'(Being an appeal from the decree arising from the whole judgment of the Tax Appeals Tribunal in Case Number 034 of 2023 delivered on 9/2/2024)
Background
1. The appellant filed this appeal through a memorandum dated 8/4/2024. The record of appeal is dated 14/2/2025. This appeal challenges the Tax Appeal Tribunal’s (TAT) judgment dated 9/2/2024.
2. The dispute arose from a decision of the appellant to reclassify two categories of the respondent’s imported goods. The first category comprised food or dietary supplements and the second category had named medical products which the respondent has in some of its documents referred to as orthopaedic products. The appellant alleged that the respondent had used the wrong HS codes for classifying the imported goods in its declared self-assessment, thereby attracting less taxes. The appellant upon assessment, reclassified the goods under different HS codes out of which extra tax arose. Consequently, the appellant demanded for payment of the extra tax from the respondent.
3. For the food supplements, the respondent had declared and classified the products under HS Code 3004.50.00 while the appellant on assessment found the correct HS Code to be 2106.90.91.
4. For the orthopaedic products the respondent classified all the goods under the HS code 9021 which attracted 0% import duty while during reclassification by the appellant, the goods were found to be under various HS codes and attracted varying percentages of duty depending on the product as follows:
No Product Assessed HS Code
1) Back Rest 9404.90.00
2) Coccyx Cushion Seat 9401.80.00
3) Elbow Support 6307.90.00
4) Hernia Belt 6212.90.00
5) Knee Cap Comfeel 6307.90.00
6) Pregnancy Back Support 6212.90.00
7) Scrotal Support 6212.90.00
8) Shoulder Support 6307.90.00
5. According to the appellant the alleged tariff misclassification, had led to a short levy of import duty, excise duty and VAT amounting to KShs. 174,835,029. The appellant issued a Demand Notice to the respondent to pay the shortfall. The respondent contested the reclassification of the goods and the demand for extra taxes arising therefrom and applied for a review to the Commissioner. In a decision dated 5/11/2022 the Commissioner declined a review and upheld the appellant’s demand for the additional taxes from the respondent.
6. The Commissioner’s Review Decision was expressed to be based on the General Rules for the Interpretation of the Harmonized System as set out in the East African Community Common External Tariff and specifically Rule 6, which provides that:
“For legal purposes, the classification of goods in the subheadings of a heading shall be determined according to the terms of those subheadings and any related Subheading Notes and, mutatis mutandis, to the above Rules, on the understanding that only subheadings at the same level are comparable. For the purposes of this Rule the relative Section and Chapter Notes also apply, unless the context otherwise requires.”
7. The respondent appealed the Commissioner’s Review Decision to the Tax Appeals Tribunal. After listening to the parties and considering the evidence the Tax Appeals Tribunal in its judgment dated 9/2/2024 allowed the appeal by the respondent and set aside the Commissioner’s Review Decision.
8. The appellant was dissatisfied with that decision and now appeals to this court under section 32 of the Tax Appeals Tribunal Act (Cap. 469A) Laws of Kenya.
Grounds of appeal
9. The appeal is based on the principal ground that the TAT erred in law and in fact in holding that the appellant was not justified in reclassifying the respondent’s imported products by reclassifying the imports from the tariff rulings issued to the appellant on diverse dates in 2017 and classifying food items at HS Code 3004.50.00 and the other products at HS Code 9021.10.00.
10. Secondly that the TAT erred in law and in fact by failing to consider the parties’ pleadings and submissions and make a determination thereon.
11. The appellant therefore prays to this court to set aside the decision of the Tax Appeal Tribunal.
Duty of appellate court
12. This court’s appellate jurisdiction in tax matters is provided for under section 56 of the Tax Procedures Act (Cap. 469B) as follows:
(1) In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.
(2) An appeal to the High Court or to the Court of Appeal shall be on a question of law only.
(3) In an appeal by a taxpayer to the Tribunal, High Court or Court of Appeal in relation to an appealable decision, the taxpayer shall rely only on the grounds stated in the objection to which the decision relates unless the Tribunal or Court allows the person to add new grounds.
13. Rule 20 of the Tax Appeals Tribunal (Appeals to the High Court) Rules (Legal Notice 226 of 2015) provides that:
“The rules determining procedure in civil suits before the Court, to the extent to which those rules are not inconsistent with the Act or these Rules, shall apply to the tax appeal as if it were a civil suit.”
14. The Court of Appeal in the case of M’Riungu v. Republic [1983] KLR 455, has given guidance on how to proceed in an appeal on points of law thus:
“where a right of appeal is confined to question of law, an appellate court has loyalty to accept the findings of fact of the lower court(s) and resist the temptation to treat findings of fact as holdings of fact and law and it should not interfere with the decision of the trial court or the first appellate court unless it is apparent that on evidence, no reasonable tribunal could have reached that conclusion, which would be the same as holding that the decision is bad in law”.
15. The appellate court may however interfere with the findings of the trial court where it is demonstrated that there was no evidence at all upon which such findings were based or that the evidence relied upon was of such a nature that no reasonable tribunal, properly addressing its mind on it, could have made such findings as has been held in numerous decisions. (see for instance Bashir Haji Abdullahi v Adan Mohammed Nooru & 3 others [2014] eKLR.
Case before the Tax Appeals Tribunal
16. The judgment of the TAT indicates that the appellant’s (respondent at the TAT) statement of facts dated 10/3/2023 was filed on 15/3/2023, witness statement of Cecilia Njatha dated 12/6/2023 and filed on 15/6/2023 and which was admitted under oath in evidence by the TAT and the written submissions dated 31/10/2023. In other words, Cecilia Njatha testified for the appellant before the TAT.
17. The proceedings before the TAT indicate that the respondent (appellant at the TAT) was to call one witness at the hearing. But none was made available. The TAT relied on the statement of facts and the submissions by the respondent.
18. The judgment of the TAT indicates that the respondent’s (appellant at the TAT) case was premised on the statement of facts dated 8/2/2023 and filed on 10/2/2023 (which I have found above to be incomplete in the record of appeal) and the written submissions filed on 16/11/2023.
19. In this appeal, for the appellant’s case before the TAT this court has relied on the statement of facts, the letter dated 9/11/2022 from the Commissioner of Customs and Border Control department (the Demand Notice) to the respondent, the Commissioner’s Review Decision dated 5/1/2023 and the witness statement of Cecilia Njatha dated 12/6/2023.
20. The Demand Notice is the primary document that initiated the dispute and I reproduce it herein for its full purport and meaning:
“KENYA REVENUE AUTHORITY
9th November 2022.
PIN. P000626483G
HQ/PCA/RRI/515/2022
The Managing Director,
Harleys Ltd,
P.O. Box 28240-00100,
NAIROBІ.
Dear Sir/Madam,
''RE: DEMAND NOTICE KSHS. 174,835,029.
A routine desk audit to check compliance with laws and regulations was conducted on your customs transactions for the period starting November 2017 to September 2022, pursuant to the provisions of
Section 235 and 236 of the East African Community Customs Management (EACCM) Act 2004, the Regulations 2006 and any other Law in force during the period under review.
Audit Scope and Objective
The purpose of this audit was to assess the Company''s compliance with tax Laws and regulations with specific emphasis on tariff classification of some of your imported goods as explained below.
Desk Audit Findings
1. Dietary Supplements
A review of imports of supplements showed several misclassifications of dietary supplements that had been classified under tariff code 3004.90.00 and 3004.50.00 0.00 which covers medicaments used for
treatment or prevention of diseases. The tariffs attract 0% rate of import duty, excise duty and VAT.
Guided by the General Interpretation Rules for the classification of goods as contained in the East African Community Common External tariff we have correctly re-classified the supplements under tariff code 21.06.90.91 for food supplements which attracts 10% excise duty and 16% vat applicable at the time of importation.
The products under review are Becoactin, Biofcron, Cardioace, Feroglobin, Immunace, Jointace, Liveril, Menopace, Ologare, Osteogare, Ovacare, Perfectil, Pregnacare, Tres Orix, Ultra-plant Sterols; Wellbaby, Wellkid Immune, Wellinan and Zedo
Consequently, taxes amounting to Kshs.174,830,057 have been assessed for the period under review as tabulated below.
Misclassified Item Extra Import Duty Extra Excise Duty Extra Vat Total Principal Due
Dietary Supplements 78,260,997 94,768,551 173,029,548
*Refer to the schedule of workings for detailed analysis.
2. Other imported products
The exercise established instances of tariff misclassification of the following products shoulder support, hernia belt, scrotal support, pregnancy back support, back rest, Coccуx cushion Seat, knee cap comfeel and elbow support which had been classified under Hs code 9021.10.00. which covers. orthopaedic and fracture appliances. This tariff code attracts 0% import duty rate and 16% vat or (0% VAT in accordance with the Finance Act 2021 which took effect on 1st July 2021.
This is further explained below; -
a) Shoulder support (Neoprene)
The above product had been declared under 9021.10.00 whereas the correct tariff code is 6307.90.00. The Hs Code attracts import duty at the rate of 25% and vat at the rate of 16%. This has resulted in extra taxes as tabulated below.
b) Hernia Belt
The above product was declared under tariff 9021.10.00 whereas it should have been classified under tariff 6212.90.00 which attracts import duty at the rate of 25% and vat at the rate of 16%.
This has resulted in extra taxes as tabulated below.
c) Scrotal Support.
Scrotal Support has been classified under tariff code 9021.10.00 whereas the same should have been classified under tariff 6212.90.00 which attracts import duty at the rate of 25% and vat at the rate of 16%. This has resulted in extra taxes as tabulated below.
d) Pregnancy back Support
Pregnancy back Support imports had been under tariff cöde 9021.10.00 whereas they are correctly classified under tariff 6212.90.00 which attracts import duty at the rate of 25% and vat at the rate of 16%. This has resulted in extra taxes as tabulated below.
e) Back Rest
Back Rest under tariff code 9021.10.00 whereas they are appropriately classifiable under tariff 9404.90.00 which attracts import duty at the rate of 35% and vat at the rate of 16%. This has resulted in extra taxes as tabulated below.
Coccy Cushion Seat
Coccyx Cushion Seat under tariff 9021.10.00 whereas the correct tariff code is 9401.80.00 that attracts import duty at the rate of 25% and vat at the rate of 16%. This has resulted in extra taxes as tabulated below.
g) Knee cap comfeel
Knee cap comfeel under tariff 9021.10.00 whereas the correct tariff code is 6307.90.00 that attracts import duty at the rate of 25% and vat at the rate of 16%. This has resulted in extra taxes as tabulated below.
h) Elbow Support
Elbow Support under tariff 9021.10.00. However, the same should have been classified under tariff 6307.90.00 which attracts import duty at the rate of 25% and vat at the rate of 16%. This has resulted.
in extra taxes as tabulated below.
Consequently, extra taxes amounting to Kshs:1,805,481.00 have been assessed for the period under review as tabulated below
No Misclassified Item Extra Import Duty Extra Vat Total Principal Taxes
a Shoulder Support 440,977 204,752 645,729
b Hernia Belt 44,138 14,689 58,827
c Scrotal Support 18,249 7,890 26,139
d Pregnancy Back Support 58,416 27,326 85,742
e Back Rest 154,867 55,080 209,946
f Coccyx Cushion seat 30,958 16,162 47,120
g Knee cap comfeel 406,838 230,380 637,217
h Elbow Support 72,863 21,896 94,759
Total 1,227,306 578,175 1,805,481
*Refer to the schedule of workings for detailed analysis.
3. Revenue Implication of misclassification.
The misclassification of the severally products reviewed above led to the application of wrong import duty, excise duty and vat respectively where applicable thereby leading to a loss of customs taxes.
Consequently, and in accordance to the provisions of Section 135 of EACCMA,2004 extra taxes amounting to Ksh 174,835,029 have been assessed as summarized below.
Item Extra Import Duty Assessed Excise Duty Extra VAТ Total Taxes Due
Supplements 78,260,997 94,768,551 173,029,548
Other products 1, 227,306 578,175 1,805,481
Total 1,227,306 78,260,997 95,346,726 174,835,029
Please note that the assessed amount should be settled within thirty (30) days from the date of this demand notice.
Further note that the findings as summarized in the schedule was limited to the Simba System 2005 and iCMS system declarations and conclusions drawn from them. The Commissioner Customs and Border Control reserves the right for re-audit where new information becomes available.
Should you require further clarifications, do not hesitate to contact Cecilia Njatha on email cecilia.njatha@kra.go.ke or Leonard Sang on email lconard:sang@kra.po.ke or contact them on telephone no 0709013117.
Yours faithfully,
Franklin Ombaka.
For: Commissioner, Customs & Border Control Department.”
21. I did not find anywhere in the evidence the schedules referred to in the Demand Notice for the detailed calculations.
22. The respondent on its part before the TAT relied on its letter dated 6/12/2022 through its advocates applying for review of the Demand Notice, Statement of Facts and Submissions.
23. It was the respondent’ case that Rule 6 of the East African Community Common External Tariff General Rules for the Interpretation of the Harmonized System relied on by the Commissioner does not grant the Commissioner the mandate to reclassify goods.
24. It was also the contention by the respondent at the TAT that the Commissioner''s decision did not explain the reasons for departure from the advance tariff rulings issued to the appellant on diverse dates in 2017 classifying food supplements under HS Code 3004.50.00 and the other products under HS Code 9021.10.00 because the respondent had based its declarations of the goods on the tariff rulings by the appellant and analyses conducted by the appellant at the time of importation.
25. It was the respondent’s contention therefore that there is no evidence from the appellant to support the reclassification of the H.S. Codes in the form of a laboratory analysis and no evidence that the previous tariff rulings issued on diverse dates in 2017 were based on any incomplete, incorrect, false or misleading information to warrant the appellant to depart from them. Further that the appellant has no right to retrospectively revise the classification once the goods have been verified and cleared at the port of entry. The respondent also contended that the reclassification of the goods was not accompanied by laboratory analyses or objective evidence supporting the reclassification of the HS Codes under which the goods had been declared.
26. The appellant filed a response to the respondent’s issues whose substance is captured in the appellant’s witness statement to the Tax Disputes Tribunal as follows:
4. The instant dispute arose when the Respondent conducted a desk audit on the appellant for the period starting November 2017 to September 2022 pursuant to the provisions of Section 236 of the East African Community Customs Management Act 2004 (EACCMA).
5. The instant dispute arose following intelligence/analysis received from the Respondent''s ISO department, which was also analysed by PAU (Pre Audit Unit) within PCA. From the intelligence, it was established that the Appellant imports various types of consignment which are supplements as they have no therapeutic or prophylactic uses but are meant for nutritive value (emphasis by italics and underlining mine).
6. A review of the Appellant''s consignment established that the Appellant has been declaring these products under heading 3004 but should be classified under heading 2106.
7. On 4th October 2022, the Respondent''s Post Clearance Audit team conducted a desk review of import transactions of the importer for the period October 2017 to September 2022 pursuant to Sections 235 and 236 of the East African Community Customs Management Act 2004 (EACCMА).
8. Examination of the entries revealed that the Appellant has been misclassifying the food supplements under heading 3004 instead of 2106 while some of the medical equipment''s have been classified under 9021 instead of either 6212, 6307 or 9401.
9. After the examination of the Appellant''s import entries a demand for uncollected taxes of ksh 174,835,029 was sent on 9th November 2022.”
27. The TAT agreed with the respondent’s contentions and held that the reclassification was unreasonable, unjustified, violated the respondent’s legitimate expectation and was unprocedural.
Submissions
28. This appeal was disposed of by way of written submissions filed by learned counsels for both parties.
29. The respondent also filed a statement of facts in this appeal.
30. The appellant’s submissions are a summary reiterating what is contained in the statement of facts the appellant had filed before the TAT without any addition. The appellant does not, in the submissions, point out any issue to support its grounds of appeal that the TAT erred in fact and in law.
31. In the submissions, the appellant restates the items on which the dispute was hinged as being in two categories:
i. Food supplements namely: Becoactin, Beoferon, Cardioace, Feroglobin, Immuncare, Jointace, Liveril, Menopace, Ologare, Osteogare, Ovacare, Perfectil, Pregnacare, Tres Orix, Ultra Plant Sterols, Wellbaby, Wellkid Immune, Wellman and Zedcal.
It has been the appellant’s case throughout this dispute that the respondent declared these goods under HS Code 3004.50.00 while the appellant reclassified them under HS Code 2106.90.91.54 whereat code 2106 is for products meant to maintain general health and wellbeing.
ii. Other products namely: Shoulder support (Neoprene), Hernia Belt, Scrotal Support, Pregnancy back support, Back Rest, Coccyx Cushion Seat, Knee cap, Comfeel and Elbow Support.
32. It is the appellant’s position that the Commissioner is empowered under section 135 of the EACCMA to recover customs taxes found to have been short levied even after clearance. The said section provides as follows:
135. (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 erroneously made, as the case may be.
33. The appellant submits further that section 235 of EACCMA defines the audit period of up to five years from the date of importation or exportation of goods while section 236 empowers the Commissioner to check for accuracy of declarations even where customs clearance of goods has been undertaken. The said sections provide as is material to the present case follows:
235. (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; and
b) to answer any question in relation to the goods; and
c) to make declaration with respect to the weight, number, measure, strength, value, cost, selling price, origin, destination or place of transshipment of the goods, as the proper officer may deem fit.
236. 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
b) systems and all relevant customs documents, commercial documents and other data related to the goods;
c) 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;
d) inspect the premises of the owner of the goods or any other place of the person directly or indirectly involved in the operations; and
e) examine the goods where possible for the goods to be produced.
34. The appellant further submits that at all material times the respondent did a self-assessment and self-declared the items under the impugned tariffs until the respondent was advised by the appellant on the correct heading.
35. The respondent’s submissions are a replica of the statement of facts. They are extensive and will be considered fully in the analysis following.
36. The respondent outlined the following issues for determination:
a. Whether the Appellant’s reclassification of the Respondent’s products contravened the Harmonized System (HS) of classification and the General Rules for the Interpretation of the Harmonized System.
b. Whether the subsequent reclassification was improper for lacking new, compelling, and material evidence necessary to justify a lawful departure from the 2017 tariff rulings.
c. Whether the Appellant’s issuance of the demand notice dated 9th November 2022, based on a tariff ruling made in May 2022 was unjustified due to inordinate delay, given it sought to retrospectively collect taxes covering the period between November 2017 and September 2022.
d. Whether the Appellant violated the Respondent’s right to fair administrative action under Article 47 of the Constitution, including breaching the Respondent’s legitimate expectation arising from prior tariff rulings that classifications would not be altered arbitrarily or without notice and lawful justification.
Analysis and Determination
37. Tariff classification is an issue of mixed point of law and fact. The factual description of the goods has to be determined first before the rules and guidelines under the GIRs of classifying goods are applied to them.
38. In this appeal therefore, this court has a duty to consider and determine whether the decision of the Tax Appeals Tribunal was arrived at appropriately or not, always remembering that the primary evidence was tendered before the Tax Appeals Tribunal and therefore what comes to this court is limited.
39. This court recognizes that the Tax Appeals Tribunal, is constituted of persons who are specialized in various fields related to tax and tax procedures and this court must greatly give allowance to that fact in its determination. I note however in this case, the Tax Appeals Tribunal proceeded as though it was a normal court. My understanding of the operations of a Tribunal is that its proceedings would be in the form of round the table discussions of the issues submitted for its determination in a relaxed and not so formalistic approach as the courts are wont to do with open discussions by the honourable members and a very brief determination of the issues based on the tax expertise of the various members. That would make the work of this court easier with regard to the issues it needs to deal with points of law on appeal.
40. What is contained in the judgment of the Tribunal is the approach of the usual court without bringing out the technical input of the experts in tax matters as compose the TAT.
41. As stated above, other than restating its position as contained in its case at the TAT, the appellant’s submissions do not highlight any issue to support its grounds of appeal that the TAT erred in fact and in law.
42. To the contrary the respondent’s submissions address the issues decided upon by the TAT and why they should stand and not be set aside.
43. Section 30 of the Tax Appeals Tribunal Act (Cap. 469A) Laws of Kenya provides with respect to burden of proof that:
“In a proceeding before the Tribunal, the appellant has the burden of proving—
a) where an appeal relates to an assessment, that the assessment is excessive; or
b) in any other case, that the tax decision should not have been made or should have been made differently.”
44. The appellant before the TAT is the taxpayer, in this case, Harley’s, the respondent herein. In that case, in line with the provisions of section 30(b) above. the burden was upon the respondent herein to prove that the tax decision to reclassify the respondent’s product should not have been made or should have been made differently.
45. Although the respondent submits that the appellant had no authority to reclassify the goods and apply the reclassified HS Codes retrospectively, that is not correct. The appellant, as any other customs authority, may conduct a reclassification of imported goods. There are various reasons for the same among them from the custom’s authority’s standpoint as in the present case being for review, where, audits and investigations reveal suspicions of misclassification. Another reason from the standpoint of the taxpayer, as is contended by the respondent herein would be and where an importer requests for binding tariff classification ruling from customs authorities to ensure accuracy so that they pay the correct duties and avoid penalties, avoid delays, avoid overpayment of duties and also for purposes of correct pricing of the goods.
46. Classification of import and export goods in Kenya is governed by the East African Community Common External Tariff (EAC CET) which codified and adopted the World Custom Organization Harmonized Commodity Description and its principles of General Interpretation Rules (GIRs) classification of goods. (See the cases of Republic v Commissioner General & Another Ex- Parte Awal Ltd [2008]eKLR and Beta Healthcare International Ltd v Commissioner of Customs Services [2010]eKLR).
47. The TAT observed correctly in its analysis at paragraph 53 that the items on which the dispute was hinged were in two categories, namely, the food supplements (which the respondent has referred to in its statement of facts and submissions as medicarments) and other products, (which the respondent has referred to in its statement of facts and submissions as orthopaedic items).
48. The food supplements subject of the dispute were: Becoactin, Beoferon, Cardioace, Feroglobin, Immuncare, Jointace, Liveril, Menopace, Ologare, Osteogare, Ovacare, Perfectil, Pregnacare, Tres Orix, Ultra Plant Sterols, Wellbaby, Wellkid Immune, Wellman and Zedcal.
49. The other category of products were: shoulder Support (Neoprene), Hernia Belt, Scrotal Support, Pregnancy back support, Back Rest, Coccyx Cushion Seat, Knee cap Comfeel, and Elbow Support.
50. According to the appellant herein, the reclassification of the respondent’s imported goods was necessary because the respondent had wrongly classified them during the self-assessment.
51. I have looked at the very first report where the issue of reclassification was addressed as contained in the appellant’s (the respondent before the TAT) witness statement dated 12/6/2023 by Cecilia Njatha to the Tribunal and she says in paragraph 22:
“THAT at all material times, the Appellant did a self-assessment and self-declared the items under impugned tariffs until the Appellant was advised by the Respondent on the correct heading.”
52. Two things emerge from this evidence of the appellant. First, that during the reclassification the appellant only considered the self-assessment and declaration made by the respondent. Secondly, it is the appellant’s contention that the self-assessment was wrong and after the appellant had done a Post Clearance Audit (PCA) of the respondent’s goods it reclassified the respondent’s goods and advised the respondent accordingly.
53. The respondent’s response however is that in fact, the appellant had made advance tariff rulings on the classification of the imported goods and the respondent relied on these advance tariff rulings to classify its imported goods and do a self-assessment of the tax due thereon.
54. The appellant has never disputed that indeed it issued advance tariff ruli
[...truncated]
Background
1. The appellant filed this appeal through a memorandum dated 8/4/2024. The record of appeal is dated 14/2/2025. This appeal challenges the Tax Appeal Tribunal’s (TAT) judgment dated 9/2/2024.
2. The dispute arose from a decision of the appellant to reclassify two categories of the respondent’s imported goods. The first category comprised food or dietary supplements and the second category had named medical products which the respondent has in some of its documents referred to as orthopaedic products. The appellant alleged that the respondent had used the wrong HS codes for classifying the imported goods in its declared self-assessment, thereby attracting less taxes. The appellant upon assessment, reclassified the goods under different HS codes out of which extra tax arose. Consequently, the appellant demanded for payment of the extra tax from the respondent.
3. For the food supplements, the respondent had declared and classified the products under HS Code 3004.50.00 while the appellant on assessment found the correct HS Code to be 2106.90.91.
4. For the orthopaedic products the respondent classified all the goods under the HS code 9021 which attracted 0% import duty while during reclassification by the appellant, the goods were found to be under various HS codes and attracted varying percentages of duty depending on the product as follows:
No Product Assessed HS Code
1) Back Rest 9404.90.00
2) Coccyx Cushion Seat 9401.80.00
3) Elbow Support 6307.90.00
4) Hernia Belt 6212.90.00
5) Knee Cap Comfeel 6307.90.00
6) Pregnancy Back Support 6212.90.00
7) Scrotal Support 6212.90.00
8) Shoulder Support 6307.90.00
5. According to the appellant the alleged tariff misclassification, had led to a short levy of import duty, excise duty and VAT amounting to KShs. 174,835,029. The appellant issued a Demand Notice to the respondent to pay the shortfall. The respondent contested the reclassification of the goods and the demand for extra taxes arising therefrom and applied for a review to the Commissioner. In a decision dated 5/11/2022 the Commissioner declined a review and upheld the appellant’s demand for the additional taxes from the respondent.
6. The Commissioner’s Review Decision was expressed to be based on the General Rules for the Interpretation of the Harmonized System as set out in the East African Community Common External Tariff and specifically Rule 6, which provides that:
“For legal purposes, the classification of goods in the subheadings of a heading shall be determined according to the terms of those subheadings and any related Subheading Notes and, mutatis mutandis, to the above Rules, on the understanding that only subheadings at the same level are comparable. For the purposes of this Rule the relative Section and Chapter Notes also apply, unless the context otherwise requires.”
7. The respondent appealed the Commissioner’s Review Decision to the Tax Appeals Tribunal. After listening to the parties and considering the evidence the Tax Appeals Tribunal in its judgment dated 9/2/2024 allowed the appeal by the respondent and set aside the Commissioner’s Review Decision.
8. The appellant was dissatisfied with that decision and now appeals to this court under section 32 of the Tax Appeals Tribunal Act (Cap. 469A) Laws of Kenya.
Grounds of appeal
9. The appeal is based on the principal ground that the TAT erred in law and in fact in holding that the appellant was not justified in reclassifying the respondent’s imported products by reclassifying the imports from the tariff rulings issued to the appellant on diverse dates in 2017 and classifying food items at HS Code 3004.50.00 and the other products at HS Code 9021.10.00.
10. Secondly that the TAT erred in law and in fact by failing to consider the parties’ pleadings and submissions and make a determination thereon.
11. The appellant therefore prays to this court to set aside the decision of the Tax Appeal Tribunal.
Duty of appellate court
12. This court’s appellate jurisdiction in tax matters is provided for under section 56 of the Tax Procedures Act (Cap. 469B) as follows:
(1) In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.
(2) An appeal to the High Court or to the Court of Appeal shall be on a question of law only.
(3) In an appeal by a taxpayer to the Tribunal, High Court or Court of Appeal in relation to an appealable decision, the taxpayer shall rely only on the grounds stated in the objection to which the decision relates unless the Tribunal or Court allows the person to add new grounds.
13. Rule 20 of the Tax Appeals Tribunal (Appeals to the High Court) Rules (Legal Notice 226 of 2015) provides that:
“The rules determining procedure in civil suits before the Court, to the extent to which those rules are not inconsistent with the Act or these Rules, shall apply to the tax appeal as if it were a civil suit.”
14. The Court of Appeal in the case of M’Riungu v. Republic [1983] KLR 455, has given guidance on how to proceed in an appeal on points of law thus:
“where a right of appeal is confined to question of law, an appellate court has loyalty to accept the findings of fact of the lower court(s) and resist the temptation to treat findings of fact as holdings of fact and law and it should not interfere with the decision of the trial court or the first appellate court unless it is apparent that on evidence, no reasonable tribunal could have reached that conclusion, which would be the same as holding that the decision is bad in law”.
15. The appellate court may however interfere with the findings of the trial court where it is demonstrated that there was no evidence at all upon which such findings were based or that the evidence relied upon was of such a nature that no reasonable tribunal, properly addressing its mind on it, could have made such findings as has been held in numerous decisions. (see for instance Bashir Haji Abdullahi v Adan Mohammed Nooru & 3 others [2014] eKLR.
Case before the Tax Appeals Tribunal
16. The judgment of the TAT indicates that the appellant’s (respondent at the TAT) statement of facts dated 10/3/2023 was filed on 15/3/2023, witness statement of Cecilia Njatha dated 12/6/2023 and filed on 15/6/2023 and which was admitted under oath in evidence by the TAT and the written submissions dated 31/10/2023. In other words, Cecilia Njatha testified for the appellant before the TAT.
17. The proceedings before the TAT indicate that the respondent (appellant at the TAT) was to call one witness at the hearing. But none was made available. The TAT relied on the statement of facts and the submissions by the respondent.
18. The judgment of the TAT indicates that the respondent’s (appellant at the TAT) case was premised on the statement of facts dated 8/2/2023 and filed on 10/2/2023 (which I have found above to be incomplete in the record of appeal) and the written submissions filed on 16/11/2023.
19. In this appeal, for the appellant’s case before the TAT this court has relied on the statement of facts, the letter dated 9/11/2022 from the Commissioner of Customs and Border Control department (the Demand Notice) to the respondent, the Commissioner’s Review Decision dated 5/1/2023 and the witness statement of Cecilia Njatha dated 12/6/2023.
20. The Demand Notice is the primary document that initiated the dispute and I reproduce it herein for its full purport and meaning:
“KENYA REVENUE AUTHORITY
9th November 2022.
PIN. P000626483G
HQ/PCA/RRI/515/2022
The Managing Director,
Harleys Ltd,
P.O. Box 28240-00100,
NAIROBІ.
Dear Sir/Madam,
''RE: DEMAND NOTICE KSHS. 174,835,029.
A routine desk audit to check compliance with laws and regulations was conducted on your customs transactions for the period starting November 2017 to September 2022, pursuant to the provisions of
Section 235 and 236 of the East African Community Customs Management (EACCM) Act 2004, the Regulations 2006 and any other Law in force during the period under review.
Audit Scope and Objective
The purpose of this audit was to assess the Company''s compliance with tax Laws and regulations with specific emphasis on tariff classification of some of your imported goods as explained below.
Desk Audit Findings
1. Dietary Supplements
A review of imports of supplements showed several misclassifications of dietary supplements that had been classified under tariff code 3004.90.00 and 3004.50.00 0.00 which covers medicaments used for
treatment or prevention of diseases. The tariffs attract 0% rate of import duty, excise duty and VAT.
Guided by the General Interpretation Rules for the classification of goods as contained in the East African Community Common External tariff we have correctly re-classified the supplements under tariff code 21.06.90.91 for food supplements which attracts 10% excise duty and 16% vat applicable at the time of importation.
The products under review are Becoactin, Biofcron, Cardioace, Feroglobin, Immunace, Jointace, Liveril, Menopace, Ologare, Osteogare, Ovacare, Perfectil, Pregnacare, Tres Orix, Ultra-plant Sterols; Wellbaby, Wellkid Immune, Wellinan and Zedo
Consequently, taxes amounting to Kshs.174,830,057 have been assessed for the period under review as tabulated below.
Misclassified Item Extra Import Duty Extra Excise Duty Extra Vat Total Principal Due
Dietary Supplements 78,260,997 94,768,551 173,029,548
*Refer to the schedule of workings for detailed analysis.
2. Other imported products
The exercise established instances of tariff misclassification of the following products shoulder support, hernia belt, scrotal support, pregnancy back support, back rest, Coccуx cushion Seat, knee cap comfeel and elbow support which had been classified under Hs code 9021.10.00. which covers. orthopaedic and fracture appliances. This tariff code attracts 0% import duty rate and 16% vat or (0% VAT in accordance with the Finance Act 2021 which took effect on 1st July 2021.
This is further explained below; -
a) Shoulder support (Neoprene)
The above product had been declared under 9021.10.00 whereas the correct tariff code is 6307.90.00. The Hs Code attracts import duty at the rate of 25% and vat at the rate of 16%. This has resulted in extra taxes as tabulated below.
b) Hernia Belt
The above product was declared under tariff 9021.10.00 whereas it should have been classified under tariff 6212.90.00 which attracts import duty at the rate of 25% and vat at the rate of 16%.
This has resulted in extra taxes as tabulated below.
c) Scrotal Support.
Scrotal Support has been classified under tariff code 9021.10.00 whereas the same should have been classified under tariff 6212.90.00 which attracts import duty at the rate of 25% and vat at the rate of 16%. This has resulted in extra taxes as tabulated below.
d) Pregnancy back Support
Pregnancy back Support imports had been under tariff cöde 9021.10.00 whereas they are correctly classified under tariff 6212.90.00 which attracts import duty at the rate of 25% and vat at the rate of 16%. This has resulted in extra taxes as tabulated below.
e) Back Rest
Back Rest under tariff code 9021.10.00 whereas they are appropriately classifiable under tariff 9404.90.00 which attracts import duty at the rate of 35% and vat at the rate of 16%. This has resulted in extra taxes as tabulated below.
Coccy Cushion Seat
Coccyx Cushion Seat under tariff 9021.10.00 whereas the correct tariff code is 9401.80.00 that attracts import duty at the rate of 25% and vat at the rate of 16%. This has resulted in extra taxes as tabulated below.
g) Knee cap comfeel
Knee cap comfeel under tariff 9021.10.00 whereas the correct tariff code is 6307.90.00 that attracts import duty at the rate of 25% and vat at the rate of 16%. This has resulted in extra taxes as tabulated below.
h) Elbow Support
Elbow Support under tariff 9021.10.00. However, the same should have been classified under tariff 6307.90.00 which attracts import duty at the rate of 25% and vat at the rate of 16%. This has resulted.
in extra taxes as tabulated below.
Consequently, extra taxes amounting to Kshs:1,805,481.00 have been assessed for the period under review as tabulated below
No Misclassified Item Extra Import Duty Extra Vat Total Principal Taxes
a Shoulder Support 440,977 204,752 645,729
b Hernia Belt 44,138 14,689 58,827
c Scrotal Support 18,249 7,890 26,139
d Pregnancy Back Support 58,416 27,326 85,742
e Back Rest 154,867 55,080 209,946
f Coccyx Cushion seat 30,958 16,162 47,120
g Knee cap comfeel 406,838 230,380 637,217
h Elbow Support 72,863 21,896 94,759
Total 1,227,306 578,175 1,805,481
*Refer to the schedule of workings for detailed analysis.
3. Revenue Implication of misclassification.
The misclassification of the severally products reviewed above led to the application of wrong import duty, excise duty and vat respectively where applicable thereby leading to a loss of customs taxes.
Consequently, and in accordance to the provisions of Section 135 of EACCMA,2004 extra taxes amounting to Ksh 174,835,029 have been assessed as summarized below.
Item Extra Import Duty Assessed Excise Duty Extra VAТ Total Taxes Due
Supplements 78,260,997 94,768,551 173,029,548
Other products 1, 227,306 578,175 1,805,481
Total 1,227,306 78,260,997 95,346,726 174,835,029
Please note that the assessed amount should be settled within thirty (30) days from the date of this demand notice.
Further note that the findings as summarized in the schedule was limited to the Simba System 2005 and iCMS system declarations and conclusions drawn from them. The Commissioner Customs and Border Control reserves the right for re-audit where new information becomes available.
Should you require further clarifications, do not hesitate to contact Cecilia Njatha on email cecilia.njatha@kra.go.ke or Leonard Sang on email lconard:sang@kra.po.ke or contact them on telephone no 0709013117.
Yours faithfully,
Franklin Ombaka.
For: Commissioner, Customs & Border Control Department.”
21. I did not find anywhere in the evidence the schedules referred to in the Demand Notice for the detailed calculations.
22. The respondent on its part before the TAT relied on its letter dated 6/12/2022 through its advocates applying for review of the Demand Notice, Statement of Facts and Submissions.
23. It was the respondent’ case that Rule 6 of the East African Community Common External Tariff General Rules for the Interpretation of the Harmonized System relied on by the Commissioner does not grant the Commissioner the mandate to reclassify goods.
24. It was also the contention by the respondent at the TAT that the Commissioner''s decision did not explain the reasons for departure from the advance tariff rulings issued to the appellant on diverse dates in 2017 classifying food supplements under HS Code 3004.50.00 and the other products under HS Code 9021.10.00 because the respondent had based its declarations of the goods on the tariff rulings by the appellant and analyses conducted by the appellant at the time of importation.
25. It was the respondent’s contention therefore that there is no evidence from the appellant to support the reclassification of the H.S. Codes in the form of a laboratory analysis and no evidence that the previous tariff rulings issued on diverse dates in 2017 were based on any incomplete, incorrect, false or misleading information to warrant the appellant to depart from them. Further that the appellant has no right to retrospectively revise the classification once the goods have been verified and cleared at the port of entry. The respondent also contended that the reclassification of the goods was not accompanied by laboratory analyses or objective evidence supporting the reclassification of the HS Codes under which the goods had been declared.
26. The appellant filed a response to the respondent’s issues whose substance is captured in the appellant’s witness statement to the Tax Disputes Tribunal as follows:
4. The instant dispute arose when the Respondent conducted a desk audit on the appellant for the period starting November 2017 to September 2022 pursuant to the provisions of Section 236 of the East African Community Customs Management Act 2004 (EACCMA).
5. The instant dispute arose following intelligence/analysis received from the Respondent''s ISO department, which was also analysed by PAU (Pre Audit Unit) within PCA. From the intelligence, it was established that the Appellant imports various types of consignment which are supplements as they have no therapeutic or prophylactic uses but are meant for nutritive value (emphasis by italics and underlining mine).
6. A review of the Appellant''s consignment established that the Appellant has been declaring these products under heading 3004 but should be classified under heading 2106.
7. On 4th October 2022, the Respondent''s Post Clearance Audit team conducted a desk review of import transactions of the importer for the period October 2017 to September 2022 pursuant to Sections 235 and 236 of the East African Community Customs Management Act 2004 (EACCMА).
8. Examination of the entries revealed that the Appellant has been misclassifying the food supplements under heading 3004 instead of 2106 while some of the medical equipment''s have been classified under 9021 instead of either 6212, 6307 or 9401.
9. After the examination of the Appellant''s import entries a demand for uncollected taxes of ksh 174,835,029 was sent on 9th November 2022.”
27. The TAT agreed with the respondent’s contentions and held that the reclassification was unreasonable, unjustified, violated the respondent’s legitimate expectation and was unprocedural.
Submissions
28. This appeal was disposed of by way of written submissions filed by learned counsels for both parties.
29. The respondent also filed a statement of facts in this appeal.
30. The appellant’s submissions are a summary reiterating what is contained in the statement of facts the appellant had filed before the TAT without any addition. The appellant does not, in the submissions, point out any issue to support its grounds of appeal that the TAT erred in fact and in law.
31. In the submissions, the appellant restates the items on which the dispute was hinged as being in two categories:
i. Food supplements namely: Becoactin, Beoferon, Cardioace, Feroglobin, Immuncare, Jointace, Liveril, Menopace, Ologare, Osteogare, Ovacare, Perfectil, Pregnacare, Tres Orix, Ultra Plant Sterols, Wellbaby, Wellkid Immune, Wellman and Zedcal.
It has been the appellant’s case throughout this dispute that the respondent declared these goods under HS Code 3004.50.00 while the appellant reclassified them under HS Code 2106.90.91.54 whereat code 2106 is for products meant to maintain general health and wellbeing.
ii. Other products namely: Shoulder support (Neoprene), Hernia Belt, Scrotal Support, Pregnancy back support, Back Rest, Coccyx Cushion Seat, Knee cap, Comfeel and Elbow Support.
32. It is the appellant’s position that the Commissioner is empowered under section 135 of the EACCMA to recover customs taxes found to have been short levied even after clearance. The said section provides as follows:
135. (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 erroneously made, as the case may be.
33. The appellant submits further that section 235 of EACCMA defines the audit period of up to five years from the date of importation or exportation of goods while section 236 empowers the Commissioner to check for accuracy of declarations even where customs clearance of goods has been undertaken. The said sections provide as is material to the present case follows:
235. (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; and
b) to answer any question in relation to the goods; and
c) to make declaration with respect to the weight, number, measure, strength, value, cost, selling price, origin, destination or place of transshipment of the goods, as the proper officer may deem fit.
236. 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
b) systems and all relevant customs documents, commercial documents and other data related to the goods;
c) 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;
d) inspect the premises of the owner of the goods or any other place of the person directly or indirectly involved in the operations; and
e) examine the goods where possible for the goods to be produced.
34. The appellant further submits that at all material times the respondent did a self-assessment and self-declared the items under the impugned tariffs until the respondent was advised by the appellant on the correct heading.
35. The respondent’s submissions are a replica of the statement of facts. They are extensive and will be considered fully in the analysis following.
36. The respondent outlined the following issues for determination:
a. Whether the Appellant’s reclassification of the Respondent’s products contravened the Harmonized System (HS) of classification and the General Rules for the Interpretation of the Harmonized System.
b. Whether the subsequent reclassification was improper for lacking new, compelling, and material evidence necessary to justify a lawful departure from the 2017 tariff rulings.
c. Whether the Appellant’s issuance of the demand notice dated 9th November 2022, based on a tariff ruling made in May 2022 was unjustified due to inordinate delay, given it sought to retrospectively collect taxes covering the period between November 2017 and September 2022.
d. Whether the Appellant violated the Respondent’s right to fair administrative action under Article 47 of the Constitution, including breaching the Respondent’s legitimate expectation arising from prior tariff rulings that classifications would not be altered arbitrarily or without notice and lawful justification.
Analysis and Determination
37. Tariff classification is an issue of mixed point of law and fact. The factual description of the goods has to be determined first before the rules and guidelines under the GIRs of classifying goods are applied to them.
38. In this appeal therefore, this court has a duty to consider and determine whether the decision of the Tax Appeals Tribunal was arrived at appropriately or not, always remembering that the primary evidence was tendered before the Tax Appeals Tribunal and therefore what comes to this court is limited.
39. This court recognizes that the Tax Appeals Tribunal, is constituted of persons who are specialized in various fields related to tax and tax procedures and this court must greatly give allowance to that fact in its determination. I note however in this case, the Tax Appeals Tribunal proceeded as though it was a normal court. My understanding of the operations of a Tribunal is that its proceedings would be in the form of round the table discussions of the issues submitted for its determination in a relaxed and not so formalistic approach as the courts are wont to do with open discussions by the honourable members and a very brief determination of the issues based on the tax expertise of the various members. That would make the work of this court easier with regard to the issues it needs to deal with points of law on appeal.
40. What is contained in the judgment of the Tribunal is the approach of the usual court without bringing out the technical input of the experts in tax matters as compose the TAT.
41. As stated above, other than restating its position as contained in its case at the TAT, the appellant’s submissions do not highlight any issue to support its grounds of appeal that the TAT erred in fact and in law.
42. To the contrary the respondent’s submissions address the issues decided upon by the TAT and why they should stand and not be set aside.
43. Section 30 of the Tax Appeals Tribunal Act (Cap. 469A) Laws of Kenya provides with respect to burden of proof that:
“In a proceeding before the Tribunal, the appellant has the burden of proving—
a) where an appeal relates to an assessment, that the assessment is excessive; or
b) in any other case, that the tax decision should not have been made or should have been made differently.”
44. The appellant before the TAT is the taxpayer, in this case, Harley’s, the respondent herein. In that case, in line with the provisions of section 30(b) above. the burden was upon the respondent herein to prove that the tax decision to reclassify the respondent’s product should not have been made or should have been made differently.
45. Although the respondent submits that the appellant had no authority to reclassify the goods and apply the reclassified HS Codes retrospectively, that is not correct. The appellant, as any other customs authority, may conduct a reclassification of imported goods. There are various reasons for the same among them from the custom’s authority’s standpoint as in the present case being for review, where, audits and investigations reveal suspicions of misclassification. Another reason from the standpoint of the taxpayer, as is contended by the respondent herein would be and where an importer requests for binding tariff classification ruling from customs authorities to ensure accuracy so that they pay the correct duties and avoid penalties, avoid delays, avoid overpayment of duties and also for purposes of correct pricing of the goods.
46. Classification of import and export goods in Kenya is governed by the East African Community Common External Tariff (EAC CET) which codified and adopted the World Custom Organization Harmonized Commodity Description and its principles of General Interpretation Rules (GIRs) classification of goods. (See the cases of Republic v Commissioner General & Another Ex- Parte Awal Ltd [2008]eKLR and Beta Healthcare International Ltd v Commissioner of Customs Services [2010]eKLR).
47. The TAT observed correctly in its analysis at paragraph 53 that the items on which the dispute was hinged were in two categories, namely, the food supplements (which the respondent has referred to in its statement of facts and submissions as medicarments) and other products, (which the respondent has referred to in its statement of facts and submissions as orthopaedic items).
48. The food supplements subject of the dispute were: Becoactin, Beoferon, Cardioace, Feroglobin, Immuncare, Jointace, Liveril, Menopace, Ologare, Osteogare, Ovacare, Perfectil, Pregnacare, Tres Orix, Ultra Plant Sterols, Wellbaby, Wellkid Immune, Wellman and Zedcal.
49. The other category of products were: shoulder Support (Neoprene), Hernia Belt, Scrotal Support, Pregnancy back support, Back Rest, Coccyx Cushion Seat, Knee cap Comfeel, and Elbow Support.
50. According to the appellant herein, the reclassification of the respondent’s imported goods was necessary because the respondent had wrongly classified them during the self-assessment.
51. I have looked at the very first report where the issue of reclassification was addressed as contained in the appellant’s (the respondent before the TAT) witness statement dated 12/6/2023 by Cecilia Njatha to the Tribunal and she says in paragraph 22:
“THAT at all material times, the Appellant did a self-assessment and self-declared the items under impugned tariffs until the Appellant was advised by the Respondent on the correct heading.”
52. Two things emerge from this evidence of the appellant. First, that during the reclassification the appellant only considered the self-assessment and declaration made by the respondent. Secondly, it is the appellant’s contention that the self-assessment was wrong and after the appellant had done a Post Clearance Audit (PCA) of the respondent’s goods it reclassified the respondent’s goods and advised the respondent accordingly.
53. The respondent’s response however is that in fact, the appellant had made advance tariff rulings on the classification of the imported goods and the respondent relied on these advance tariff rulings to classify its imported goods and do a self-assessment of the tax due thereon.
54. The appellant has never disputed that indeed it issued advance tariff ruli
[...truncated]