party to bear its own costs.

79. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF JULY, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERDR. TIMOTHY B. VIKIRU - MEMBER