[2023] KETAT 341 (KLR)

Wire Products Limited v Commissioner of Customs & Border Control (Appeal 573 of 2022) [2023] KETAT 341 (KLR) (Civ) (9 June 2023) (Judgment)

Neutral citation: [2023] KETAT 341 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 573 of 2022

Robert M. Mutuma, Chair, E.N Njeru, D.K Ngala, Edwin K. Cheluget & Rodney Odhiambo Oluoch, Members

June 9, 2023

Between

Wire Products Limited

Appellant

and

Commissioner of Customs & Border Control

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and located in Nairobi. Its principal business is the manufacture of steel wire products.

2. The Respondent is a principal officer appointed under section 13 of theKenya Revenue Authority Act Cap 469 Laws of Kenya. Under Section 5 (1) of the Act the Respondent is an agency of the government for collection and receipt of all the tax revenue. Further under Section 5 (2) of the Act with respect to the performance of its functions under subsection (1), the Respondent is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenue in accordance with those laws.

3. On 8th November, 2018 the Appellant imported materials under HS Code 7213. 91. 00 valued at Kshs 44,980,031. 98. The Respondent obtained a sample for testing and vide a letter dated 11th January, 2022 issued a demand for payment of customs duty for Kshs 34,655,728. 00

4. The Appellant objected to this assessment vide its letter dated 31st January 2022. This was followed up with a meeting of the parties on 16th February, 2022 where it was agreed that the Appellant does a formal appeal for tariff review through the Tariff unit and the Post Clearance Audit team to respond to the Appellant’s letter dated 31st January, 2022 which the Respondent did vide its letter dated 17th February, 2022.

5. The Appellant objected to the said assessment vide its letter dated 18th February, 2022 and received on 24th February, 2022. The Appellant then followed up with another appeal vide its letter dated 21st March, 2022. The Respondent thereafter issued its review decision vide its letter dated 6th April, 2022.

6. Being aggrieved by the Respondent’s decision, the Appellant filed its Notice of Appeal dated 20th May, 2022. It proceeded to file its Memorandum of Appeal and Statement of Facts dated 2nd June, 2022 on 3rd June, 2022.

The Appeal 7. The Appeal is premised on the following grounds as set out in the Memorandum of Appeal:-i.That the Respondent erred in fact and law, by reclassifying the Appellant’s products from HS Code 7213. 91. 00 to HS Code 7227. 90. 00. ii.That the Respondent erred in law and fact by failing to explain to the Appellant in writing, pursuant to Section 122(2) of East African Community Customs Management Act, 2004 of how the customs value of the Appellant’s goods was determined.iii.That the Respondent erred in law by failing to provide reasons for its decision despite request from the Appellant, pursuant to Section 6 of the Fair Administrative Actions Act 2015. iv.That the Respondent erred in law and fact by rendering a decision stating that the wire rod falls under the category ‘Other Alloy Steel’ without conducting a full analysis on the sample it collected.v.That the Respondent erred in law by failing to furnish the Appellant with the laboratory sample test results of the wire rod and erred in assessing the Appellant by failing to provide the basis of the assessment from the approved laboratory.vi.That the Respondent erred in fact and law by failing to provide reasons for the delay in releasing the laboratory results of the test of the samples.vii.That the Respondent erred in law and fact by failing to consider the evidence adduced to them by the Appellant in its letters illustrating that the wire rod should not be classified as an alloy steel.

8. The Appellant prays that the Tribunal:i.Allows the Appeal.ii.Annuls the Respondent’s confirmed assessment based on the grounds above, as well as the information contained in the Statement of Facts attached; andiii.Awards costs of this Appeal to the Appellant.

The Respondent’s Case 9. Through its Statement of Facts dated 26th November, 2022 and filed on 28th November, 2022, the Respondent addressed the Appellant’s Appeal and averred:i.That it tested the Appellant’s sample and found it to be metallic rod of other alloy steel containing iron (98. 65%), manganese (0. 42%) boron (0. 0011%) and trace amounts of chromium, copper and aluminium. Further that the lab results revealed that bars and rods, hot rolled, in irregularly coils are products which have a solid cross-section in the shape of circles, segments of circle, ovals, rectangles (including squares), of which two opposite sides are convex arcs, the other sides being straight of equal length and parallel.ii.That Heading 72. 27 covers the classification of bars and rods, hot-rolled, in irregularly wound coils of other alloy steel. As a result, the findings declared the sample tested to be hot rolled metallic rod in irregularly wound coils, of other alloy steel classified in EAC/CCET HS Code 7227. 90. 00. These results were declared in the Tariff ruling which was availed to the Appellant.iii.That Sections 235 and 236 of EACCMA gives the Respondent powers to call for documents and conduct Post Clearance Audit (PCA) on the import and export operations of a taxpayer within a period of five years from the date of importation or exportation.iv.That where the Respondent’s post clearance audit reveals that taxes are short levied, or erroneously refunded, Sections 135 and 249 (1) of EACCMA empowers the Respondent to recover any such amount short levied or erroneously refunded with interest at a rate of two percent per month for the period the taxes remain unpaid.v.That the Appellant did not produce any material evidence to support the argument that the product under the audit were classifiable under EAC/CET HS Code 7227. 90. 00. vi.That the meeting of 16th February, 2022 between the Respondent and the Appellant clarified to the Appellant the basis of the classification and the demand. Further, that the Minutes of the deliberations held, together with the Respondent’s review decision were emailed to the taxpayer on 18th February, 2022.

10. The Respondent prays that the Tribunal finds that: -i.The Appeal lacks merit and ought to be dismissed.ii.The Ruling by the Respondent on the tariff classification for steel wire rods is upheld.iii.The Respondent is entitled to the costs of the Appeal

Submissions of the Parties 11. The Appellant has raised three issues for determination through its Written Submissions filed on 20th December, 2022.

a. Whether the Respondent erred in fact and law by reclassifying the Appellant’s products from HS Code 7213. 91. 00 to 7227. 90. 00. 12. The Appellant submitted that the Respondent erred in law and fact by reclassifying the prime newly produced hot rolled steel wire rods from HS Code 7213. 91. 00 to HS Code 7227. 90. 00. Further that HS Code 7213. 91. 00 which sets the customs duty payable at 0% states: -“Bars and rods, hot-rolled, in irregularly wound coils, of iron or non-alloy steel…. of a height not more than 100 mm”.

13. The Appellant submitted that the Respondent alleged that upon testing, it was discovered that the samples contained 0. 0011% of boron which would mean that the imported goods were not steel but other alloy steel as defined under Note 1 therefore classifiable under HS Code 7227. 90. 00. However, the Appellant submitted that the Respondent did not and has not shared the laboratory test results, nor the accreditation of the laboratory where the tests were conducted to obtain these findings despite a request for the same being made. The Respondent merely stated that the tariff ruling echoes the laboratory results.

14. The Appellant contended that in the absence of the laboratory report, the alleged contents of the report cannot be used to make the assessment, and that any contents found under the said report are null and void.

15. It was the Appellant’s submission that a laboratory report from SGS of the sample of imported goods being tested showed that the sample tested contains 0. 0003% of boron, and the same was controverted with tests done at other labs. The correct customs code would therefore be 7213. 90. 00 which the import was declared.

16. The Appellant asserted that the reason why it had the tests conducted at laboratories situated outside of Kenya was due to the fact that there are no laboratories in Kenya that are accredited and capable of performing these tests. Hence it is sceptical of any tests that the Respondent alleged to have conducted, since the required tests cannot be conducted in Kenya.

17. The Appellant submitted that the Respondent had failed to avail copies of the laboratory reports of its alleged tests and it therefore puts the Respondent to strict proof as to its alleged finding.

18. It was the Appellant’s averment that it does not stand to benefit in any form from the importation of alloy steel as alleged by the Respondent as alloy steel with boron impurities do not serve any beneficial aspects in the manufacture of nails, barbed wire or other products as the boron content mentioned are impurities that occur in the manufacturing process.

19. The Appellant submitted that the Respondent has yet to provide copies of the laboratory results, results it relied on by stating that the laboratory tests were echoed in the tariff ruling. The Appellant cited Section 4(3)(g) of the Fair Administrative Actions Act which states that: -“Where an administrative action is likely to adversely affect the rights or fundamental freedoms of any person, the administrator shall give the person affected by the decision……g)Information materials and evidence to be relied upon in making the decision or taking the administrative action”

20. The Appellant submitted that the Respondent failed to produce the laboratory test sample results that it relied upon on making its decision contrary to the provisions of the Act. Further, that the Appellant has a right to review and confirm that the information used by the Respondent in arriving at its decision actually pertained to the Appellant.

21. It was the Appellant’s averment that without the laboratory results of the tests, it is impossible to verify whether or not the tests were indeed conducted as alleged, and if so, then where tests were conducted, what was tested, and what the results of the said tests were. It was the Appellant’s submission therefore that the results that the Respondent used to arrive at its decision cannot be relied upon. Consequently, without the alleged reports, the Respondent’s reclassification of the imported goods to HS Code 7227. 90. 00 cannot stand, which means that the goods were indeed declared under the correct code (HS Code 7213. 91. 00) and therefore there is no additional tax liability.

b. Whether the Respondent erred in law by causing unreasonable delay in raising their assessment. 22. The Appellant submitted that the Respondent obtained the samples of the Appellant’s goods in November 2018, while its demand for duty was made vide its letter dated 11th January, 2022, with an explanation on its findings given on 14th February 2022, which is over three (3) years after obtaining the samples.

23. The Appellant asserted that the Respondent did not only fail to act expeditiously, it also failed to offer a reason for the prolonged delay. Further that, in issuing the said assessment, there was no way that the Appellant could verify the alleged laboratory results and if indeed the samples allegedly tested were the same as those provided by the Appellant, given that the Respondent failed to provide the supposed results. The Appellant submitted that this is contrary to Section 4(1) of the Fair Administrative Action Actwhich provides that:-“Every person has the right to administrative action which is expeditious, efficient, lawful, reasonable and procedurally fair.”

c. Whether there was any legitimate expectation created by the Respondent’s delay 24. It was the Appellant submission that the fact that there was such a delay created legitimate expectation that the matter was settled. Further, that the Respondent neither communicated to the Appellant over a 3year period, nor did it provide any reasons for this delay.

25. The Appellant, in regard to the delay in the Respondent’s response cited the case of Kenya Revenue Authority vs Export Trading Company Limited (2022) where the Supreme Court in agreeing with the findings of the appellate court stated that:-“It is thus the appellate Court’s finding that the absence of an explanation as to why the post clearance audit and resulting demand for short levied duty was made after a long time can only be perceived as irrational”

26. In regard to the legitimate expectation the Respondent created, the Appellant has cited the statement in De Smith, Woolf, & Jowell, Judicial Review of Administrative Action 6th Edition, Sweet & Maxwell, page 609. “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 or advantage. It is a basic principle of fairness that legitimate expectations ought not to be thwarted. The protection of legitimate expectation is at the root of the constitutional principle of the rule of law, which requires predictability and certainty in government’s dealings with the public”.

27. In its submissions dated 10th January, 2023 and filed on 11th January, 2023, the Respondent has raised three issues for determination.

a. Whether the Respondent erred in classifying the hot rolled steel wire rods under tariff 7227. 90. 00 as opposed to tariff code 7213. 91. 00 28. On this issue, the Respondent in relying on the case ofGibb Africa Ltd vs Kenya Revenue Authority (2017) eKLR, submitted that it is settled law that public bodies, no matter how well intentional, may only do what the law empowers them to do. In propagating the principle of legality it made reference to Article 210 (1) of the Constitution which states as follows:-“No tax or licensing fee may be imposed, waived or varied except as provided by legislation”

29. It submitted that the Harmonized Tariff Schedule is a systematic classification or enumeration of all goods found in international trade along with international rules and interpretation and since Kenya is a signatory to the World Custom Organization (WCO), parties are required to rely on the Harmonized Community Description and Coding System. Further that the classification of goods under HS Code is determined by characteristics composition and components of the product and not what the product is called or what it is alleged to do.

30. The Respondent submitted that the General Interpretative Rule (GIR) guide on the interpretation of tariff classification and that GIR 6 directs that classification shall be determined according to the terms of subheading notes. Further, the Explanatory Notes to the HS constitute the official interpretation level of Harmonized System at the International level and are an indispensable complement to the system.

31. The Respondent relied on Section 56(1)of TPA and Section 30 of TAT and submitted that the classification was correctly issued and conformed to the Custom tax law and that the onus of proof in tax objections is on the taxpayer who in this case failed to avail evidence that would support a contrary classification or that would have guided the Respondent in arriving at a different Objection Decision.

b. Whether the Respondent caused an unreasonable delay in raising its assessment. 32. The Respondent asserted that an audit was carried out pursuant to Sections 235 and 236 of EACCMA and issued its audit findings and a demand letter for taxes. Further, that it is mandated to ascertain the accuracy of the entries declared and therefore requested further information from the Appellant as provided for under Section 229(4) (2) of EACCMA so as to verify. However, the Appellant did not produce any material evidence to support the argument that its products had been classified under HS Code 7227. 90. 00.

33. On the issue of the laboratory analysis report, the Respondent submitted that the same was communicated to the Appellant which placed the samples in HS 7227. 90. 00 as per the law. It consequently confirmed the taxes as per the laboratory results despite the taxpayer failing to provide further information as provided for under Section 229 of EACCMA.

c. Whether the Respondent erred in failing to provide the results of the laboratory tests 34. The Respondent submitted that the principle of legitimate expectation arises from the clean hands doctrine that states “He who comes to equity must come with clean hands”. Further that legitimate expectation cannot arise where a person’s actions are in breach of clearly written provisions of the law.

35. The Respondent relied on the case of R (Bibi) vs Newham London Borough Council (2001) EWCA Cave 607 (2002) WLR 237 at (19) as applied in Republic vs Kenya Revenue Authority Ex Parte Cooper K-Brands Limited (2016) eKLR where the Court stated that three basic questions should be answered before a public body is held to have contravened the principle of legitimate expectation.The Court stated that:-“In all legitimate expectation cases whether substantive or procedural, three practical questions rise;a.The first question is to what has the public authority, whether by practice or by promise, committed itself to;b.The second is whether the Authority has acted or proposes to act unlawfully in relation to its commitment;c.The third is what the court should do”

36. The Respondent concluded by submitting that the Appellant cannot claim that the Respondent failed to provide the results of the laboratory results yet it failed to provide documents as requested by the Respondent. Further that it declared the findings of the lab records as soon as they were ready, in the Tariff notice which was availed to the Appellant.

Issues For Determination 37. The Tribunal has considered the pleadings and submissions of the parties and documentation availed, and is of the view that the Appeal raises two issues for determination.i.Whether the Respondent was justified in reclassifying the Appellant’s hot rolled steel wired rods under tariff 7227. 90. 00; andii.Whether the Respondent created Legitimate Expectation on the Appellant.

Analysis and Findings 38. The Tribunal will now proceed to analyse the said issues as herein under: -

i. Whether Respondent was justified in reclassifying the Appellant’s hot rolled steel wired rods under Tariff Code 7227. 90. 00. 39. The Respondent had argued that it conformed to customs tax laws in reclassifying the Appellant’s products and that the onus of proof in tax objections lay with the Appellant who in this case failed to avail evidence that would support a contrary classification. It argued further that the laboratory analysis report of the products placed the samples under HS Code 7227. 90. 00 as per the law.

40. The Appellant on the other hand asserted that the Respondent did not share the laboratory test analysis results with the Appellant apart from stating it on the tariff ruling. Further that in the absence of the laboratory report, the alleged contents of the report cannot be used to make the assessment. The Appellant submitted that a laboratory report from SGS of the sample of imported goods being tested showed that the sample tested contained 0. 0003% of boron.

41. The Tribunal notes that the Respondent took a sample of the Appellant’s products on 8th November 2018 whereas the tariff ruling was issued on 19th August 2021, three (3) years later. One would question why the delay, and whether indeed the alleged results by the Respondent were for the samples taken on 8th November 2018, or it may have been results of samples of other products.

42. The Respondent has based its reclassification of the Appellant’s products on a laboratory analysis it conducted at its premises. However, the Tribunal has not sighted any such laboratory analysis report to enable the Tribunal make an informed decision. The Appellant on the other has adduced a laboratory results certificate from SGS which most importantly established a boron content of the Appellant’s product at 0. 0003% as opposed to the Respondent’s finding of 0. 0011%.

43. The Respondent’s action of unilaterally obtaining the samples and analysing the same, goes against the principles of justice and fairness. Such principles are supposed to ensure procedures generate consistent, reliable and unbiased decisions.

44. The Tribunal has taken note of the laboratory chemical composition analysis report from SGS and the mill test certificate of the Appellant’s products which are at variance with the Respondent’s purported findings. Further, the Respondent has not controverted these results. It would have aided all parties if the samples were analysed at an independent laboratory. Such results would have been objective as opposed to the doubt the Respondent has created by unilaterally undertaking the whole process.

45. The Respondent had reclassified the goods under tariff code 7227. 90. 00 which describes the goods as “bars and rods, hot rolled in irregularly wound coils of other alloy steel”, while the Appellant had classified them under HS Code 7213. 91 which describes the goods as “bars and rods, hot-rolled, in irregularly wound coils of iron or non-alloy steel”.

46. It is important to note that before the goods are loaded for export, they undergo the Pre- Export Verification of Conformity procedure by accredited institutions, SGS being one of those verification bodies approved by the Kenya Bureau of Standards.

47. In the absence of the Respondent’s laboratory analysis report, the Tribunal is inclined to consider the SGS laboratory analysis report and the mill certificates as credible hence more reliable.

48. In view of the foregoing, the Tribunal finds that the Respondent was not justified in reclassifying the Appellant’s product under tariff code 7227. 90. 00.

ii. Whether the Respondent created Legitimate Expectation on the Appellant. 49. Having concluded that the reclassification was not justified, the determination of this issue is rendered moot.

Final Decision 50. The upshot of the above is that the Appeal is merited and the Tribunal will accordingly proceeds to make the following final Orders:-a.The Appeal be and is hereby allowed.b.The Respondents review decision dated 6th April 2022 be and is hereby set aside.c.Each party to bear its own cost.

51. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF JUNE, 2023. ...............................ROBERT M. MUTUMACHAIRPERSON...............................ELISHAH N. NJERUMEMBER...............................DELILAH K. NGALAMEMBER...............................EDWIN K. CHELUGETMEMBER...............................RODNEY O. OLUOCHMEMBER