[2023] KETAT 99 (KLR)

Universal Impex Limited v Commissioner of Customs & Border Control (Tribunal Appeal 563 of 2021) [2023] KETAT 99 (KLR) (10 February 2023) (Judgment)

Neutral citation: [2023] KETAT 99 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 563 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

February 10, 2023

Between

Universal Impex Limited

Appellant

and

Commissioner of Customs & Border Control

Respondent

Judgment

Background 1. The Appellant is a limited company incorporated in Kenya under the Companies Act and has its registered office in Nairobi County.

2. The Respondent is an principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act and Kenya Revenue Authority 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 Appellant imported goods on diverse dates between 10th January 2020 and 13th January 2020 which were declared to Customs.

4. The Respondent conducted a post clearance audit and determined that the importer underpaid taxes by a sum of Kshs. 2,142,427. 70 and vide a demand notice dated 22nd September 2020 demanded for the short-levied taxes.

5. The Appellant objected to the assessment vide an undated letter referenced P051807573W. The Respondent replied vide a letter dated 5th November 2020.

6. The Appellant being dissatisfied with the Respondent’s decision filed a Notice of Appeal dated 18th December 2020.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 15th January 2021:-a.That the Respondent failed to consider that the short levy demand in their tax decisions dated 22nd September 2020 and 5th November 2020 arose from their omission/failure to update their Simba system to reflect the prevailing tax regime five (5) months after the passing of the East African Community (EAC) Gazette Notice of 30th June, 2019. b.That the Respondent failed to consider that the goods had been sold based on the costing which factored the taxes paid at the port of entry.c.That were the Appellants to pay the taxes as demanded, it would mean paying taxes on non-existent goods and going back to pocket for a mistake/omission/failure which was beyond the Appellant's control.d.That the Respondent failed to consider that despite their mistake/omission/failure, the Appellant based on the tax assessment during shipment, sold the goods and remitted Value Added Tax to the Respondent.e.That the Appellant's business following the Covid-19 pandemic has greatly suffered financial challenges and would be highly prejudiced should the Respondent's Tax Decisions dated 22nd September 2020 and 5th November 2020 be upheld.f.That it is a principle of natural justice requiring an administrative authority when exercising discretionary power to maintain proper balance between any adverse effects which its decision may have on the rights, liberties or interests of persons and the purpose which it pursues.

Appellant’s Case 8. The Appellant’s case is premised on the Appellant’s Statement of Facts dated 15th January 2021 together with the documents attached thereto and the Appellant’s written submissions dated 1st March 2022 and filed on the same date.

9. That the Appellant in November, 2019 imported Red Film Faced Plywood, Brandplex, WBP Glue, Finger Joint Core with Four Layers Fresh Core, Size: 1220*2440*17 mm from Lianyungang Chanta International Wood Co. Ltd via invoice number: 19CTB72046-01.

10. That the Appellant through its clearing agent, declared the shipment via Customs entry number 2020ICD174092 to the Respondent in the Simba System.

11. That the Appellant’s clearing agent advised it to pay taxes of Kshs. 1,522,217. 00 as computed in the Simba system and of which the Appellant paid and the goods were cleared.

12. That the Appellant made a similar import in December 2019 via invoice number: 19CTB72046-02. That the Appellant through its clearing agent, declared the shipment under Customs entry number 2020ICD174462 in the Simba System.

13. That the Appellant’s clearing agent advised it to pay taxes of Kshs. 776,141. 00 and this sum was paid and the goods were cleared.

14. That the Appellant sold both consignments to Shyam Suppliers Ltd under invoice numbers 202002001 and 202002002 both dated 3rd February 2020 and 202002008 dated 22nd February 2020.

15. That out of the sale, the Appellant collected Kshs. 8,745,000. 00. Further, that out of this transaction, the Appellant remitted to the Respondent Kshs. 1,206,068. 91. 00 being Value Added Tax (VAT).

16. That the Appellant on the 22nd September, 2020 received a tax demand letter from the Respondent in relation to the two shipments claiming that there was a short levy of taxes amounting to Kshs. 2,121,783. 78 that was payable within 30 days of the date of the demand letter.

17. That the Respondent indicated that the short levy was as a result of the EAC Gazette Notice of 30th June, 2019 which introduced a specific Import Duty rate of USD175/m3 on the said import.

18. That the Appellant imported the said goods five months subsequent to the Gazette Notice and during which period the Respondent ought to have updated the Simba System.

19. That the short levy was occasioned by the Respondent's failure to update their Simba system to reflect the prevailing tax rate.

20. That it objected to the demand notice via an email dated 19th October, 2020, on the basis that goods in the said entries were sold based on the assessment at the Kenya Revenue Authority Simba System.

21. That the Respondent rejected the Appellant’s objection and reviewed the demand upwards from Kshs. 2,121,783. 78 to Kshs. 2,142,427. 70.

22. That all payments of taxes demanded were paid as per the initial computation from the Respondent's Simba system when the entries were lodged.

23. That in any event, the goods where sold factoring in the purchase price, assessed taxes to the Respondent, clearing costs, inland freight, storage warehousing and sales cost to determine selling price.

24. That the error/omission by the Respondent should not be visited upon the Appellant.

25. The Appellant submits that import duty was computed in the Simba system, which was devoid of an external interference, and unless all the taxes calculated in the system are paid in full, the Respondent does not issue Customs clearance and the cargo is not released from the Port.

26. That the Respondent’s officers verified the entries that were made and even inspected the consignments for them to be released to the Appellant.

27. The Appellant relied on the Export Trading Company v Kenya Revenue Authority (2018) eKLR in which the court held that:-“I further find that the Respondent's officers cannot be said to have been acting as a conveyor belt performing a perfunctory exercise while totally oblivious of their solemn duty to the public to furnish them with accurate information regarding the applicable taxation rate".

28. In the same case, the Court pronounced itself on the Simba System as follows:-“It is also worthy to note that the identification of the applicable rate of duty and assessment of duty payable was done by the Simba system which is owned and controlled by the Respondent and the Petitioner had no role in declaring and setting the rate to be applied. I find that it was therefore unreasonable for the Respondent to turn around and pass the blame to the Petitioner by contending that it was, at all material times, aware of the right based on Legal Notice No.EAC/10/2007 more so considering that the Respondent's own officer verified the entries made and even inspected the consignments"

29. The Appellant further submitted that although the Tribunal may not have jurisdiction to interpret the Constitution of Kenya, 2010, it cannot turn a blind eye on Article 47(1) of the Constitution which provides that:-“Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair.”

30. The Appellant urged that simply because the Respondent is empowered to carry our post clearance audit and demand the short-levied taxes does not mean that they should not exercise this power in a manner that is reasonable, fair, efficient and effective. That the demand notices are an attempt by the Respondent to shift the burden of their negligence and failure to update their Simba system for over one year to the Appellant. That this Tribunal ought to frown on that and place the blame where it lies, on the Respondent.

Appellant’s Prayers 31. The Appellant made the following prayers:-a.That the tax decision in the letters dated 22nd September 2020 and 5th November 2020 be set aside.b.That the Tribunal issues an order directed at the Respondent from ever demanding import taxes arising from the Appellant's shipments Entry numbers 2020ICD174092 and 2020ICD174462.

Respondent’s Case 32. The Respondent’s case is premised on the hereunder filed documents before the Tribunal:-a.The Respondent’s Statement of Facts dated and filed on 23rd March 2021 together with the documents attached thereto.b.The Respondent’s written submissions dated 9th March 2022 and filed on the same date together with the legal authorities filed therewith.

33. The Respondent avers that tax laws are statutes of strict interpretation. But what's more, the Constitutional imperative under Article 210 cannot be amended by administrative or system shortcomings. Article 210 stipulates that:-“No tax or licensing fee may be imposed, waived or varied except as provided by legislation."

34. That the Simba System is a mere administrative tool for the facilitation of payment of duties and is in no way the equivalent of legislation itself - the Simba System cannot impose, vary or waive any tax.

35. That vide the EAC Gazette Notice Vol. AT 1 - No. 10, the rate for the items imported by the Appellant had already been set and therefore validly legislated upon.

36. That Section 135 (1) of the EACCMA, 2004 provides for the issue of short-levying of taxes and acknowledges that an error may occur during assessment:-"Where any duty has been short levied or erroneously refunded, then the person who should have paid the amount short levied or to whom the refund has erroneously been made shall, on demand by the proper officer, pay the amount short levied or repay the amount erroneously refunded, as the case may be; and any such amount may be recovered as if it were duty to which the goods in relation to which the amount was short levied or erroneously refunded, as the case may be where liable."

37. That when the law makes the provision for recovering duty under Section 135 (1) of the EACCMAit is alive to the fact that the monies being sought for recovery may have already been appropriated by a taxpayer who had obtained the irregular advantage. The law does not offer anywhere to excuse the said irregular advantage.

38. That Article 201(b)(i) of the Constitution provides that "the burden of taxation shall be shared fairly". That to this end, it would be unfair for the Appellant to be excused from payment of the due taxes while other importers have fairly paid their due taxes.

39. That in the case of Partington vs. Attorney General (quoted with approval by Hon. John Mativo. J in Law Society of Kenya v Kenya Revenue Authority & another [2017) eKLR) where the House of Lords held that:-"As I understand the principle of all fiscal legislation it is this: if the person sought to be taxed, comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be."

40. That the Appellant has based reliance on the case of Export Trading Company v Kenya Revenue Authority (2018) eKLR as to the place of the Simba System in tax administration. That to this, the Respondent stated that every case must be decided on its own merit bearing in mind the special circumstances surrounding the case. That in the Export Trading Company case, the Court of Appeal observed as follows:-“In our view, and in the circumstances of the present case, it is unfair and unreasonable for the Appellant to have demanded the shortfall of duty four (4) years down the line."

41. The Respondent submitted that the circumstances in the present case are not similar. That the Respondent’s demand for the short-levied tax was served upon the Appellant on 22nd September 2020 while the shipments were sold on 22nd February 2020.

42. The Respondent submitted that the demand for short-levied taxes was therefore barely seven (7) months after the declaration and payment. That this cannot be said to be unreasonable and unfair in a taxing regime that allows for post clearance audit within a period of five (5) years.

43. That Section 135(3) of EACCMA allows the Commissioner to work within a five year window. The Section provides as follows:-“The proper officer shall not make any demand after five years from the date of the short levy or erroneous refund, as the case may be, unless the short levy or erroneous refund had been caused by fraud on the part of the person who should have paid the amount short levied or to whom the refund was erroneously made, as the case may be.”

44. The Respondent further submitted that if the argument by the Appellant were to find merit in law, it would not matter if the post clearance audit had taken place two (2) days after the Appellant had made payment from the rate on the Simba System. That it would not even matter that the Appellant had not sold the items to a third party. The Appellant would still claim that in the Export Trading Case, the onus to make sure that the Simba system was updated was said to be on the Respondent and as such the Appellant ought to be excused from the correct rate by virtue of legitimate expectation.

45. That the Respondent made reference to Section 235(1) of the EACCMA provides as follows:-“The proper officer may, within five years of the date of importation, exportation or transfer or manufacture of any goods, require the owner of the goods or any person who is in possession of any documents relating to the goods-a.to produce all books, records and documents in relating in any way to the goods; andb.to answer any question in relation to the goods; andc.to make declaration with respect to weight, number, measure, strength, value, cost selling price, origin, destination or place of transshipment of the goods, as the proper officer may deem fit."

46. The Respondent submitted that the foregoing statutory provision was meant to enable the Respondent to carry out its mandate of post clearance audits based on the Legislature's understanding of the unique nature of taxation, and the sheer magnitude of the obligations of the Respondent following the release of goods from the port of entry.

47. That the Tribunal had in a recent decision in the case TAT No. 11 Of 2021 Jumbo Steel Mills Limited V Commissioner of Customs & Border Control, observed as follows at paragraph thirty (30) of its judgment:“The Tribunal notes that the Appellant does not dispute that the rate used during importation ought to have been the higher rate as specified in the referenced EAC Gazette Notice. However, the Appellant anchors its arguments on the omission and/or commission of the Respondent's failure to update its Simba System to reflect the applicable higher rate of duty."

48. That the Tribunal proceeded at Paragraphs 39 to 41 of the same Judgment to make the following findings:-“The Tribunal notes that the Appellant while aggrieved at the assessment fails to demonstrate how the audit may have been punitive or the tax demand erroneous.In advancing its case further, the Respondent cited the case of Republic vs Kenya Revenue Authority Ex-Parte Bata Shoe Company Kenya ltd [2014] eKLR where the Court pronounced itself succinctly as follows:‘This brings me to the role and interpretation of tax laws. Payment of tax is an obligation imposed by the law. It is not a voluntary activity. That being the case, a taxpayer is not obligated to pay a single coin more than is due to the taxman. The taxman on the other hand is entitled to collect up to the last coin that is due from a taxpayer.The Tribunal therefore wishes to associate itself with the decision of the Court in the case cited above and finds that the Appellant has not discharged its burden of proof in this matter. Furthermore, and as the Respondent cites in its arguments, the Tribunal cannot over-emphasize the legal requirement to collect short-levied taxes arising from a post clearance customs audit process’”.

49. The Respondent further relied on the following cases:-a.R.K. Garg v Union of India (1981) 4 SCC 675b.Republic v Kenya Revenue Authority & 3 others ex parte Five Forty Aviation Limited [2015] eKLR.c.Republic v Cabinet Secretary for Internal Security ex parte Gragory Oriaro Nyauchi & 4 Others [2017] eKLR.d.Republic v Kenya Revenue Authority & Another ex parte Krone LCS Centre East Africa ltd [2012} eKLR.e.Communication Authority of Kenya & 5 others v Royal Media Services & 5 others [2014) eKLR.f.ARYUV Agencies Ltd v Kenya Revenue Authority [2019] eKLR.g.TAT No. 11 of 2021 Jumbo Steel Mills vs Commissioner of Customs & Border Control.

Respondent’s Prayers 50. The Respondent prays that the Tribunal:-a.Dismisses the Appeal and upholds the Respondent's decision as an accurate reflection of the Appellant's tax obligations.b.Costs of the Appeal to be borne by the Appellant.

Issue For Determination 51. The Tribunal, having carefully studied the pleadings and documentation together with the submissions of both parties, is of the respectful view that the sole issue that calls for its determination is as follows:-Whether the Respondent erred in fact and in law in demanding short-levied taxes vide its tax decisions dated 22nd September 2020 and 5th November 2020.

Analysis and Findings 52. This Appeal arose as a result of the Respondent’s decision dated 5th November 2020 demanding short levied tax following a post clearance audit.

53. The Appellant submitted that the demand arose from the Respondent’s omission or failure to update the Simba System to reflect the prevailing tax regime five months after the passing of the East African Community Gazette Notice of 30th June 2019.

54. The Appellant submitted that in January 2020, it imported two consignments and its clearing agents advised it to pay the taxes computed in the Respondent’s Simba System.

55. The Appellant submitted that it had no role in declaring or setting the rate at which tax payable was calculated and that the Respondent’s officers verified the entries that were made and even inspected the consignments for them to be released from the Port.

56. The Appellant relied on the case of Export Trading Company Limited v Kenya Revenue Authority (2018) eKLR where in paragraph 32 the Court held that;-“I further find that the Respondent’s officers cannot be said to have been acting as a conveyor belt performing a perfunctory exercise while totally oblivious of their solemn duty to the public to furnish them with accurate information regarding the applicable taxation rate.”

57. The Appellant also cited paragraph 31 of the same case where the Court stated:-“It is also worthy to note that the identification of the applicable rate of duty and assessment of the duty payable was done by the Simba system which is owned and controlled by the respondent and that the petitioner had no role in declaring or setting the rate to be applied. I find that it is therefore unreasonable for the Respondent to turn around and pass the blame to the Petitioner by contending that it was, at all material times, aware of the right rate based on Legal Notice No EAC/10/2017 more so considering that the Respondent’s own officers verified the entries and even inspected the consignments.”

58. On their part, the Respondent faulted the Appellant’s reliance on the case of Export Trading Company v Kenya Revenue Authority (2018) eKLR as to the place of the Simba System in tax administration. It submitted that, every case must be decided on its own merit bearing in mind the special circumstances surrounding the case. In the Export Trading Company case, the matter went to the Court of Appeal which observed as follows:-“In our view, and in the circumstances of the present case, it is unfair and unreasonable for the Appellant to have demanded the shortfall of duty four (4) years down the line."

59. The Respondent submitted that the circumstances in the present case are not similar to the Export Trading Company case because the demand for the short- levied tax was served upon the Appellant on 22nd September 2020 while the shipments were sold on 22nd February 2020. The Respondent submitted that the demand for short-levied taxes was therefore barely seven (7) months after the declaration and payment. This cannot be said to be unreasonable and unfair in a taxing regime that allows for post clearance audit within a period of five (5) years.

60. The Respondent further submitted that Section 135(3) of EACCMA, 2004 allows the Commissioner to work within a five year window, as it states that:-“The proper officer shall not make any demand after five years from the date of the short levy or erroneous refund, as the case may be, unless the short levy or erroneous refund had been caused by fraud on the part of the person who should have paid the amount short levied or to whom the refund was erroneously made, as the case may be.”

61. The Tribunal reviewed the case of Export Trading Company v Kenya Revenue Authority [2018] eKLR and found the following two fundamental differences:-a.The matter was determined on basis of Article 47 of the Constitution of Kenya, 2010 and the Tribunal does not have jurisdiction to interpret the Constitution and/or to enforce the bill of rights under the Constitution.b.Secondly, the Tribunal notes that in that matter there was the issue of legitimate expectation arising from the taxpayer’s prior request for an applicable tax rate from the Respondent and which is not the case in the present Appeal.

62. The Tribunal is guided by the case of the Republic v Commissioner General Kenya Revenue Authority ex parte Mount Kenya Bottlers Ltd and Another [2016} eKLR where the Court held that:-“(57)The second issue is whether the Respondent was entitled to carry out Post Clearance Audits to verify the accuracy of the entries after the goods had been released from Customs control. In this respect sections 235 and 236 of the EACCMA, 2014 are couched in the following terms:‘235 (1) The “proper officer” may, within five years of the date of importation, exportation or transfer or manufacture of any goods, demand for documents relating to the goods, to answer any question in relation to the goods; and to make declaration for audit purposes.236 The Commissioner shall have the powers to- (a) verify the accuracy of the entry of goods or documents (b) question any person; (c) inspect the premises of the owner of the goods or; and (e) examine the goods.'

(58)In my view, the Customs Officer is supposed to verify the accuracy of the entries made by the clearing agent within the shortest time possible in order to facilitate the release of the goods and mitigate the accrual of demurrage and customs warehouse rent hence the reason for conferment of the powers under section 235 and 236 of the EACCMA to conduct Post Clearance Audits to verify the accuracy of the entries after the goods have been released from Customs control. Therefore the mere fact that goods have been released to the importer does not preclude the Respondent from carrying out post clearance audit to verify the accuracy of the declarations made at the time of the clearance of the goods and where the said audit disclose that as there was an undervaluation of import values by the Applicant Company’s agents for customs purposes hence resulting in gross underpayment of duties on the Applicant Company’s imports, the importer will be liable to make good the difference. The general rule was propounded in Mombasa Civil Appeal No. 157 of 2007 between Commissioner Customs and Others vs. Amit Ashok Doshi & Two Others where the Court cited Tarmal Industries Ltd vs. Commissioner of Customs and Excise [1968] EA 471 and held that:The High Court of Tanzania (Georges, C.J) held that there was no estoppel against statute and that although the Commissioner initially erred in deciding the substance was not dutiable and possibly was negligent not to have analyzed the sample, the Commissioner was bound under the law to correct the matter and levy duty on the basis that the substance had always been dutiable. His lordship after a consideration of the authorities”

63. The Tribunal has previously pronounced itself on the matter of post clearance audits and short levied taxes in Tax Appeal No 11 of 2021, Jumbo Steel Mills Limited v Commissioner of Customs and Border Control, when the Tribunal held as follows:-“In interrogating the above line of defence by the Appellant, the Tribunal fails to see the nexus between the Appellant's argument and the short-levying of taxes based on the fact that the law remains relevant at the time of the transaction. Further, the law also provides for the Respondent to demand the taxes due for a period of up to 5 years from date of importation. It is the Tribunal's position that notwithstanding the Respondent's failure to update the system, admitted by the Respondent, the Appellant is neither precluded from paying the correct amount of tax nor the Respondent estopped by law from demanding the same.”

64. The Tribunal equally associates itself with the holding in Tax Appeal No 11 of 2021, Jumbo Steel Mills Limited v Commissioner of Customs and Border Control when the Tribunal found as follows:“43. The Tribunal, being cognizant of the clear admission by the Respondent of the inadvertent administrative failure to capture the correct applicable rate, is of the respectful view that the Appellant ought not to be punished by way of accrued interest and penalties, if any”.

65. The Tribunal does not wish to depart from the finding and decision it held on short levied taxes in Tax Appeal No 11 of 2021 and therefore finds that the Respondent did not err in fact and in law in demanding short-levied taxes vide the tax decision of 5th November 2020.

Final Decision 66. The upshot of the foregoing analysis is that the Appeal is without merit and the Tribunal accordingly makes the following Orders: -a.The Appeal be and is hereby dismissed.b.The Respondent’s tax decision dated 5th November 2020 be and is hereby upheld.c.The Appellant is at liberty to apply for waiver of accrued interest and penalties.d.Each party to bear its own costs.

67. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF FEBRUARY, 2023. ERIC N. WAFULACHAIRMAN........****CYNTHIA B. MAYAKAMEMBER........GRACE MUKUHAMEMBER........JEPHTHAH NJAGIMEMBER........ABRAHAM K. KIPROTICHMEMBER........