[2024] KETAT 1088 (KLR)

Vigati Limited v Commissioner of Customs and Border Control (Tax Appeal 117 of 2024) [2024] KETAT 1088 (KLR) (12 July 2024) (Judgment)

Neutral citation: [2024] KETAT 1088 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 117 of 2024

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

July 12, 2024

Between

Vigati Limited

Appellant

and

Commissioner of Customs and Border Control

Respondent

Judgment

1. The Appellant is a limited liability company duly incorporated and registered in Kenya under the Companies Act. Its principal activity is import of cotton fabric and clothing.

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 KRA 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. The Appellant was subjected to review of its imported consignments under Customs Entry 23MBAIM406136353.

4. On the 1st of December 2023, the Respondent issued a tax demand for short levied Customs duty of Kshs. 7,192,219. 00 including penalties and interest.

5. The Appellant lodged an objection on 7th December 2023,

6. The Respondent issued its objection decision on 20th December 2023 confirming the assessed taxes.

7. The Appellant being dissatisfied with the Respondent’s objection decision lodged a Notice of Appeal dated 30th January, 2024 at the Tribunal on the 31st January 2024.

8. 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 that: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 the construction and application of law relating to valuation method.iii.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 Custom 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 on 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 9. The Appellant’s case is premised on the following documents filed before the Tribunal: -i.Its Statement of Facts dated 30th January 2024 and filed on 31st January 2024. ii.Its Written Submissions dated 9th May 2024 and filed on 11th May 2024.

10. The Appellant stated that the gravamen of this dispute relates to the Respondents allegation that it had underpaid Customs duty. That contrary to the Respondent’s allegations, it had duly paid all the taxes due for the period under review and that the decision to demand the said amounts was arbitrary and irrational.

11. The Appellant averred that it had been importing readymade garments from 2016 to date and through engagements with other traders they had negotiated a benchmark applicable for the purposes of facilitating trade.

12. The Appellant averred that one such a Meeting was held on 4th April 2023, during which the Respondent addressed the confusion among traders on import taxes and Excise duty to be paid upon importation of mixed goods and consolidated cargo, and the cargo declaration and verification process. Specifically, the use of benchmark values and amounts' payable.

13. The Appellant submitted that the Respondent, vide a letter dated 24th May 2023, reminded the Appellant together with the other traders who had attended the above mentioned Meeting that 1st June 2023 would be the implementation date of the agreed rates.

14. The Appellant averred that if there was confusion with regards to which rate the Appellant was expected to adhere to and on which the Respondent based its valuation and assessment, the said tax rates were as agreed upon during the Meeting held on 4th April 2023 and as per the letter dated 24th May 2023.

15. The Appellant submitted that in the event there is any ambiguity in law, it must be resolved in favor of the taxpayer and not the public revenue authorities which are responsible for their implementation. The Appellant relied on the case of Kenya Revenue Authority v Waweru & 3 others; Institute of Certified Public Accountants & 2 others (Interested Parties) (Civil Appeal E591 of 2021) [2022] KECA 1306 (KLR) (2 December 2022) (Judgment) where the Court of Appeal reiterated the general rule of when a taxing provision is ambiguous, it must be construed in favor of the assesse.

16. The Appellant averred that the Respondent has assessed, valued and cleared previous and subsequent cargo under the agreed upon rate of Kshs 3,900,000. 00. Therefore, creating a legitimate expectation on the part of the Appellant upon inspection and verification that the subject matter consignment will be assessed and valued at the same rate effected from 1st June 2023.

17. The Appellant averred that other importers have imported the consignment for new clothes into Kenya under the same import rates and Excise duty and have not been prejudiced by the Respondent.

18. The Appellant further submitted that the classification of items should be consistently and impartially applied without showing any discrimination, favoritism towards any party involved.

19. The Appellant relied on the case of Kenya Revenue Authority vs Export Trading Compat1y Limited (2022) whereby the Supreme Court was guided by De Smith Woolf & Jowell, "Judicial Review of Administrative Action" 6th Edn Sweet & Maxwell page 609 which states that:-“A legitimate expectation arises where a person responsible for taking a decision has induced in someone a reasonable expectation that he will receive or retain a benefit of advantage."

20. The Appellant further relied on the case of Communications Commission of Kenya & 5 Others v Royal Media Services & 5 Others where the Supreme Court stated that:-“Legitimate expectation would arise when a body, by representation or by past practice, has aroused an expectation that is within its power to fulfil. Therefore, for an expectation to be legitimate, it must be founded upon a promise or practice by public authority that is expected to fulfil the expectation."

21. The Appellant stated 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.

Appellant’s Prayers 22. The Appellant prayed the Tribunal that: -i.A declaration that the Respondent’s Objection decision dated 20th 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.

Respondent’s Case 23. The Respondent’s case is premised on the hereunder filed documents:-a.The Respondent’s Statement of Facts dated and filed on 1st March 2024. b.The Respondent’s Written Submissions filed on 11th April 2024.

24. The Respondent submitted that Section 133 of EACCMA empowers it to determine duties where a short levy is identified. The Section provides;-“133. Effect of obligation to pay duty.(1)Where any obligation has been incurred, whether by bond or otherwise, for the payment of any duty, then such obligation shall be deemed to be an obligation to pay all duties which are or may become payable or recoverable under the provisions of this Act”

25. The Respondent submitted that it verified the Appellant's consignment and shared the findings with its valuation and tariff team upon which the team recommended adjustment to the FOB for the consignment in question.

26. The Respondent averred that it exercised its rights under Section 122 (4) of EACCMA referred to its test values and database and found that the values were low thereby resulting in the uplift of values. The Section provides:-“122 (4) Nothing in the Fourth Schedule shall be construed as restricting or calling into question the rights of the proper officer to satisfy himself or herself as to the truth or accuracy of any statement, document or declaration presented/or customs valuation purposes.”

27. 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."

28. The Respondent submitted that the Appellant did not provide any tangible proof to show that the customs duty applied was incorrect or any evidence that would have altered the tax assessment based on the HS Code used.

29. The Respondent relied on court’s holding in Mulherin Vs Commissioner of Taxation (2013) FCAFC 115 where it was 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."

30. The Respondent submitted that it followed due procedure and was guided by relevant law under Section 122 of the EACCMA and applied Paragraphs 3 and 4 to the Fourth Schedule of EACMMA to arrive at the extra taxes. The Sections provide as follows;-“122. (1)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.(2)Upon written request, the importer shall be entitled to an explanation in writing from the proper officer as to how the Customs value of the importer's goods was determined.”

31. The Respondent averred that it is upon the Appellant to proof that the Respondent's action were wrong by virtue of Section 56(1) of the Tax Procedures Act and the Appellant was granted an opportunity to defend itself but failed to do so.

32. The Respondent submitted that the benchmark rules are not methods of valuation but internal guidelines, and 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 only six valuation methods.

33. The Respondent submitted that the valuation methods were applied on a sequential basis as per Section 122 and the Fourth Schedule of EACCMA, 2004. The Respondent averred that it is not restricted to accept documents provided by the Appellant by virtue of Section 122 (4) of the EACCMA which provides:-“Nothing in the Fourth Schedule shall be construed as restricting or calling into questions the rights of a proper officer to satisfy himself/herself as to the truth or accuracy of any statement, document, or declaration presented before customs for valuation purposes.”

34. The Respondent averred that the audit was carried out pursuant to Sections 235 and 236 of EACCMA. The Section provides:-“The Commissioner shall have the powers to;-a.verify the accuracy of the entry of goods or documents through examination of books, records, computer stored information, business systems and all relevant customs documents, commercial documents and other data related to the goods;b.question any person involved directly or indirectly in the business, or any person in the possession of documents and data relevant to the goods or entry;c.inspect the premises of the owner of the goods or any other place of the person directly or indirectly involved in the operations;d.examine the goods where possible for the goods to be produced.”

35. The Respondent submitted that the law places the onus of proof in tax objections on the taxpayer who, in this case, failed to avail evidence that would support a contrary assessment or that would have guided the Respondent in arriving at a different value as per the provisions of Section 235 of EACCMA, 2004. The Section provides:-“(1)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 relating in any way to the goods; andb.to answer any question in relation to the goods;”

36. The Respondent submitted that the assessment of Kshs. 7,192,220. 00 arose from the Appellant's lower declaration of the value of imports contrary to Section 203 of EACCMA. It provides:-“203. A person who, in any matter relating to the Customs makes any entry which is false or incorrect in any particular,b.makes or causes to be made any declaration, certificate, application, or other document, which is false or incorrect in any particular; orc.when required in accordance with this Act to answer any question put to him or her by an officer, refuses to answer such question or makes any false or incorrect statement in reply thereto;commits an offence and shall be liable on conviction to imprisonment for a term not exceeding three years or to a fine not exceeding ten thousand dollars.”

37. The Respondent relied on the case of Kudheiha -V- Kenya Revenue Authority and Others (2014) EKLR, wherein the court stated:“….article 209 of the constitution empowers the national government to impose taxes and charges. such taxes include income tax, value-added tax, customs duties and other duties on import and export goods and excise tax. the manner in which the tax is defined, administered and collected is a matter for parliament to define and it is not for the court to interfere merely because the legislature would have adopted a better or different definition of the tax or provided an alternative method of administration or collection. under article 209 of the constitution, the legislature retains wide authority to define the scope of the tax."

38. The Respondent submitted that Section 135 of EACCMA empowers the Respondent to bring to charge taxes where a short levy is established. The Section provides;“1. 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, were liable.2. Where a demand is made for any amount pursuant to sub-section (1), the amount shall be deemed to be due from the person liable to pay it on the date on which the demand note is served upon him or her, and if payment is not made within thirty days of the date of such service, or such further period as the Commissioner may allow, a further duty of a sum equal to five percent of the amount demanded shall be due and payable by that person by way of a penalty and a subsequent penalty of two percent for each month in which he or she defaults.3. 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 e1·roneously made, as the case may be.”

39. The Respondent further relied on the case of Kenya Revenue Authority V Man Diesel & Turbo Se, Kenya [2021] eKLR at Paragraphs 31 and 32 where the court held that:“...The import of the above provisions is that the party with the obligation of persuasion (what Wig more termed the risk of non-persuasion) is said to bear the burden of proof The flip side of the foregoing is the effect of non-persuasion on a party with the burden of proof which is that the particular issue at stake in the litigation will be decided against him/her. Generally, the taxpayer has the burden of proof in any tax controversy. The tax payer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect.The shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the Commissioner's assessments or determinations of deficiency. The commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in it sell the presumption remains until the taxpayer produces competent and relevant evidence to support his position. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer”

40. The Respondent averred that there were discrepancies between the value as declared by the Appellant and the values as charged. That the Respondent was therefore, unconvinced by the documents produced by the Appellant, forcing it to adjust the FOB values.

41. The Respondent submitted that Section 249 of EACCMA provides that:“Where an amount of duty or other sum of money which is due under this Act remains unpaid after the date upon which it is payable, an interest of two per cent per month or part of the month, of the unpaid amount shall be charged.”

42. The Respondent averred that the Appellant was uncooperative in the provision of records and failed to respond to the request for documents; hence, its actions were necessary in order to harmonize the value and rectify the undervaluation of the impugned consignment. That it was guided by the law, followed the method permissible in law and found that the imports were undervalued; hence, the same was brought to charge.

43. The Respondent relied on the case of Digital Box Limited vs Commissioner of Investigations and Enforcement, Appeal No.115 of 2017 where it was held that:“The Tax Procedures Act in granting the Respondent powers to assess taxpayers does not specify the methods that may be used; instead, the law provides that the best judgment must be exercised.”

44. The Respondent relied on the case of Cape Brandy Syndicate vs. Inland Revenue Commissioner [1921] 1 KB 64 where it was held that:-“In a taxing Act, one has to look merely at what is clearly stated. There is no room for any intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used"

45. The Respondent submitted that upon scrutiny of the Appellant's Entry Number 23MBAIM406136353, it established that the declaration did not reflect the correct transaction value of the imports.

46. The Respondent denied that the Appellant has paid all its taxes and reiterated that because of the under-declaration the Appellant is in debt of Kshs. 7,192,219. 00.

Respondent’s Prayers 47. The Respondent prayed to the Tribunal:-a.That the Respondent's objection decision be upheld.b.The outstanding tax arrears of Kshs. 7, 192,219 are due and payable by the Appellant.c.The confirmed demand dated 1st December, 2023 was proper in law.d.That the Appeal herein be dismissed with cost to the Respondent.

Issue for Determination 48. The Tribunal, having considered the pleadings and submissions made by the parties, is of the considered view that the issue that crystalized for its determination was: Whether the Respondent was justified in confirming the tax assessed upon the Appellant.

Analysis And Determination 49. The Tribunal, having identified the issue that fell for its determination, proceeded to analyse it as hereunder.

50. The dispute at hand emanated from the Respondent’s review of the Appellant’s consignments imported under Customs Entry 23MBAIM406136353, a review which established that the Appellant had imported readymade goods being: girls’ dresses, girls’ jeans, girls’ blouses and boys’ shirts.

51. The Respondent received a report prepared by its valuation and tariff team on whose basis the Respondent adjusted the Appellant’s FOB price resulting in a tax demand for short levied Customs duty of Kshs. 7,192,219. 00 including penalties.

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

53. 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 that was creating confusion among traders on import taxes and Excise duty to be paid upon importation of mixed goods and consolidated cargo, and the cargo declaration and verification process.

54. 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.

55. The Tribunal perused the documents presented and noted that the Appellant provided the Respondent with 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.

56. Whereas the Respondent questioned the credibility of the Minutes of the alleged Meeting of 4th April 2023 for lack of signatures, it did not deny that the Meeting happened. The Tribunal noted that the Appellant attached a letter by the Respondent dated 24th May 2023 making reference to the said Meeting of 4th April 2023 thereby lending credence to the Appellant’s averments of the existence and decisions reached at that meeting.

57. The Tribunal considered that in such circumstances, it would have been prudent for the Respondent to avail its version of the authentic Minutes of that Meeting so as to unlock the impasse, it failed to do so. It also failed to avail the same for the Tribunal’s appreciation.

58. The Respondent also distanced itself from the benchmark values for readymade imports provided by the Appellant, allegedly agreed upon at the said Meeting of 4th April 2023 as the same were equally not signed.

59. The Respondent 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.

60. This then raises the question of why the Respondent took part in drafting the benchmark rules when the Act was clear on the methods of valuation of a Customs value of imported goods. The Tribunal noted that the presence of the EACCMA and purported introduction of Benchmark rules agreed upon by the Respondent and the industry players, the Appellant included created inconsistency in the application of the law.

61. It is the Respondent’s case that the benchmark rules are not methods of valuation but internal guidelines, and 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 were only six valuation methods.

62. It was the Respondent's assertion that it applied the valuation methods sequentially as per Section 122 and the Fourth Schedule of EACCMA, 2004.

63. 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.”

64. 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”

65. Upon careful perusal of the Fourth Schedule of EACCMA, 2004, the Tribunal noted that Paragraphs 2,3,4,5,6,7 and 8 provide for the methods of valuation of a Customs value of imported goods.

66. Paragraph 2 (1) 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 soldfor export to the Partner State adjusted in accordance with theprovisions of Paragraph 9 ... "

67. The Respondent stated that it relied on the provisions of Section 122 (2) of the EACCMA and Section 56 (1) of the Tax Procedures Act when reassessing and confirming the Appellant’s tax liability on the grounds that insufficient documentation was provided.

68. The Tribunal noted that the Respondent did not provide reasons for departure from the declared FOB values despite the same having been accepted by the Respondent previously and subsequently for both the Appellant and other industry players’ imports as evidenced by the Appellant.

69. The court in Standard Group Resource Ltd vs Attorney General & 2 others [2016] eKLR 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.”

70. The Respondent having elicited the Appellant’s legitimate expectation by accepting the declared values for similar consignments ought to have provided a basis for departure from the previously accepted F.O.B.

71. Further, the Tribunal was made aware of a valuation report which the Respondent had prepared, but deemed private and confidential. The Respondent neither produced the said reports to the Appellant nor before the Tribunal. It is not open for the Respondent to adjust the value of imported goods whimsically or upon some secret report unavailable to the taxpayer.

72. The Appellant having imported similar cargo consignments previously paying a duty of Kshs. 3,900,000. 00 per consignment, the Respondent ought to have provided the basis for the valuation uplift as is provided under the Fourth Schedule of EACCMA.

73. The Tribunal therefore found that the Respondent was not justified in confirming the tax assessed upon the Appellant.

Final Decision 74. The upshot of the foregoing 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 20th December 2023 be and is hereby set aside.c.Each party to bear its own costs.

75. It is so ordered.

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