Angelica Medical Supplies Limited v Commissioner of Customs & Border Control (Appeal 258 of 2021) [2023] KETAT 135 (KLR) (17 March 2023) (Judgment)
Neutral citation:
[2023] KETAT 135 (KLR)
Republic of Kenya
Appeal 258 of 2021
E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members
March 17, 2023
Between
Angelica Medical Supplies Limited
Appellant
and
Commissioner Of Customs & Border Control
Respondent
Judgment
1.The Appellant, is a limited liability company incorporated in Kenya and whose principal activity is the importation, sale and distribution of medical supplies.
2.The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and the Kenya Revenue Authority is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.
3.During the period 2016 to 2018, the Appellant imported various shipments of dialyzer and declared the imports under HS code "9018.39.00 - Other" of the East African Community Common External Tariff (the EAC CET).
4.The Respondent's post clearance audit team conducted a desk audit of the Appellant's imports declarations for dialyzer for the period 2016 to 2018. After the desk audit, the Respondent issued a letter of findings dated 16th February 2021.
5.Vide the letter of findings, the Respondent informed the Appellant that it had used an incorrect tariff classification code while declaring dialyzer upon importation into Kenya during the period 2016 to 2018.
6.Based on the findings of the alleged application of an incorrect EACCET code, the Respondent demanded payment of taxes amounting to Kshs. 27,730,065.00 being import Duty, VAT and late payment interest.
7.The Appellant responded to the Respondent's letter of findings vide a letter dated 18th February 2021 asserting that it had correctly declared dialyzer under tariff code 9018.39.00.
8.The Respondent subsequently, vide a letter dated 24th February 2021 responded to the Appellant's letter granting the Appellant seven days, within which to provide substantive responses to its letter of findings, failure to which the taxes amounting to Kshs. 27,730,065,00 would be officially demanded.
9.The Appellant, vide a letter dated 25th February 2021 responded to the Respondent's letter dated 24th February 2021 reiterating its earlier position as contained in the letter dated 18th February 2021.
10.Subsequently, the Respondent vide a letter dated 16th April 2021 issued a tax decision demanding payment of additional taxes amounting to Kshs. 27,730,065.00 being Import Duty, VAT and late payment interest for the period 2016 to 2018.
11.Aggrieved by the tax decision, the Appellant filed a Notice of Appeal on 14th June 2021.
The Appeal.
12.The Appeal is premised on the following four grounds as stated in the Memorandum of Appeal dated 27th May 2021 and filed on 14th June2021:-a.That the Respondent erred in law and in fact by failing to appreciate that Dialyzer diapes steam is an artificial kidney and was correctly classified under Tariff Code 9018.39.00 of the East African Community Common External Tariff;b.That the Respondent erred in law and in fact by classifying Dialyzer diapes steam imported by the Appellant under Tariff Code 8421.29.00 of the East African Community Common External Tariff and thus demanding taxes for Import Duties and Value Added Tax (VAT) at the rates of 10% and 16% respectively;c.That the Respondent erred in law and in fact by failing to appreciate the principle of Ejusdem Generis in interpreting the provisions of the East African Community Common External Tariff; andd.That the Respondent erred in law and in fact by violating the Appellant's legitimate expectation that Dialyzer diapes steam will be classified under Tariff Code 9018.39.00 of the East African Community Common External Tariff, which Tariff Code attracts Import Duty at the rate of 0% and is VAT exempt as provided for under Paragraph 36 of Part 1 of the First Schedule to the VAT Act, 2013.
Appellant’s Case
13.The Appellant’s case is premised on the following documents and the proceedings before the Tribunal:-a.The Appellant’s Statement of Facts dated 28th May 2021 and filed on 14th June 2021 together with the documents attached thereto.b.The witness statement of Reuben Chege dated 19th October 2021 and filed on 26th October 2021 and admitted in evidence on oath on 24th August, 2022.c.The Appellant’s Written Submissions dated 9th September 2022 and filed on 12th September 2022 together with the authorities filed therewith.
14.In its Statement of Facts, the Appellant presents four main arguments as follows:-a.Dialyzer (Artificial kidney) is classifiable under HS Code 9018.39.00 of the EAC CET which attracts Import Duty at the rate of 0% and is VAT exempt.
15.The Appellant avers that dialyzer in the medical field is also known as an artificial kidney owing to it performing the functions of a human kidney.
16.That the dialyzer is usually composed of hollow fibre which is used in haemodialysis to eliminate waste products from blood and remove excess fluids from the blood stream. Blood flows on one side of the membrane, whilst the other side is bathed by electrolyte or salt solution (dialysis fluid) continually produced by a proportionate system (haemodialysis machine), which also monitors and controls treatment. Molecules small enough to pass through the membrane, such as salts and low molecular protein breakdown products, tend to move in the direction of decreasing concentration. Larger substances, such as proteins and cells having dimensions greater than the pore diameter are retained.
17.That the Respondent vide its application for review decision held that a dialyzer should be classified under tariff Heading 8421 (and specifically under HS code 8421.29.00- Other) as opposed to tariff Heading 9018 of the EAC CET.
18.That tariff Heading 84.21 provides classification for "Centrifuges, including centrifugal dryers, filtering or purifying machinery and apparatus, for liquids or gases".
19.That HS code 8421.29.00 provides classification for "other", "Filtering or purifying machinery and apparatus for gases". This attracts import duty at the rate of 10%.
20.That tariff Heading 9018 provides classification for "instruments and appliances used in medical, surgical, dental or veterinary sciences, including scintigraphy apparatus, other electro-medical apparatus and sight setting instruments". Classification under this code attracts import duty at the rate of 0%.
21.That on the other hand, HS code 9018.39.00 provides for classification for "Other". This attracts import duty at the rate of 0%.
22.That additionally, paragraph 36 of Part I to the First Schedule of the VAT Act, 2013 provides for VAT exemption of "Catheters, cannulae and the like of tariff no. 9018.39.00."
23.That in interpreting tariff Headings 8421 and 9018, considerations should be given to the General Interpretation Rules (GIRs) for Classification of Goods and the Explanatory Notes ("ENs") to tariff Heading 9018 as provided for under the EAC CET. The GIRs provide for the principles to be applied while classifying goods under the EAC CET.a.That Rule 1 of GIRs states that "the titles of the Sections, Chapters and sub-Chapters are provided for ease of reference only, for legal purposes, classification shall be determined according to the terms of the Headings and any relative Section or Chapter Notes..”b.That Rule 3(a) of GIRs provides that where goods are prima facie classifiable under two or more Headings, classification shall be effected by having regards to, "the Heading which provides the most specific description shall be preferred to the Headings that provide more general description..."c.That Rule 3(b) of GIRs provides that the Heading which provides the essential character of the product has to be preferred for classification.d.That Rule 3(c) of GIR provides that "when goods cannot be classified by reference to 3(a) or 3(b), they shall be classified under the Heading which occurs last in the numerical order among those which equally merit consideration."e.That Rule 4 of the GIR provides that "goods which cannot be classified in accordance with the Rules set out in 27.1 to 27.4 above shall be classified under the Heading appropriate to the goods which they are most akin".1.The Appellant avers that by invoking Rules 1, 3(a), 3(b), 3(c) and 4 of the GIRs to the EAC CET it is clear that the dialyzer should be classified under tariff Heading 90.18 as opposed to tariff Heading 84.21 for the following reasons:a.That by invoking Rule 1 of the GIR, it is undisputed that a dialyzer commonly referred to as "an artificial kidney" is a medical apparatus/device/instrument and thus should fall under Tariff Heading 9018 which provides classification for other medical instruments;b.That without prejudice to the above, by invoking Rule 3(a) of the GIR, in the event that dialyzer was classifiable under both Tariff Headings 8421 and 9018, which is not the case in the present circumstances, tariff Heading 9018 should take precedence as it is specific to medical instruments as opposed to tariff Heading 8421 which provides for "other filtering or purification equipment or apparatus for liquids and gases." The latter is a very general description that provides for classification of apparatus which can be used outside the medical field including, for example, filtration of water for domestic and other uses;c.That by invoking Rule 3 (b) of the GIR in the present case, the essential character of a dialyzer is for the performance of dialysis in patients with renal failure which involves purification of blood in the human body and thus falls under Tariff Heading 9018 as opposed to Tariff Heading 8421 which provides classification of apparatus used for general filtration or purification of liquids or gases;d.That if Rule 3(c) of the GIRs is invoked, Tariff Heading 9018 occurs last in the numerical order hence remains the preferred product categorisation for the dialyzer; ande.That further, Rule 4 of the GIR provides that "goods which cannot be classified in accordance with the Rules set out above shall be classified under the Heading appropriate to the goods which they are most akin." The Cambridge English Dictionary describes "akin" to mean "having some of the same qualities." It therefore follows that if Rule 4 of the GIRs was to be invoked, then, it is clear that a dialyzer would best fall under tariff Heading 9018 which provides for other medical instruments/apparatus that a dialyzer is akin to, from a description and application perspective.
24.That in paragraph 10 of its review decision, the Respondent stated that the Explanatory Notes to Heading 84.21 lists dialyzers as classifiable in this Heading. According to the Respondent, Explanatory Notes to Heading
25.21 notes that "the Heading also covers dialysers, special type filters consisting essentially of a semi-permeable membrane through which liquids can pass by diffusion and thus be separated from colloidal particles."
26.The Appellant avers that the Respondent has selectively read and interpreted Explanatory Notes to Heading 8421 on the basis that Explanatory Notes to Chapter 8421 expressly exclude artificial kidney (dialysis) apparatus (Heading 9018) from Chapter 8421.
27.Further, the Appellant avers that the Explanatory Notes to tariff Heading 9018 expressly provides that artificial kidney (dialysis) apparatus falls under tariff Heading 9018.
28.The Appellant relied on various case laws which have held that dialyzers should be classified under Tariff Heading 9018. In the Indian cases of Sanwar Agarwal versus Commissioner of Customs (Port), W.P No, 496 of 2015 (the Sanwar case) and the decision in M/S Nipro India Corporation Private Limited (GST AAR Maharashtra) Appeal No. GST-ARA 141/2018- 19 /B-94 (the M/S Case) it was held that a dialyzer should be classified under tariff Heading 9018 and not 8421.
29.The Appellant avers that based on the interpretation of the GIRs and the Explanatory Notes to the CET, dialyzer should be classified under Tariff Heading 9018. Thus, it then follows that it correctly classified dialyzer under Tariff Code "9018.39.00 - other" which attracts Import Duty at 0% and is VAT exempt as provided for under Paragraph 36 of Part I to the First Schedule of the VAT Act, 2013 which provides for VAT exemption of "Catheters, cannulae and the like of tariff number. 9018.39.00."
30.The Appellant also took note of the Respondent's contention at Paragraph 10 of the review decision that WCO Classification Decision of 1999 also classified Disposable Sterilized dialyzers in Heading 8421 using GIR 1.
31.The WCO Classification Decision of 1999 held that:
32.The Appellant disputes the contention by the Respondent and avers that the WCO Classification Decision of 1999 did not relate to classification of an artificial kidney (as in this case), but rather related to classification of an article called 'Disposable Sterilized dialyzer' which is a part or component that is attached to an appliance including but not limited to an artificial kidney.
33.The Appellant avers that disposable sterilized dialyzer cannot work on its own and has to be connected to another appliance for example an artificial kidney for it to work. What this means is that the disposable sterilized dialyzer can be connected to other appliances and not only to an artificial kidney.
34.In light of the above, it is the Appellant's contention that disposable sterilized dialyzer can be attached to other non-medical appliances and thus why it had been classified under Chapter 8421 which is a very general classification Chapter.
35.The Appellant avers that the Respondent erred in law and fact by relying on the WCO Classification Decision of 1999 to hold that dialyzer should be classified under Tariff Heading 8421 as the WCO decision does not relate to classification of an actual artificial kidney.b.The principle of Ejusdem generis in construction of tax statutes.
36.The principle of Ejusdem generis states that where there is a list of words which is followed by general words then the general words are limited to the same kind as the specific words. This is consistent with Rule 4 of the GIR which requires goods which cannot be classified in accordance with the above Rules shall be classified under the Heading appropriate to the goods which they are most akin.
37.The Appellant avers that pursuant to the principle of ejusdem generis, it then follows that the Appellant properly categorized the dialyzer under tariff code "9018.39.00-Other".
38.That an interpretation of tariff code "9018.39.00 - Other" means that the general word "other" should be confined to the same scope of genus as the particular words within Chapter 9018.
39.That the particular words within Chapter 9018 relate to medical items such as electro-cardiographs, ultrasonic scanning apparatus, magnetic resonance imaging apparatus, scintigraphy apparatus, ultraviolet or infrared ray apparatus, syringes with or without needles, tubular metal needles for sutures.
40.The Appellant avers that by virtue of the principle of ejusdem generis rule, it has correctly classified dialyzer, which is a medical apparatus under tariff code 9018.39.00.
41.On the other hand, the Appellant avers that Chapter 8421 relates to "centrifuges, including centrifugal dryers, filtering or purifying machinery and apparatus, for liquids and gases". Further, the particular words within HS Code 8421 do not relate to medical items or devices but rather to items such as cream separators, clothes-dryers, filtering or purifying machinery and apparatus for liquids, water, beverages other than water and oil or petrol filters for internal combustion engines.
42.In this regard, the Appellant contends that dialyzer cannot be classified under HS code "8421.29.00 other filtering or purifying machinery and apparatus" as the same does not have any resemblance to the products covered therein, as blood in human body cannot be compared with any other filters and apparatus meant for purifying water, other beverages, oil and petrol filters for internal combustion engines which items are not used in the medical field.b.The Appellant had a Legitimate Expectation that the dialyzer would be cleared under Tariff Code 9018.39.00 of the EAC CET.
43.Legitimate expectation as observed by De Smith, Woolf & Jowell, in Judicial Review of administrative Action, 6th Edition of Sweet & Maxwell at Page 609 arises where a person making a decision has induced in someone a reasonable expectation that he will receive or retain a benefit of advantage.
44.The Appellant avers that the action by the Respondent in allowing it to clear for importation the dialyzers under HS Code 9018.39.00 from the year 2015 when it started importing the product to the year 2018 when it raised a concern on the tariff classification, created a legitimate expectation that the Appellant was declaring the dialyzer under the correct HS Code.
45.That the Respondent's action to demand import duty and VAT from the Appellant on the basis that dialyzer should be classified under HS Code 8421 amounts to the Respondent reneging from the expectation that it created to the Appellant that dialyzer is classifiable under HS Code 9018.39.00 which action is unlawful.
46.The Appellant avers that the Respondent is estopped from reneging on this expectation that it created to the Appellant that dialyzers are classifiable under HS Code 9018.39.00 and imposing another tariff classification as there has been no change in law or change in nature of the imported dialyzer.
47.The Appellant contended that it had a legitimate expectation that its products would be taxed according to the correct construction of the provisions of EACCMA as read together with the EAC CET and not according to concession or wrong view of the law by the Respondent.
48.That relying on the proper and lawful interpretation of the provisions of EACCMA as read together with the EAC CET, the Appellant imported various quantities of dialyzer and the same were entered under tariff code 9018.39.00 and the Respondent cleared the dialyzer for entry without levying any VAT or Import Duties.
49.That the Respondent erred in reneging on legitimate expectation created on the Appellant that the dialyzer would be cleared under Tariff Code 9018.39.00 of the EACCET.b.Import Duty and VAT paid on dialyzer in respect to previous shipments 2017MSA6751592 and 2017MSA6751563 were paid 'under protest'.
50.The Appellant avers that in a bid to clear urgent shipments needed in Kenya and to avoid huge demurrage costs, it paid 'under protest' taxes demanded by the Respondent.
51.The Appellant avers that the payments above were not made as a result of admission of liability on unpaid taxes but made 'under protest' owing to the urgency of the shipments as the product was urgently needed in Kenya.
52.That in this regard and based on the demonstration that dialyzer is classifiable under HS Code 9018 and thus subject to Import Duty at 0% and exempt from VAT, the Appellant avers that the payments for the taxes were erroneous and thus it is entitled to a refund of the taxes paid 'under protest' as the taxes were neither due nor payable.
53.In its submissions, the Appellant is of the view that the issues set out in the Memorandum of Appeal should be the issues for determination by the Tribunal as follows:-a.Whether the Respondent erred in failing to appreciate that dialyzer diapes steam is an artificial kidney.b.Whether the Respondent erred in law and in fact in failing to be guided by the General Interpretation Rules (GIR) as well as the Explanatory Notes in the re• classification dialyzers.c.Whether the ruling by the World Customs Organization (WCO) - Opinion 8421.29/1 is binding on the Tribunal and the Respondent.d.Whether the Respondent violated the Appellant's legitimate expectation in re• classifying dialyzers thus entitling the Appellant to a refund of the taxes paid.e.Whether the Appellant should be refunded the import taxes paid "under protest" in respect to shipments 2017MSA6751592 and 2017MSA6751563.
a. Whether the Respondent erred in failing to appreciate that dialyzer diapes steam is an artificial kidney.
54.The Appellant submitted that the Respondent vide Paragraphs 18 and 22 of its Statement of Facts as read together with Paragraph 10 of its witness statement has erred by averring that dialyzer diapes is a part of or a filter of an artificial kidney.
55.The Appellant submitted that contrary to the Respondent's contention, dialyzer diapes steam is the scientific name for artificial kidney owing to it performing the functions of a human kidney.
56.The Appellant submitted that the dialyzer is a semi permeable membrane instrument usually composed of hollow fibre which is used in haemodialysis to eliminate waste products from blood and remove excess fluids from the blood stream.
b. Whether the Respondent erred in law and in fact in failing to be guided by the by the General Interpretation Rules (GIR} as well as the Explanatory Notes in the re• classification dialyzers.
57.The Appellant avers that it imported a consignment of dialyzers under vide entry number 2017/MSA 6751563. As demonstrated above, the term "dialyzer diapes steam" is the scientific name in the medical field for an artificial kidney owing to it performing the functions of a human kidney.
58.The Appellant submitted that it declared its consignments of dialyzers under Tariff Heading 90.18, which provides classification for "instruments and appliances used in medical, surgical, dental or veterinary sciences, including scintigraphy apparatus, other electro-medical apparatus and sight setting instruments". Classification under this code attracts import duty at the rate of 0%.
59.The Appellant urged the Tribunal to uphold the provisions of the Explanatory Notes to Heading 9018 in compliance with the principle of strict interpretation of tax statutes without intendment. In this regard, the Appellant called upon the Tribunal to endorse the principles of tax interpretation as set out in the case of Mount Kenya Bottlers Ltd & 3 Others v Attorney General & 3 Others NRB Civil Appeal No. 164 of 2013 [2019) eKLR where the Court of Appeal cited with approval Cape Brandy Syndicate v I.R. Commissioners [1921) 1KB;' ...in a taxing Act one has to look at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used'.
60.The Appellant relied on the principles of taxation as reiterated by the author of Bennion on Statutory Interpretation, 5th Edition where he summarizes the correct position in law as far as interpretation of tax legislation is concerned as follows:-
61.The Appellant urged the Tribunal to be persuaded by the holding of the Indian High Court at Calcutta. The Calcutta High Court in the case of Sanwar Agarwal vs. Commissioner of Customs {Port), W.P No. 496 of 2015 Sanwar Agarwal was faced with the issue of the correct classification of an artificial kidney. The Court in classifying dialyzers under Heading 9018 on account of specificity found the Commissioner's preferred Heading 8421 to be too generic. The relevance of the subject at paragraph 28 holds as follows;
62.Similarly, in the case of M/S Nipro India Corporation Private Limited (GST AAR Maharashtra} Appeal No. GST-ARA 141/2018-19 /B-94 (the M/S Case), the Maharashtra Court found that an artificial kidney should be classified under Heading 9018 among other medical equipment used by professionals. Accordingly, the Appellant urges this Honourable Tribunal to find Heading 9018 as the correct Heading as its peer courts in India, bearing in mind that EAC CET is based on the International Convention on the Harmonized Commodity Description and Coding System whose aim is to unify commodity classification.
63.That in addition to the foregoing, where classification cannot be done in accordance with the GIR 3(a), the provisions of GIR 3(b) will take precedence before GIR 3(c). GIR 3(b) provides for classification by reference to the essential character of the item classified i.e. reference to the material or component which gives the item is essential character. In this regard, the Explanatory Notes adjudge the essential character of an item by a number of factors such as the quantity, weight, value, or by the role played by competent.
64.That as was clarified by the Appellant's witness during the hearing, the most important part of the dialysis machine is the artificial kidney, considering that the other equipment are the pump and the tubes. As such, the essential character of a dialyzer is for the performance of dialysis in patients with renal failure which involves purification of blood in the human body. Prudence therefore dictates that dialyzers should be classified together with other medical equipment under Heading 9018 as opposed to a generic classification for filters used for industrial process which cannot be used to filter human blood.
65.That in the unlikely event that classification cannot be done in accordance with GIR 1, GIR 3(a) and 3(b), the Appellant urged the Tribunal to rely on the classification criterion under GIR 3(c). Under GIR 3(c) goods which cannot be classified under 3(a} and 3(b} are to be classified in the Heading which occurs last in numerical order among those which equally merit consideration in determining their classification. Of the two Headings that merit consideration in this Appeal. Heading 9018 occurs last in the numerical order thus affirming that the Appellant did not err in classifying the products during importation.
66.The Appellant submitted that based on the interpretation of the GIRs and the Explanatory Notes to the CET, dialyzer should be classified under Tariff Heading 9018. Thus, it then follows that it correctly classified dialyzer under Tariff Code "9018.39.00- other" which attracts Import Duty at 0% and is VAT exempt as provided for under Paragraph 36 of Part I to the First Schedule of the VAT Act, 2013 which provides for VAT exemption of "Catheters, cannulae and the like of tariff no. 9018.39.00.
c. Whether the World Customs Organization (WCO) Opinion 8421.29/1 on Disposable Sterilized dialyzers is binding on the Tribunal and the Respondent
67.The Respondent has relied on a ruling by the World Customs Organization (WCO), regarding classification of disposable sterilized dialyzers, as the basis for re-classifying the dialyzers imported by the Appellant herein. The Appellant submitted the Tribunal should decline reliance on the said ruling.
68.That the opinions rendered by the WCO are not dispositive in nature, neither are they legally binding on this Tribunal. That this position was appreciated by the Tribunal in a number of cases. In Tax Appeal Number 83 of 2021, Car & General Trading Ltd v Commissioner of Customs [2021], the Tribunal at paragraph 112 of the judgement was of the view that interpretation of the Harmonised (HS) system by a single contracting party, though persuasive did not form an official binding decision of the WCO. To that extent the Tribunal determined that KRA was not bound to apply a decision on the HS merely because it was made by a contracting party.
69.That similar position was taken by the Tribunal in Tax Appeal No. 21 of 2021 Auto Industries Limited v Commissioner of Customs & Border Control, wherein it held that the Respondent was not bound to apply a decision on the HS merely because it was made by another contracting party to the HS Convention.
70.That to buttress the above position, and in the context of this Appeal, it should be noted that the Respondent cannot at all with certainty claim to know what items were submitted to WCO classification committee for it to rely on the said classification. The Appellant submitted that this is the reason why the WCO ruling should not hold any currency in this Appeal. It should not, and cannot, be a proxy for independent interpretation of the EAC CET and the Explanatory Notes therein.
71.The Appellant submitted that WCO's ruling does not take precedence over the Tribunal's interpretative jurisdiction. The Appellant relied on the United States Federal Circuit court Cummins Inc. v United States, 454 F.3d 1361 (Fed. Cir. 2006) wherein the Court in declining to rely on WCO ruling laid down its reasoning at paragraph 28 as follows:
72.The Appellant submitted that the Respondent cannot rely on the said WCO ruling as the ruling in question classifies an item different from those imported by the Appellant herein. The WCO ruling relied upon by the Commissioner classifies an item known as a 'disposal sterilized dialyzer'. The Appellant drew the Tribunal's attention to the last sentence of the said ruling at Appendix 9 of the Respondent's Statement of Facts. The relevant part of the ruling states as follows;
d. Whether the Respondent violated the Appellant's legitimate expectation in re-classifying dialyzers thus entitling the Appellant to a refund of the taxes paid under protest.
73.The Appellant submitted that the Respondent in re-classifying the dialyzers under HS Code 8421 as opposed to HS Code 9018 violated the Appellant's legitimate expectation.
74.The Appellant submitted that since its incorporation, close to 10 years ago, it had been importing and clearing dialyzers under the Heading 9018.
75.That at no point did the Respondent object to the Appellant's classification of the dialyzers. The Appellant submitted that the Respondent is estopped from re•classifying the product as its conduct created an expectation on the part of the Appellant.
76.Legitimate expectation as observed by De Smith, Woolf & Jowell, in Judicial Review of Administrative Action, 6th Edition of Sweet & Maxwell at Page 609 arises where a person responsible for taking a decision has induced in someone a reasonable expectation that will receive or retain a benefit of advantage.
77.Additionally, in the case of Regina v London Borough of Newham and Manik Bibi and Ataya A/noshed [2002] 1 WLR 237 (hereinafter R versus Bibi case) established three questions that must answered for legitimate expectation to arise. These are:a.What has the public authority, whether in practice or by promise committed itself. That is if the public body has done nothing which can legitimately have generated the expectation that it advanced to the Court, the case ends there;b.Whether the authority has acted or proposes to act unlawfully in relation to the commitment; andc.What should the Court do? In this, the Court has two functions- assessing the legality of actions by administrators, and if it finds unlawfulness on the administrators part, deciding what relief it should give.
78.The Appellant avers that the action by the Respondent in allowing the Appellant to clear for importation the dialyzers under HS Code 9018.39.00 from the year 2015 when it started importing the product to the year 2018 when it first raised a concern on the tariff classification, created a legitimate expectation on the Appellant that it was declaring the goods under the correct HS Code.
79.The Respondent's action to demand Import Duty and VAT from the Appellant on the basis that dialyzers should be classified under HS Code 8421 amounts to the Respondent reneging from the expectation that it created to the Appellant that dialyzers are classifiable under HS Code 9018.39.00, which action is unlawful.
80.Relying on the proper and lawful interpretation of the provisions of EACCMA as read together with the EACCET, the Appellant imported various quantities of dialyzer and the same were entered under tariff code 9018.39.00 and the Respondent cleared the dialyzer for entry without levying any VAT or Import Duties.
81.In this regard, it is the Appellant's assertation that the Respondent erred in reneging on legitimate expectation created on the Appellant that the dialyzer would be cleared under Tariff Code 9018.39.00 of the EACCET.
82.To buttress the above averments on legitimate expectation by conduct, the Appellant relies on the Court of Appeal decision in Kenya Revenue Authority & 2 others v Darras Investment Limited [2018] eKLR, wherein it was held as follows;
83.A similar approach was adopted by the Hon. Majanja J, in Republic v Kenya Revenue Authority Ex Parte Sharke Distributors Ltd [2012] In holding that legitimate expectation could arise from the conduct of a public authority, the Hon. Judge held as thus;
84.The Appellant submitted that a representation was created by the Respondent to the extent that the Respondent and his agents allowed and approved the Appellant's declaration of dialyzers under tariff Heading 9018 from 2015. It cannot therefore renege on that representation, which the Appellant maintains was a representation proper in law and in line with the interpretation of the EACCET and the explanatory notes therein.e.Whether the Appellant should be refunded the import taxes paid "under protest" in respect to shipments 2017MSA675J.5SZ and l017MSA6751563.
85.The Appellant avers that in a bid to clear urgent shipments needed in Kenya for patients in urgent need of medical care and to avoid huge demurrage costs, it paid 'under protest' taxes demanded by the Respondent.
86.The Appellant submitted that the taxes already paid were not made as a result of admission of liability on unpaid taxes but made 'under protest' owing to the urgency of the shipments as the product was urgently needed in Kenya due to the large number of patients suffering from renal failure.
Appellant’s prayers
87.The Appellant makes the following prayers to the Tribunal:-a.The decision of the Respondent contained in the letter dated 16th April 2021 demanding payment of Kshs. 27,730,065.00 be set aside;b.dialyzer diapes steam be classifiable under Tariff Code 9018.39.00 of the EAC CET which attracts Import Duty at the rate of 0% and is VAT exempt as provided for under Paragraph 36 of Part I of the first Schedule to the VAT Act, 2013;c.The Appellant is entitled to a refund of the taxes amounting to Kshs. 3,605,006.00 paid “under protest”.d.The Appeal be allowed with costs to the Appellant; ande.Any other orders that the Honorable Tribunal may deem fit.
Respondent’s Case
88.The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:-a.The Respondent’s Statement of Facts dated and filed on 30th June 2021.b.The Witness statement of Ms. Janekaren Kigoro dated and filed on 2nd December 2021 which was admitted in evidence on oath on 12th September 2022; andc.The Respondent’s written submissions filed on 24th August 2022.In the Statement of Facts, the Respondent addressed the following issues.
a.Whether a dializer diapes steam (hereby referred to as Dializer) is correctly classified under tariff code 9018.39.00 of the East Africa Community Common External Tariff EAC/CET.
89.The Respondent avers that a Dializer is a disposable filtering part that functions when the article is connected by means of tubes to a special appliance, an artificial kidney, which enables the blood and the dialysate to circulate and toxic matter to be evacuated.
90.That as such, Dializers being part of a dialysis machine are excluded from Chapter 90, by the application of Note 2 (a) to Chapter 90.
91.That note 2(a) to Chapter 90 states that,Subject to Note 1 to Chapter 90, parts and accessories for machines, apparatus, instruments or articles of this Chapter are to be classified according to the following rules:
92.That the Appellant has failed to appreciate the rules of classification as stated in the GIRs, and invokes GIR Rule 1, 3 a, 3b, 3c and 4. The Appellant invokes GIR 4 to stress on the principle of ‘ejusdem generis' which states that "general words (as in a statute) that follow specific words in a list must be construed as referring only to the types of things identified by the specific words".
93.That GIR 4 requires goods that cannot be classified in accordance with the GIR 1 to GIR 3, be classified under the Heading appropriate to the goods, which they are most akin. That however, the Appellant already claims to use GIR 1 and all of 3, but classifies under the Subheading that provides for “Syringes, needles, catheters, cannulae and the like” and more specifically under the Subheading that reads "others", 9018.39.00.
94.That GIR Rules are to be applied sequentially from the first rule to the last rule. The other GIR Rules can only take effect provided the terms of Headings or Section or Chapter Notes do not otherwise require. In addition, Rule 3(b) operates only if Rule 3(a) fails in classification, and if both Rules 3(a) and (b) fail, Rule 3(c) will apply.
b. Whether the Respondent was wrong in classifying dialyzer diapes steam imported by the Appellant under Tariff code 8421.29.00 of CET and thus demanding taxes for import Duties and VAT at the rates of 10% and 16% respectively.
95.The RespondeInt avers that its classification of the goods in dispute was determined by following the General Interpretation Rules (GIR) as cited in the EAC/CET, which govern classification of goods in the nomenclature.
96.That using GIR 1 by application of Note 2 (a) to Chapter 90, and GIR 6 which states that "classification of goods in Subheading of a Heading shall be determined according to the terms of those Subheading, and that only Subheadings at the same level are comparable''. A dializer is a filtering and purifying apparatus for liquids, in this case, blood and dialysate to remove toxic matter, and thus classifiable under EAC/CET tariff code 8421.29.00, which provides for 'Filtering or purifying machinery and apparatus for liquids", and attracts Import Duty at 10% and VAT at the standard rate.
97.That further, the Explanatory Notes (ENs) to the Harmonized Commodity Description and Coding System constitute the official interpretation of the Harmonized system at the International level. That they provide a commentary on the scope of each Heading of the EACCET and are useful in ascertaining the classification of merchandise.
98.That the Explanatory Notes (ENs) to Heading 8421.29 indicate that dialyzers are covered under thisHeading. The note reads, "the Heading also covers dialyzers, special type filters consisting essentially of a semi- permeable membrane through which liquids can pass by diffusion and thus be separated from colloidal particles."
c. Whether the Authority erred in law and in fact by violating the Appellant's legitimate expectation that dialyzer diapes steam will be classified under Tariff code 9018:39.00 of EACCMA. CET, which Tariff code attracts import duty at the rate of 0% and is VAT exempt as provided for under Paragraph 36 of Part 1 of the First Schedule to the VAT Act.
99.The Respondent is a member of the WCO and relies on the guidance of WCO for valuation, origin and tariff determination. The WCO classified dialyzers under Heading 8421 by application of GIR 1 in the Classification Decision of 1999.
100.The Respondent that the Tribunal should note that WCO is the highest body of consultation whenever member countries are unable to determine the proper classification.
101.That additionally, the WCO is a neutral body that gives tariff classification opinion to member countries whenever there is a dispute that a member country is unable to determine.
102.That the Respondent is also guided by the EACCET for all classification matters, and the GIR provide for how the classification is done in the nomenclature. In case of any doubts, the importers including the Appellant have the option to seek an advance tariff ruling to ensure certainty, which is usually binding on the applicant and the Commissioner customs.
103.That Section 248A of the East African Community Management Act provides for a window for taxpayers wishing to import goods to make a written application to the Respondent for advance binding rulings on, inter alia, a tariff classification.
104.That Section 235 of the EACCMA allows the Respondent to conduct a post clearance audit to ensure that the Appellant's declarations on import and payment of taxes on the said declaration are accurate.
105.That in response to the Appellant's allegations that the Respondent violated the Appellant's legitimate expectation that dialyzer diapes steam will be classified under Tariff code 9018.39.00, the Respondent responds as follows;-i.Legitimate expectation can only arise when a body, by representation or by past practice, has aroused an expectation that is within its power to fulfill. For an expectation to be legitimate, therefore, it must be founded upon a promise or practice by a public authority that is expected to fulfill the expectation.ii.A taxpayer cannot grant themselves legitimate expectation by virtue of the fact that they have been importing under a tariff that the Respondent later on through post clearance Audit realizes is not the correct tariff.iii.The fact that the Appellant has been importing the dialyzer diapes steam under Tariff code 9018.39.00 does not mean that the Respondent created a legitimate expectation to the Appellant that that is the correct tariff.iv.Legitimate expectation cannot override the clear provisions of the law.v.The Respondent has done nothing that will create a legitimate expectation subject to the dispute herein.vi.The Appellant's averments under paragraphs 47 to 55 of its Statement of facts are therefore erroneous appreciation of the concept of Legitimate Expectation.
106.That in response to paragraphs 56 to 58 of the Appellant's statement of facts, the Respondent avers that there is no evidence on record to show that the payments made for the previous shipments were paid under protest.
107.The Respondent states the taxes outlined in its assessment and confirmed in its objection decision were raised in conformity with the laws should be upheld. In its submissions, the Respondent stated as follows:-a.What is the correct tariff classification of the dialyzer diapes steam?
108.The Respondent submitted that dialyzers, being an apparatus that is a part of a dialysis machine are classifiable in Heading 8421 under the provisions of GIR 1 because the Heading covers therein "..... filtering or purifying machinery and apparatus for liquids or gases."
109.That this is in accordance with the provisions of the GIR 1 which stipulates that when determining Classification of a product, classification will be determined according to the terms of the Headings and any relative Section or Chapter Notes and, provided such Headings or Notes do not otherwise require.
110.The Respondent submitted that having looked at what the dialyzer diapes steam apparatus is and what it does (filtration) then the said apparatus was best suitable to be classified under Heading 8421 which covers "....filtering or purifying machinery and apparatus for liquids or gases."
111.That by application of note 2 (a) to Chapter 90 of the CET which states that,
112.That the purpose of Note 2(a) of Chapter 90 is that it is an exclusion clause that expressly removes parts and accessories which are goods included in any of the Headings of this Chapter or of Chapters 84, 85 or 91 (other than Heading 8487, 8548 or 9033) and directs that the same be classified in their respective Headings.
113.That this means that where an item would have been classified under Chapter 90, if the said item is a part of an accessory, the said items is to be removed from then said Chapter 90 and be classified as directed by the said Note 2(a) to Chapter 90.
114.That having observed above that a dialyzer diapes steam cannot function on its own without being connected to a dialysis machine, then it is very clear that the dialyzer diapes steam apparatus is a part or an accessory to the dialysis machine, and it is expressly removed from Chapter 90 and directs it where it is to be classified which is Chapter 84.
115.That GIR 6 directs that, classification shall be determined according to the terms of those Subheadings and any related Subheading Notes and, mutatis mutandis, to the preceding Rules, on the understanding that only Subheadings at the same level are comparable.
116.That Heading 8421 has - Filtering or purifying machinery and apparatus for liquids. It has a Subheading 8421.29.00 indicated as --other, which will include any other filtering or purifying machinery or apparatus, that is not specifically included in the other two level Subheadings under the same one level Heading.
117.That in this case, the consignment of dialyzers are thus classifiable under Subheading 8421.29.00.
118.That there is an inclusion note under Heading 8421 that further provides as follows:-
119.That the explanation provided by this inclusion note is in tandem with the Appellant's own explanation of the dialyzer diapes steam at paragraph 12.2 of its witness statement.b)Reasons why the dialyzer diapes steam cannot be classified under tariff code 9018.19.00 of the East Africa Community Common External Tariff EAC/CET.
120.That a dialyzer is a disposable filtering part that functions when the article is connected by means of tubes to a special appliance, an artificial kidney, which enables the blood and the dialysate to circulate and toxic matter to be evacuated.
121.The Respondent submitted that this very classification is an erroneous application of the GIRs and secondly, the Heading under which the Appellant has sought to classify the said dialyzer diapes steam i.e. "Syringes, needles, catheters, cannulae and the like”, has nothing to do with dialyzers.
122.That the GIRs are to be applied sequentially from the first rule to the last rule. The other GIRs can only take effect provided the terms of Headings or Section or Chapter Notes do not otherwise require. In addition, Rule 3(b) operates only if Rule 3(a) fails in classification, and if both Rules 3(a) and (b) fail, Rule 3(c) will apply.
123.That the Appellant has argued that the dialyzer diapes steam ought to be classified under Heading 9018 by virtue of the explanatory note to Chapter 8421 which excludes artificial kidney (dialysis apparatus). That in response, the Respondent submitted that the Appellant has confused the whole dialysis machine vis a vis the dialyzer diapes steam apparatus that it imports. The Respondent submitted that what the Appellant is calling an artificial kidney is actually a part/accessory to the dialysis machine which is the artificial kidney.
d. Whether the Authority erred in law and in fact by violating the Appellant's legitimate expectation that dialyzer diapes steam will be classified under Tariff' code 9018.39.00 of EACCMA CET.
124.That in carrying out the post clearance audit, the Respondent was guided by the law on post clearance audit under EACCMA.
125.That post clearance audit is sanctioned by Section 235 and 236 of EACCMA. That under the said provisions the Appellant is empowered to carry out in-depth audits after the release of the goods without the pressure of time which would otherwise prevail at the part of entry before the release of the goods. That pursuant to the said Sections, the Appellant has powers to call for relevant documents from the taxpayer and to conduct an inspection or audit.
126.That the East African Community Customs Management Act, 2004 at Section 235 (1) provides that;1.That in accordance with Section 236 of EACCMA, the proper officer has the following powers in conducting an audit, namely to-
a.verify the accuracy of the entry of goods or documents through examination of books, records, computer-stored information, business systems and all relevant customs documents, commercial documents and other data related to the goods;b.question any person involved directly or indirectly in the business, or any person in the possession of documents and data relevant to the goods or entry;c.inspect the premises of the owner of the goods or any other place of the person directly or indirectly involved in the operations; and (d)examine the goods where it is possible for the goods to be produced.
128.That in order to facilitate cross border trade, Sections 235 and 236 of the EACCMA have endowed the Respondent with the powers to carry out post clearance audits in order to ensure that goods are efficiently cleared from the port of entry and the time taken while in Customs custody is significantly reduced and to enable traders to dispose of their goods promptly upon their arrival in the Country.
129.That the purpose of such audits is to verify the accuracy and authenticity of declarations and covers a trader's commercial data, business systems, records and books. That post clearance audits can be conducted on a case- by-case basis, focusing on targeted sectors/industries, selected on the grounds of risk analysis of the commodity and/or trader, or in a planned, regular way, set out in an annual audit programme.
130.That in the case of Republic vs. Kenya Revenue Authority Ex Parte Bata Shoe Company Kenya Limited [2014] eKLR the High Court (W. K. Korir, J.) held that Sections 235 and 236 of the Act clearly give the KRA powers to conduct a post clearance audit on the affairs of a taxpayer for the previous five years from the date of the audit.
131.That the Respondent therefore sought to establish through the post clearance audit whether the Appellant had correctly classified the apparatus under dispute.
132.That Section 248A of the East African Community Management Act provides for a window for taxpayers wishing to import goods to make a written application to the Respondent for advance binding rulings on, inter alia, a tariff classification
133.That the Respondent as a member of WCO relied on the guidance of WCO for valuation, origin and tariff determination. The WCO classified dialyzers under Heading 8421 by application of GIR 1 in the Classification Decision of 1999.
134.That the Tribunal should note that WCO is the highest body for consultation whenever member countries are unable to determine the proper classification.
135.That additionally, the WCO is a neutral body that gives tariff classification opinion to member countries whenever there is a dispute that a member country is unable to determine.
136.That the Respondent is also guided by the EACCET for all classification matters, and the GIR provide for how the classification is done in the nomenclature. In case of any doubts, the importers including the Appellant have the option to seek an advance tariff ruling to ensure certainty, which is usually binding on the applicant and the Commissioner customs.
137.The Respondent relied on the case of Nairobi TAT No. E006 of 2021: Solutions Medical Systems Ltd v The Commissioner of Customs and Border Control where when an identical tariff classification dispute was presented before the Honorable Tribunal, the Honourable Tribunal analyzed the issue and found the proper classification to be Hs Code 8421.29.00.
Respondent’s Prayers
138.The Respondent prays that the Tribunal finds that:-a.The Respondent carried out proper and credible audit and the resultant demand was issued in accordance with the applicable laws;b.The demand for Kshs. 27,730,065.00 were lawful and properly demanded and as such the same should be upheld;c.The appeal be dismissed with costs.
Issues For Determination
139.The Tribunal has carefully studied the pleadings and documentation filed by both parties and is of the respectful view that that the issues that call for its determination are as follows:-a.What is the correct tariff classification applicable to the dialyzer diapes steam imported by the Appellant?b.Whether the Respondent erred in law and in fact in demanding the short-levied taxes through the demand notice dated 16th April 2021?
Analysis And Findings
140.Having identified the issues for determination the Tribunal proceeded to deal with the issues separately as follows:a.What is the correct tariff classification applicable to the dialyzer diapes steam imported by the Appellant?
141.The dispute before the Tribunal is on the correct tariff classification of a Dialyser. The Cambridge English dictionary defines a dialyzer as follows:-
142.From the pleadings by the parties and the proceedings before the Tribunal, the product imported by the Appellant was agreed to be a dialyzer as defined above. What is in dispute is the tariff classification of this product.
143.The Tribunal had the opportunity to determine an identical tariff classification dispute in TAT 472 of 2020, Solutions Medical Systems Limited vs. Commissioner of Customs and Border Control. In the determination contained in paragraphs 46 to 53, the Tribunal stated:-
144.The Tribunal finds no justification for departing from this finding and re- confirms that the correct tariff for classification of the dialyser diapes steam imported by the Appellant is 8421.29.00.
b Whether the Respondent erred in law and in fact in demanding the short- levied taxes through the Demand Notice dated 16th April 2021?
145.The Appellant avers that the action by the Respondent in allowing it to clear for importation the dialyzers under HS Code 9018.39.00 from the year 2015 when it started importing the product to the year 2018 when it raised a concern on the tariff classification, created a legitimate expectation that the Appellant was declaring the dialyzer under the correct HS Code.
146.The Respondent's action to demand import duty and VAT from the Appellant on the basis that dialyzer should be classified under HS Code 8421 amounts to the Respondent reneging from the expectation that it created to the Appellant that dialyzer is classifiable under HS Code 9018.39.00 which action is unlawful.
147.The Appellant also avers that the Respondent is estopped from reneging on this expectation that it created to the Appellant that dialyzers are classifiable under HS Code 9018.39.00 and imposing another tariff classification as there has been no change in law or change in nature of the imported dialyzer.
148.On the issue of legitimate expectation, the Respondent responded that;-a.A taxpayer cannot grant themselves legitimate expectation by virtue of the fact that they have been importing under a tariff that the Respondent later on through post clearance audit realizes is not the correct tariff.b.The fact that the Appellant has been importing the dialyzer diapes steam under Tariff code 9018.39.00 does not mean that the Respondent created a legitimate expectation to the Appellant that that is the correct tariff.c.Legitimate expectation cannot override the clear provisions of the law.1.The Respondent submitted that they based the demand on the powers granted under Section 135 of the EACCMA which states that-
149.In the case of Republic vs. Kenya Revenue Authority Ex Parte Universal Corporation Ltd [2016] eKLR, Odunga J, said the following regarding the Respondent's power to undertake post clearance audits-
150.However the exercise of statutory power must be so exercised in a manner that is fair and just to the people against whom the same is being exercised"
151.The Tribunal notes that the Respondent is empowered by statute to carry out post clearance audits and demand for short-levied taxes as long as it is within the statutory timelines provided under Sections 235 and 236 of EACCMA.
152.Consequently, the Tribunal makes a finding that the Respondent did not err in law and fact in demanding short-levied taxes through the Demand Notice dated 16th April 2021.
Final Decision
153.The upshot of the foregoing is that this Appeal is not merited and the Tribunal accordingly makes the following Orders: -a.The Appeal be and is hereby dismissed.b.The correct tariff for classification of the dialyser diapes steam imported by the Appellant is 8421.29.00.c.The Respondent’s demand notice dated 16th April 2021 for Kshs. 27,730,065.00 be and is hereby upheld.d.Each party to bear its own costs.
154.It is so ordered.
DATED and DELIVERED at NAIROBI this 17th day of March, 2023........................................…..ERIC N. WAFULA CHAIRMAN..............................................CYNTHIA B. MAYAKA GRACE MUKUHA MEMBER MEMBER................................................JEPHTHAH NJAGI ABRAHAM K. KIPROTICH MEMBER MEMBERJUDGMENT- APPEAL NO. 258 OF 2021- ANGELICA MEDICAL SUPPLIES LITD –VS- COMMISSIONER OF CUSTOMS