1. In this appeal, the appellant’s contestation is that following a post clearance audit by the respondent in respect to the tax period from January 2016 to December 2020, vide a letter dated 30th April, 2021, it was issued with a demand for additional taxes of Kshs.451,860,683.00 being Import Duty, Excise duty & VAT. The additional taxes were on grounds that the consignment imported by the appellant for the period between July 2019 and December 2020 being Sino Truck Tippers and Prime Movers had been undervalued, and wrongly classified as they did not meet the CKD Regulations as outlined in the 1st, 2nd & 4th Schedules to the said Regulations. The respondent’s allegation was that the said consignments were declared under the wrong Customs Procedure Code (CPC), thus providing a different CPC than what should have been used for the aforesaid declarations.
2. Aggrieved by the said demand, the appellant objected vide an application for review dated 28th May, 2021. It was followed by a meeting between the parties herein and a review decision dated 25th June, 2021, where the demanded additional taxes were reviewed downward to Kshs.414,512,950.00, vacating the demand in relation to mis-classification of the Sino Truck equipped with a crane, but the respondent rejected the appellant’s classification and valuation of its consignment.
3. Dissatisfied with the respondent\'s decision, the appellant filed an appeal with the Tax Appeals Tribunal through a Notice of Appeal dated 23rd July, 2021. The appellant then filed a Memorandum of Appeal and Statement of Facts both dated 6th August, 2021. In the said Appeal, the appellant’s contention was that the respondent disregarded its valuation on the basis that the discount claimed was not captured in the appellant’s documents, thus there was an under valuation, consequently uplifting the declared values. The appellant argued that the respondent applied the law retrospectively against the appellant for the CKD kits which are import duty exempt by tariff, and Excise Duty exempt on approval by the Minister, since it raised values to meet the requirements of Legal Notice No. 84 of 17th June, 2019 for three entries for a period of January up to March 2019.
4. Upon consideration of the pleadings filed and rival submissions made by Counsel for the parties, the Tribunal framed three issues for determination being; whether the respondent violated the appellant’s legitimate expectation, whether the respondent erred by relying on Legal Notice No. 84 of 2019 to review classification of the appellant’s goods, and whether the respondent erred in its review of the customs value of the goods imported by the appellant. On the first issue, the Tribunal in its judgment found that at the point of importation, there was no express promise made to the appellant to the effect that any tariff declaration or value accepted by the respondent at the time of importation could not be reviewed to ensure that the declaration was correct, which promise would in any event be illegal as it would amount to restraining the respondent from executing its legal mandate. The Tribunal also found that no legitimate expectation accrued to the appellant by virtue of having previously accepted a declaration.
5. On the second issue, the Tribunal held that based on the Harmonized Commodity Coding System and the EACCMA, the goods could only be classified and cleared ex-bond as unassembled vehicles as declared by the appellant. On the third issue, the Tribunal noted that for purposes of customs valuation, the value to be used for assessment of duty is the transaction value which is the price actually paid or payable for the goods. The Tribunal held that where Customs on the strength of a test value doubts the correctness of a declaration, it has the right to ask for additional information or to adjust the declared value, and as such, the appellant bore the burden of demonstrating that the declared values were competitive prices for the forty (40) trucks, which burden it did not discharge. The Tribunal held the position that it had no option but to use previously accepted values for assessment of Custom Duties, thus it did not err in adjusting the values declared by the appellant and demanding additional taxes.
6. In the end, the appellant’s appeal before the Tax Appeals Tribunal was partially allowed, with the respondent’s review decision dated 25th June, 2021 demanding additional taxes of Kshs.414,512,950.00 being set aside. The respondent’s demand for additional taxes in respect of uplift of customs value was upheld subject to adjustment for VAT and Excise Tax.
7. Dissatisfied with the Tribunal’s decision, the appellant has lodged an appeal against it in this Court vide a Memorandum of Appeal dated 16th June, 2023 raising the following grounds of appeal –
i) The Tribunal having found that the appellant had provided invoices confirming acceptance of the declared customs value by the appellant’s supplier, erred in finding that the appellant had not demonstrated that the price declared on importation of the forty (40) Sino Truck units was competitive;
ii) The Tribunal erred in imposing a new test outside paragraph 2 of the Fourth Schedule to the East African Community Customs Management Act, 2004 in arriving at its finding that the appellant had not demonstrated the ‘competitiveness\' of the customs value declared on the forty (40) Sino Truck units that it imported;
iii) The Tribunal erred in failing to find that the price declared by the appellant on the forty (40) Sino Truck units imported by the appellant was at arm\'s length and that the transaction value method was the correct method of valuation pursuant to the provisions of the Fourth Schedule to the East African Community Customs Management Act, 2004;
iv) The Tribunal erred in failing to appreciate the test and threshold of ruling out applicability of the transaction value method under the provisions of the Fourth Schedule to the East African Community Customs Management Act, 2004; and
v) The Tribunal erred in failing to consider the documentary evidence provided in support of the discounts received by the appellant in its supplementary statement of facts dated 8th March, 2022.
8. The appellant’s prayer is for this Court to allow the appeal with costs, set aside the Tax Appeals Tribunal judgment in so far as it upheld the respondent’s demand for additional duties amounting to Kshs.8,885,561.00 in respect of uplift of customs value subject to adjustment for VAT and Excise Tax, and be substituted with an order allowing the appeal.
9. The appeal herein was canvassed by way of written submissions. The appellant’s submissions were filed by the law firm of Hamilton Harrison & Mathews Advocates on 26th January, 2024 and 12th March, 2024, whereas the respondent’s submissions were filed on 22nd February, 2024 by Shijenje Johnson Advocate.
10. Mr. Kimani, learned Counsel for the appellant cited the provisions of Section 122(1) of the East African Community Customs Management Act (EACCMA) and the Fourth Schedule to the EACCMA which provides the various methods of determination of the value of imported goods for Customs purposes and submitted that paragraph 2(1) of the said Schedule does not expressly or impliedly require a test of competitiveness of the price paid or payable in determining the suitability of the transaction value method. He further submitted that none of the circumstances set out under Paragraph 2(1) of Part 1 of the Fourth Schedule to the EACCMA were found to exist in relation to the goods imported by the appellant to warrant ruling out of the transaction value method with respect to determination of the value of imported goods for customs purposes. He contended that the Tribunal introduced a new restriction on the suitability of the transaction value by adding a condition regarding the \"competitiveness\" of the buying price.
11. He submitted that the said action went against the wording of paragraph 2(1) of Part 1 of the Fourth Schedule to the EACCMA and contradicted the principle of strict interpretation of tax statutes, as established by the Court of Appeal in the case of Mount Kenya Bottlers Ltd & 3 others v Attorney General & 3 others [2019] eKLR. He asserted that the transaction value declared by the appellant did not warrant any adjustments and the respondent’s demand for additional taxes is therefore unjustified and cannot stand. Counsel cited the case of Benedetti v Sawiris and others [2013] UKSC 50 and argued that the declared customs value for the imported goods was competitive, as it was based on an arm\'s length commercial transaction, because the appellant and the seller were unrelated, and the price paid reflected the market value.
12. He stated that the Tribunal recognized that the appellant had provided invoices and a written confirmation from the seller indicating that the imported goods were sold at a discount to clear stock from canceled orders, thus confirming that the pricing of the said goods was driven solely by commercial reasons.
13. Mr. Kimani referred to the provisions of Paragraphs 2, 3, 4, 6 7 & 8 of Part 1 of the Fourth Schedule to the EACCMA, Section 122(6) of the EACCMA, the General Notes 1 & 2 to the Interpretative Notes under Part II of the Fourth Schedule to the EACCMA. He cited the case of Republic v Kenya Revenue Authority Ex-parte Neolife International Limited [2018] eKLR, and submitted that the customs valuation method under Paragraph 2 of the Fourth Schedule is the primary method and that alternative valuation methods can only be used sequentially, when the transaction value method is ruled out.
14. Mr. Shijenje, learned Counsel for the respondent cited the provisions of Rule 5 (e) Tax Appeals Tribunal (Appeals to the High Court) Rules, 2015 and submitted that there is no competent appeal before this Court since the Tribunal’s judgment dated 20th April, 2023 against which this appeal lies is unsigned.
15. He asserted that the invoices provided by the appellant showed the value of the trucks to be way far below the market value. He stated that it was within the statutory duty of the respondent to adjust the same upwards for purposes of assessment of the Duty due and payable, as it did.
16. In a rejoinder, Mr. Kimani relied on the case of Commissioner of Domestic Taxes v Ibangua Investments Co. Ltd (Tax Appeal 5093 of 2023) [2023] KEHC 26013 (KLR) and urged this Court to decline the respondent’s invitation to consider new issues that were being introduced at the submissions stage. He indicated that in any event, in directions issued on 18th January, 2023, this Court considered whether the instant appeal was properly on record and found that the appeal herein was properly lodged with all the requisite supporting documents. He cited the provisions of Rule 5 of the Tax Appeals Tribunal (Appeals to the High Court) Rules 2015 and asserted that the instant appeal complies with the provisions therein. He cited the case of Commissioner of Domestic Taxes vs Gulf Badr Group (K) Limited Income Tax Appeal No. E141 of 2023 and contended that the appellant has since obtained a signed copy of the judgment of the Tribunal and has filed a supplementary Record of Appeal.
ANALYSIS AND DETERMINATION
17. Pursuant to the provisions of Section 56(2) of the Tax Procedures Act, an Appeal to the High Court from the decision of the Tax Appeals Tribunal or to the Court of Appeal shall be on a question of law only. This means that this Court is not permitted to substitute the Tribunal’s decision with its own conclusions based on its own analysis and appreciation of the facts, unless where additional evidence has been adduced with leave of the Court pursuant to the provisions of Section 78 of the Civil Procedure Act, Order 42 Rule 27 of the Civil Procedure Rules 2010 and Rule 15 of the Tax Appeals Tribunal (Appeals to the High Court) Rules, 2015.
18. Upon consideration of the Memorandum of Appeal, Record of Appeal and supplementary Record of Appeal, the statement of facts filed by the respondent together with the written submissions by Counsel for the parties, the issues that arises for determination are –
i. Whether there is a competent appeal before this Court; and
ii. Whether the appeal herein is merited.
Whether there is a competent appeal before this Court.
19. The respondent challenged the competency of this appeal on the ground that the Tribunal’s judgment dated 20th April, 2023 against which this appeal lies is unsigned. In doing so, the respondent relied on the provisions of Rule 5(e) Tax Appeals Tribunal (Appeals to the High Court) Rules, 2015 which states as follows –
A memorandum of appeal shall—
a) be signed by the appellant;
b) contain an address of service of the appellant;
c) set out concisely under consecutively numbered distinct heads, the grounds of appeal without any arguments or narrative;
d) contain an index of all documents supporting the appeal with number of pages at which they appear; and
e) accompanied by a copy of the decision of the Tribunal and the notice of appeal.
20. Appeals against decisions of the Tax Appeals Tribunal are provided for under Section 53 of the Tax Procedures Act which states that –
A party to proceedings before the Tribunal who is dissatisfied with the decision of the Tribunal in relation to an appealable decision may, within thirty days of being notified of the decision or within such further period as the High Court may allow, appeal the decision to the High Court in accordance with the provisions of the Tax Appeals Tribunal Act (Cap. 469A).
21. Section 32 of the Tax Appeals Tribunals Act provides the procedure for appealing to the High Court against the decision of the Tax Appeals Tribunal, which commences with the filing of a Notice of Appeal within thirty (30) days after being notified of the decision. In this case it is not disputed that the appellant filed a Notice of Appeal dated 19th May, 2023 notifying the Tribunal and the respondent of its intention to appeal against the decision of the Tribunal delivered on 20th April, 2023. The said Notice of Appeal having been filed on the 30th day after notification of the Tribunal’s judgment was filed within time and in compliance with the provisions of Section 32 of the Tax Appeals Tribunal Act. The respondent does not dispute service of the said Notice of Appeal.
22. Rule 3 of the Tax Appeals Tribunal (Appeals to the High Court) Rules, 2015 provides for the filing of a Memorandum of Appeal and it states that –
The appellant shall, within thirty days, after the date of service of a notice of appeal under section 32(1), file a memorandum of appeal with the Registrar and serve a copy on the respondent.
23. Evidently, in compliance with the aforesaid provisions, the appellant filed a Memorandum of Appeal dated 16th June, 2023. The said Memorandum of Appeal was not only signed and dated, but was compliant with the provisions of Rule 5(e) of the Tax Appeals Tribunal (Appeals to the High Court) Rules, 2015 as it was accompanied by a copy of the decision of the Tribunal and the Notice of Appeal. It is however worthy of note that the Tribunal’s judgment contained in the appellant’s Record of Appeal dated 16th June, 2023 is neither signed nor dated. The appellant has however since filed a supplementary Record of Appeal dated 8th March, 2024 which contains a certified copy of the Tribunal’s judgment delivered on 20th April, 2023.
24. I therefore agree with Counsel for the appellant that the appeal herein complies with the provisions of Rule 5(e) of the Tax Appeals Tribunal (Appeals to the High Court) Rules, 2015, and the instant appeal is competent.
Whether the appeal herein is merited.
25. The respondent conducted a post-clearance audit on the appellant for the period January 2016 to December 2020 to assess the appellant’s compliance with tax laws and regulations, with special emphasis on tariff declaration of CKD’s and valuation for customs purposes. The respondent claims that the said audit revealed under valuation of Sino Truck Tippers and Prime Movers imported by the appellant for the period between January 2019 to December 2020. In arriving at the said conclusion, the respondent relied on the valuation method of identical goods valuation, using the appellant’s previous values as test values for identical consignments for the same period, in line with the World Trade Organisation (WTO) valuation agreement notes to Article 1, Paragraph 2(4), and Section 122 as read with the Fourth Schedule of the EACCMA. Consequently, the respondent uplifted the values of the imported units and demanded an additional import duty of Kshs.8,885,561.00 from the appellant.
26. The appellant challenged the said adjustment by lodging an application for review with the respondent, but the said application was not successful. In declining to set aside the aforesaid adjustments, the respondent stated that none of the documents provided by the appellant for review indicated discounted amounts for consideration, during the determination of the applicable Transaction Value in line with the Valuation Agreement. Upon consideration of the said issue, the Tax Appeals Tribunal in its judgment properly found that for purposes of customs valuation, the value to be used for assessment of Duty is the transaction value which is the price actually paid or payable for the goods. It further held that the appellant provided invoices and emails showing that the value of the imported goods was lower than its market value. Further, the invoice dated 7th March, 2022 confirmed that the supplier indeed accepted reduced payments for the forty (40) units of trucks that had been imported.
27. In the end, the Tribunal held that the use of test values is an integral part of customs valuation, and when the strength of the test value doubts the correctness of a declaration, the respondent has the right to ask for additional information or to adjust the declared values. Consequently, the appellant had the burden to demonstrate that the declared values were competitive prices for the forty (40) trucks it imported, which burden was not discharged. The Tribunal also held that the respondent did not err in using previously accepted values for assessment of custom duties, and thereafter adjusting the values declared by the appellant.
28. The mode of determination of the value of imported goods liable to ad valorem import duty is provided for under Section 122(1) of the EACCMA which states as hereunder –
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.
29. Upon perusal of the Fourth Schedule to the EACCMA, it is evident that it provides for six methods of determining the Customs value of imported goods as follows -
i) Transaction Value Method;
ii) Transaction Value Method of Identical goods;
iii) Transaction Value Method of Similar goods;
iv) Deductive Value Method;
v) Computed Value Method; and
vi) Fallback Value Method.
30. The Interpretative Notes at Part II of the Fourth Schedule of the EACCMA 2004 provides that the applicability of the aforesaid valuation methods should be in a sequential order. Paragraphs 1 & 2 of the General Notes provides for the sequential application of valuation methods, they provide that -
1) 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. The primary methods for customs valuation is defined in Paragraph 2 and imported goods are to be valued in accordance with the provisions of this paragraph whenever the conditions prescribed therein are fulfilled.
2) Where the customs value cannot be determined under the provisions of paragraph 2, it is to be determined by proceeding sequentially through the succeeding paragraphs to the first such paragraph under which the customs value can be determined. Except as provided in Paragraph 5, it is only when the customs value cannot be determined under the provisions of a particular paragraph that the provisions of the next paragraph in the sequence can be used.
31. The import of the above provisions is that in determining the Customs value of imported goods, the transaction value is the primary method of valuation, hence it must be attempted first. It is only when the customs value cannot be determined using the transaction value method that the 2nd respondent can resort to the other methods of valuation. In finding against the appellant, the Tribunal departed from the use of the transaction value method of valuation on the ground that the appellant had failed to demonstrate that the values declared by the appellant for the forty (40) trucks imported were competitive prices. Paragraph 2(1) of the Fourth Schedule of the EACCMA states that -
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, but where -
a) there are no restrictions as to the disposition or use of the goods by the buyer other than restrictions which:
i) are imposed or required by law or by the public authorities in the Partner State;
ii) limit the geographical area in which the goods may be resold; or
iii) do not substantially affect the value of the goods;
b) the sale or price is not subject to some condition or consideration for which a value cannot be determined with respect to the goods being valued;
c) no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions of Paragraph 9; and
d) the buyer and seller are not related, or where the buyer and seller are related, that the transaction value is acceptable for customs purposes under the provisions of subparagraph (2).
32. Pursuant to the provisions of Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, the burden of proving that a tax decision is wrong lies with the Taxpayer. This issue was addressed by the Court in Commissioner of Taxes v Galaxy Tools Ltd [2021] eKLR, where the Court held as follows: -
With greatest respect, the Tribunal got it wrong. What the respondent had done by producing the invoices, the delivery notes and payment schedules was only prima facie evidence of purchase. On producing the said documents, the evidentiary burden of proof shifted to the appellant. The appellant in answer not only queried the said documents but informed the Tribunal that; he had carried investigations on the alleged suppliers and concluded that they never existed, that there was no supply of any goods at all. That the documents produced did not contain critical details to support any reasonable commercial transaction. All this was laid before the Tribunal.
33. Applying the above decision to the circumstance of this case, the appellant had demonstrated that the transaction value in determining the Customs value of the forty (40) imported trucks was applicable. The respondent on the other hand has not adduced any evidence in relation to the four circumstances provided for in Paragraph 2(1) of the Fourth Schedule of the EACCMA, that would warrant the respondent, the Tribunal and/or this Court to rule out the applicability of the transaction value in determining the Customs value of the forty (40) imported trucks. The Tax Appeals Tribunal at paragraph 62 of its judgment found that the appellant duly produced invoices and emails showing that the appellant paid less than the market value for the 40 imported trucks. Upon perusal of the email conversation between the appellant and the exporter produced by the appellant before the Tax Appeals Tribunal, it is clear that in as much as the invoices produced by the appellant do not show the discount applied by the exporter, the exporter confirmed that the said trucks were sold for less than their actual market price since they were sold in the clearing sales.
34. Consequently, this Court finds that the respondent erred in not using the transaction value declared by the appellant in determining the Customs value of the forty (40) imported trucks. The respondent also erred by uplifting the values declared by the appellant and by demanding additional taxes.
35. In the end, this Court finds that the instant appeal is merited. It is hereby allowed as prayed. Costs are awarded to the appellant.
It is so ordered.
DATED, SIGNED and DELIVERED at NAIROBI on this 14th day of October, 2024. Judgment delivered through Microsoft Teams Online Platform.
NJOKI MWANGI
JUDGE
In the presence of:
Mr. Ruto for the appellant
No appearance for the respondent
Ms B. Wokabi – Court Assistant.
2. Aggrieved by the said demand, the appellant objected vide an application for review dated 28th May, 2021. It was followed by a meeting between the parties herein and a review decision dated 25th June, 2021, where the demanded additional taxes were reviewed downward to Kshs.414,512,950.00, vacating the demand in relation to mis-classification of the Sino Truck equipped with a crane, but the respondent rejected the appellant’s classification and valuation of its consignment.
3. Dissatisfied with the respondent\'s decision, the appellant filed an appeal with the Tax Appeals Tribunal through a Notice of Appeal dated 23rd July, 2021. The appellant then filed a Memorandum of Appeal and Statement of Facts both dated 6th August, 2021. In the said Appeal, the appellant’s contention was that the respondent disregarded its valuation on the basis that the discount claimed was not captured in the appellant’s documents, thus there was an under valuation, consequently uplifting the declared values. The appellant argued that the respondent applied the law retrospectively against the appellant for the CKD kits which are import duty exempt by tariff, and Excise Duty exempt on approval by the Minister, since it raised values to meet the requirements of Legal Notice No. 84 of 17th June, 2019 for three entries for a period of January up to March 2019.
4. Upon consideration of the pleadings filed and rival submissions made by Counsel for the parties, the Tribunal framed three issues for determination being; whether the respondent violated the appellant’s legitimate expectation, whether the respondent erred by relying on Legal Notice No. 84 of 2019 to review classification of the appellant’s goods, and whether the respondent erred in its review of the customs value of the goods imported by the appellant. On the first issue, the Tribunal in its judgment found that at the point of importation, there was no express promise made to the appellant to the effect that any tariff declaration or value accepted by the respondent at the time of importation could not be reviewed to ensure that the declaration was correct, which promise would in any event be illegal as it would amount to restraining the respondent from executing its legal mandate. The Tribunal also found that no legitimate expectation accrued to the appellant by virtue of having previously accepted a declaration.
5. On the second issue, the Tribunal held that based on the Harmonized Commodity Coding System and the EACCMA, the goods could only be classified and cleared ex-bond as unassembled vehicles as declared by the appellant. On the third issue, the Tribunal noted that for purposes of customs valuation, the value to be used for assessment of duty is the transaction value which is the price actually paid or payable for the goods. The Tribunal held that where Customs on the strength of a test value doubts the correctness of a declaration, it has the right to ask for additional information or to adjust the declared value, and as such, the appellant bore the burden of demonstrating that the declared values were competitive prices for the forty (40) trucks, which burden it did not discharge. The Tribunal held the position that it had no option but to use previously accepted values for assessment of Custom Duties, thus it did not err in adjusting the values declared by the appellant and demanding additional taxes.
6. In the end, the appellant’s appeal before the Tax Appeals Tribunal was partially allowed, with the respondent’s review decision dated 25th June, 2021 demanding additional taxes of Kshs.414,512,950.00 being set aside. The respondent’s demand for additional taxes in respect of uplift of customs value was upheld subject to adjustment for VAT and Excise Tax.
7. Dissatisfied with the Tribunal’s decision, the appellant has lodged an appeal against it in this Court vide a Memorandum of Appeal dated 16th June, 2023 raising the following grounds of appeal –
i) The Tribunal having found that the appellant had provided invoices confirming acceptance of the declared customs value by the appellant’s supplier, erred in finding that the appellant had not demonstrated that the price declared on importation of the forty (40) Sino Truck units was competitive;
ii) The Tribunal erred in imposing a new test outside paragraph 2 of the Fourth Schedule to the East African Community Customs Management Act, 2004 in arriving at its finding that the appellant had not demonstrated the ‘competitiveness\' of the customs value declared on the forty (40) Sino Truck units that it imported;
iii) The Tribunal erred in failing to find that the price declared by the appellant on the forty (40) Sino Truck units imported by the appellant was at arm\'s length and that the transaction value method was the correct method of valuation pursuant to the provisions of the Fourth Schedule to the East African Community Customs Management Act, 2004;
iv) The Tribunal erred in failing to appreciate the test and threshold of ruling out applicability of the transaction value method under the provisions of the Fourth Schedule to the East African Community Customs Management Act, 2004; and
v) The Tribunal erred in failing to consider the documentary evidence provided in support of the discounts received by the appellant in its supplementary statement of facts dated 8th March, 2022.
8. The appellant’s prayer is for this Court to allow the appeal with costs, set aside the Tax Appeals Tribunal judgment in so far as it upheld the respondent’s demand for additional duties amounting to Kshs.8,885,561.00 in respect of uplift of customs value subject to adjustment for VAT and Excise Tax, and be substituted with an order allowing the appeal.
9. The appeal herein was canvassed by way of written submissions. The appellant’s submissions were filed by the law firm of Hamilton Harrison & Mathews Advocates on 26th January, 2024 and 12th March, 2024, whereas the respondent’s submissions were filed on 22nd February, 2024 by Shijenje Johnson Advocate.
10. Mr. Kimani, learned Counsel for the appellant cited the provisions of Section 122(1) of the East African Community Customs Management Act (EACCMA) and the Fourth Schedule to the EACCMA which provides the various methods of determination of the value of imported goods for Customs purposes and submitted that paragraph 2(1) of the said Schedule does not expressly or impliedly require a test of competitiveness of the price paid or payable in determining the suitability of the transaction value method. He further submitted that none of the circumstances set out under Paragraph 2(1) of Part 1 of the Fourth Schedule to the EACCMA were found to exist in relation to the goods imported by the appellant to warrant ruling out of the transaction value method with respect to determination of the value of imported goods for customs purposes. He contended that the Tribunal introduced a new restriction on the suitability of the transaction value by adding a condition regarding the \"competitiveness\" of the buying price.
11. He submitted that the said action went against the wording of paragraph 2(1) of Part 1 of the Fourth Schedule to the EACCMA and contradicted the principle of strict interpretation of tax statutes, as established by the Court of Appeal in the case of Mount Kenya Bottlers Ltd & 3 others v Attorney General & 3 others [2019] eKLR. He asserted that the transaction value declared by the appellant did not warrant any adjustments and the respondent’s demand for additional taxes is therefore unjustified and cannot stand. Counsel cited the case of Benedetti v Sawiris and others [2013] UKSC 50 and argued that the declared customs value for the imported goods was competitive, as it was based on an arm\'s length commercial transaction, because the appellant and the seller were unrelated, and the price paid reflected the market value.
12. He stated that the Tribunal recognized that the appellant had provided invoices and a written confirmation from the seller indicating that the imported goods were sold at a discount to clear stock from canceled orders, thus confirming that the pricing of the said goods was driven solely by commercial reasons.
13. Mr. Kimani referred to the provisions of Paragraphs 2, 3, 4, 6 7 & 8 of Part 1 of the Fourth Schedule to the EACCMA, Section 122(6) of the EACCMA, the General Notes 1 & 2 to the Interpretative Notes under Part II of the Fourth Schedule to the EACCMA. He cited the case of Republic v Kenya Revenue Authority Ex-parte Neolife International Limited [2018] eKLR, and submitted that the customs valuation method under Paragraph 2 of the Fourth Schedule is the primary method and that alternative valuation methods can only be used sequentially, when the transaction value method is ruled out.
14. Mr. Shijenje, learned Counsel for the respondent cited the provisions of Rule 5 (e) Tax Appeals Tribunal (Appeals to the High Court) Rules, 2015 and submitted that there is no competent appeal before this Court since the Tribunal’s judgment dated 20th April, 2023 against which this appeal lies is unsigned.
15. He asserted that the invoices provided by the appellant showed the value of the trucks to be way far below the market value. He stated that it was within the statutory duty of the respondent to adjust the same upwards for purposes of assessment of the Duty due and payable, as it did.
16. In a rejoinder, Mr. Kimani relied on the case of Commissioner of Domestic Taxes v Ibangua Investments Co. Ltd (Tax Appeal 5093 of 2023) [2023] KEHC 26013 (KLR) and urged this Court to decline the respondent’s invitation to consider new issues that were being introduced at the submissions stage. He indicated that in any event, in directions issued on 18th January, 2023, this Court considered whether the instant appeal was properly on record and found that the appeal herein was properly lodged with all the requisite supporting documents. He cited the provisions of Rule 5 of the Tax Appeals Tribunal (Appeals to the High Court) Rules 2015 and asserted that the instant appeal complies with the provisions therein. He cited the case of Commissioner of Domestic Taxes vs Gulf Badr Group (K) Limited Income Tax Appeal No. E141 of 2023 and contended that the appellant has since obtained a signed copy of the judgment of the Tribunal and has filed a supplementary Record of Appeal.
ANALYSIS AND DETERMINATION
17. Pursuant to the provisions of Section 56(2) of the Tax Procedures Act, an Appeal to the High Court from the decision of the Tax Appeals Tribunal or to the Court of Appeal shall be on a question of law only. This means that this Court is not permitted to substitute the Tribunal’s decision with its own conclusions based on its own analysis and appreciation of the facts, unless where additional evidence has been adduced with leave of the Court pursuant to the provisions of Section 78 of the Civil Procedure Act, Order 42 Rule 27 of the Civil Procedure Rules 2010 and Rule 15 of the Tax Appeals Tribunal (Appeals to the High Court) Rules, 2015.
18. Upon consideration of the Memorandum of Appeal, Record of Appeal and supplementary Record of Appeal, the statement of facts filed by the respondent together with the written submissions by Counsel for the parties, the issues that arises for determination are –
i. Whether there is a competent appeal before this Court; and
ii. Whether the appeal herein is merited.
Whether there is a competent appeal before this Court.
19. The respondent challenged the competency of this appeal on the ground that the Tribunal’s judgment dated 20th April, 2023 against which this appeal lies is unsigned. In doing so, the respondent relied on the provisions of Rule 5(e) Tax Appeals Tribunal (Appeals to the High Court) Rules, 2015 which states as follows –
A memorandum of appeal shall—
a) be signed by the appellant;
b) contain an address of service of the appellant;
c) set out concisely under consecutively numbered distinct heads, the grounds of appeal without any arguments or narrative;
d) contain an index of all documents supporting the appeal with number of pages at which they appear; and
e) accompanied by a copy of the decision of the Tribunal and the notice of appeal.
20. Appeals against decisions of the Tax Appeals Tribunal are provided for under Section 53 of the Tax Procedures Act which states that –
A party to proceedings before the Tribunal who is dissatisfied with the decision of the Tribunal in relation to an appealable decision may, within thirty days of being notified of the decision or within such further period as the High Court may allow, appeal the decision to the High Court in accordance with the provisions of the Tax Appeals Tribunal Act (Cap. 469A).
21. Section 32 of the Tax Appeals Tribunals Act provides the procedure for appealing to the High Court against the decision of the Tax Appeals Tribunal, which commences with the filing of a Notice of Appeal within thirty (30) days after being notified of the decision. In this case it is not disputed that the appellant filed a Notice of Appeal dated 19th May, 2023 notifying the Tribunal and the respondent of its intention to appeal against the decision of the Tribunal delivered on 20th April, 2023. The said Notice of Appeal having been filed on the 30th day after notification of the Tribunal’s judgment was filed within time and in compliance with the provisions of Section 32 of the Tax Appeals Tribunal Act. The respondent does not dispute service of the said Notice of Appeal.
22. Rule 3 of the Tax Appeals Tribunal (Appeals to the High Court) Rules, 2015 provides for the filing of a Memorandum of Appeal and it states that –
The appellant shall, within thirty days, after the date of service of a notice of appeal under section 32(1), file a memorandum of appeal with the Registrar and serve a copy on the respondent.
23. Evidently, in compliance with the aforesaid provisions, the appellant filed a Memorandum of Appeal dated 16th June, 2023. The said Memorandum of Appeal was not only signed and dated, but was compliant with the provisions of Rule 5(e) of the Tax Appeals Tribunal (Appeals to the High Court) Rules, 2015 as it was accompanied by a copy of the decision of the Tribunal and the Notice of Appeal. It is however worthy of note that the Tribunal’s judgment contained in the appellant’s Record of Appeal dated 16th June, 2023 is neither signed nor dated. The appellant has however since filed a supplementary Record of Appeal dated 8th March, 2024 which contains a certified copy of the Tribunal’s judgment delivered on 20th April, 2023.
24. I therefore agree with Counsel for the appellant that the appeal herein complies with the provisions of Rule 5(e) of the Tax Appeals Tribunal (Appeals to the High Court) Rules, 2015, and the instant appeal is competent.
Whether the appeal herein is merited.
25. The respondent conducted a post-clearance audit on the appellant for the period January 2016 to December 2020 to assess the appellant’s compliance with tax laws and regulations, with special emphasis on tariff declaration of CKD’s and valuation for customs purposes. The respondent claims that the said audit revealed under valuation of Sino Truck Tippers and Prime Movers imported by the appellant for the period between January 2019 to December 2020. In arriving at the said conclusion, the respondent relied on the valuation method of identical goods valuation, using the appellant’s previous values as test values for identical consignments for the same period, in line with the World Trade Organisation (WTO) valuation agreement notes to Article 1, Paragraph 2(4), and Section 122 as read with the Fourth Schedule of the EACCMA. Consequently, the respondent uplifted the values of the imported units and demanded an additional import duty of Kshs.8,885,561.00 from the appellant.
26. The appellant challenged the said adjustment by lodging an application for review with the respondent, but the said application was not successful. In declining to set aside the aforesaid adjustments, the respondent stated that none of the documents provided by the appellant for review indicated discounted amounts for consideration, during the determination of the applicable Transaction Value in line with the Valuation Agreement. Upon consideration of the said issue, the Tax Appeals Tribunal in its judgment properly found that for purposes of customs valuation, the value to be used for assessment of Duty is the transaction value which is the price actually paid or payable for the goods. It further held that the appellant provided invoices and emails showing that the value of the imported goods was lower than its market value. Further, the invoice dated 7th March, 2022 confirmed that the supplier indeed accepted reduced payments for the forty (40) units of trucks that had been imported.
27. In the end, the Tribunal held that the use of test values is an integral part of customs valuation, and when the strength of the test value doubts the correctness of a declaration, the respondent has the right to ask for additional information or to adjust the declared values. Consequently, the appellant had the burden to demonstrate that the declared values were competitive prices for the forty (40) trucks it imported, which burden was not discharged. The Tribunal also held that the respondent did not err in using previously accepted values for assessment of custom duties, and thereafter adjusting the values declared by the appellant.
28. The mode of determination of the value of imported goods liable to ad valorem import duty is provided for under Section 122(1) of the EACCMA which states as hereunder –
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.
29. Upon perusal of the Fourth Schedule to the EACCMA, it is evident that it provides for six methods of determining the Customs value of imported goods as follows -
i) Transaction Value Method;
ii) Transaction Value Method of Identical goods;
iii) Transaction Value Method of Similar goods;
iv) Deductive Value Method;
v) Computed Value Method; and
vi) Fallback Value Method.
30. The Interpretative Notes at Part II of the Fourth Schedule of the EACCMA 2004 provides that the applicability of the aforesaid valuation methods should be in a sequential order. Paragraphs 1 & 2 of the General Notes provides for the sequential application of valuation methods, they provide that -
1) 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. The primary methods for customs valuation is defined in Paragraph 2 and imported goods are to be valued in accordance with the provisions of this paragraph whenever the conditions prescribed therein are fulfilled.
2) Where the customs value cannot be determined under the provisions of paragraph 2, it is to be determined by proceeding sequentially through the succeeding paragraphs to the first such paragraph under which the customs value can be determined. Except as provided in Paragraph 5, it is only when the customs value cannot be determined under the provisions of a particular paragraph that the provisions of the next paragraph in the sequence can be used.
31. The import of the above provisions is that in determining the Customs value of imported goods, the transaction value is the primary method of valuation, hence it must be attempted first. It is only when the customs value cannot be determined using the transaction value method that the 2nd respondent can resort to the other methods of valuation. In finding against the appellant, the Tribunal departed from the use of the transaction value method of valuation on the ground that the appellant had failed to demonstrate that the values declared by the appellant for the forty (40) trucks imported were competitive prices. Paragraph 2(1) of the Fourth Schedule of the EACCMA states that -
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, but where -
a) there are no restrictions as to the disposition or use of the goods by the buyer other than restrictions which:
i) are imposed or required by law or by the public authorities in the Partner State;
ii) limit the geographical area in which the goods may be resold; or
iii) do not substantially affect the value of the goods;
b) the sale or price is not subject to some condition or consideration for which a value cannot be determined with respect to the goods being valued;
c) no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions of Paragraph 9; and
d) the buyer and seller are not related, or where the buyer and seller are related, that the transaction value is acceptable for customs purposes under the provisions of subparagraph (2).
32. Pursuant to the provisions of Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, the burden of proving that a tax decision is wrong lies with the Taxpayer. This issue was addressed by the Court in Commissioner of Taxes v Galaxy Tools Ltd [2021] eKLR, where the Court held as follows: -
With greatest respect, the Tribunal got it wrong. What the respondent had done by producing the invoices, the delivery notes and payment schedules was only prima facie evidence of purchase. On producing the said documents, the evidentiary burden of proof shifted to the appellant. The appellant in answer not only queried the said documents but informed the Tribunal that; he had carried investigations on the alleged suppliers and concluded that they never existed, that there was no supply of any goods at all. That the documents produced did not contain critical details to support any reasonable commercial transaction. All this was laid before the Tribunal.
33. Applying the above decision to the circumstance of this case, the appellant had demonstrated that the transaction value in determining the Customs value of the forty (40) imported trucks was applicable. The respondent on the other hand has not adduced any evidence in relation to the four circumstances provided for in Paragraph 2(1) of the Fourth Schedule of the EACCMA, that would warrant the respondent, the Tribunal and/or this Court to rule out the applicability of the transaction value in determining the Customs value of the forty (40) imported trucks. The Tax Appeals Tribunal at paragraph 62 of its judgment found that the appellant duly produced invoices and emails showing that the appellant paid less than the market value for the 40 imported trucks. Upon perusal of the email conversation between the appellant and the exporter produced by the appellant before the Tax Appeals Tribunal, it is clear that in as much as the invoices produced by the appellant do not show the discount applied by the exporter, the exporter confirmed that the said trucks were sold for less than their actual market price since they were sold in the clearing sales.
34. Consequently, this Court finds that the respondent erred in not using the transaction value declared by the appellant in determining the Customs value of the forty (40) imported trucks. The respondent also erred by uplifting the values declared by the appellant and by demanding additional taxes.
35. In the end, this Court finds that the instant appeal is merited. It is hereby allowed as prayed. Costs are awarded to the appellant.
It is so ordered.
DATED, SIGNED and DELIVERED at NAIROBI on this 14th day of October, 2024. Judgment delivered through Microsoft Teams Online Platform.
NJOKI MWANGI
JUDGE
In the presence of:
Mr. Ruto for the appellant
No appearance for the respondent
Ms B. Wokabi – Court Assistant.