Alpharama Limited v Commissioner of Customs and Border Control (Appeal E832 of 2023) [2024] KETAT 1585 (KLR) (22 November 2024) (Judgment)
Neutral citation:
[2024] KETAT 1585 (KLR)
Republic of Kenya
Appeal E832 of 2023
E.N Wafula, Chair, AK Kiprotich, G Ogaga & RO Oluoch, Members
November 22, 2024
Between
Alpharama Limited
Appellant
and
Commissioner of Customs and Border Control
Respondent
Judgment
Background
1.The Appellant is a limited liability company registered for tax purposes in the Republic of Kenya.
2.The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, and the Authority is charged with the responsibility of among others, assessment, collection, receipting and accounting for all tax revenues as an agency of the Government of Kenya, and the administration and enforcement of the statutes set out under the Schedule to the Act.
3.The issue in this dispute arose when the Appellant carried out a desk audit of the Appellant’s imports for the period between March 2018 and January 2023 resulting in the issuance of its findings on 29th May 2023. The Appellant issued its response thereon on 13th September 2023.
4.The Respondent subsequently issued its review decision on 25th September 2023 in which it classified the Appellant’s products under HS Code 3402.90.00 and demanded additional tax liability of Kshs 24,743,999.00.
5.The Appellant aggrieved by the Respondent’s review decision lodged a Notice of Appeal dated 7th November, 2023 and filed on 21st November, 2024.
The Appeal
6.The Appellant filed its Memorandum of Appeal dated 21st November 2023 and filed on the same date setting out the following grounds of Appeal;a.That the Respondent erred in fact and law by confirming that Maralen PCA 85 (hereinafter referred to as “the product” imported by the Appellant are classifiable under tariff Code 3402.90.00 of the EAC/CET, and therefore, inter alia subject to additional import duty at the rate of 25% and VAT amounting to Kshs. 24,743,997.b.That the Respondent erred in law and fact in finding that the Appellant’s product fell under HS Code 3402.90.00 as opposed to Heading 3202.10.00. However, the product does not fit within the terms of the sub and Explanatory notes of the aforesaid classification.c.That the Respondent erred in law and in fact by retrospectively applying the Tariff classification Ruling dated 9th January 2023 (2nd Ruling) on the Appellant’s import made between 2018 and 2023.d.That the Respondent erred in law and fact by failing to appreciate that the Appellant's classification under Heading 3202 was based on the Respondent's tariff ruling on 30th November 2011 (1st Ruling) which stipulated that the Appellant’s product was classifiable under Heading 3202.e.That the Respondent erred in law and fact by invoking provisions of Section 229 of the EACCMA even though the referenced demand was never issued to the Appellant and no evidence of receipt of the same has been adduced.f.That the Respondent erred in law and fact by issuing a review decision which is in breach of the Appellant’s right to legitimate expectation, presumption of regularity and fair administrative action.
Appellant’s Case
7.The Appellant set out its case in its Statement of Facts dated 21st November 2023 and filed on the same date and the Written Submissions dated 1st August 2024 and filed on 2nd August 2024.
8.The Appellant stated that its decision to classify the product under Heading 3202 was premised squarely on the Respondent’s Tariff Ruling dated the 30th November 2011 wherein the Respondent had explicitly informed it that the appropriate classification of the product was HS Code 3202.10.00.
9.The Appellant identified the following issues for determination in this Appeal.
i. Whether the Respondent’s demand for Kshs 3,433,163.73 is justified.
10.The Appellant stated that the Ruling emanated from a comprehensive analysis of Maralen PCA which revealed that the products were characterized as colorless viscous chemical liquid substances that contained organic compounds characterized by the presence of aromatic hydrocarbon functional groups and non-ionic organic surface-active agents.
11.That based on these detailed findings, the Ruling concluded that the Appellant’s product was a leather tanning chemical and therefore qualified to be classified under EAC/CET Heading 3202.
12.That the said Ruling remained in force until the subsequent issuance of the new tariff Ruling dated 9th January 2023. That the 1st Ruling was in place and effective between 30th November 2011 to 8th January 2023.
13.That the applicable Ruling during the period of the audit was the 1st Ruling of 30th November 2011 and not the 2nd Ruling.
14.The Appellant averred that the 2nd Ruling did not apply to the product under review because the review was done when the 1st Ruling was in place between August 2018 to May 2023. That applying the 2nd Ruling to the product amounted to a retrospective application of the law.
15.The Appellant stated that the Respondent’s argument that the products under review are different is not factual because Maralan PCA 85 are indeed the same products and that Maralan PCA 85 is just a trade name. That the nature of the product has not changed substantially from 2011 to 2018 to warrant the reclassification.
16.That the laboratory analysis/report which guided the Respondent in its reclassification and which allegedly pointed out the differences in the products in terms of composition from what was tested in 2011 was not shared with the Tribunal and the Appellant.
17.The Appellant posited that this was a classical case where the Respondent applied its Ruling retrospectively on its imports of 2018 to 2023 as affirmed by the courts in the following cases:a.Samuel Kamau & Anor. V Kenya Commercial bank & 2 Others [2012] EKLR.b.Mzuri Sweets Limited v Commissioner of Investigations & Enforcement Appeal No. 574 of 2020.
18.The Appellant posited that a legitimate expectation was created upon issuance of the Tariff Ruling in 2011 which informed the basis of all the Appellant’s subsequent importations and which it had imported for a decade.
19.That the Respondent’s demand is an unjust and unfair attempt to demand for classification under a different code which is subject to higher taxes.
20.The Appellant stated that its goods are subjected to two inspections, both conducted by personnel appointed by the Respondent: one at the point of origin and one at the point of entry, and neither of them had found any discrepancy with what was declared, or the code applied.
21.That no error was found in its declared tariff, meaning that the Respondent only seeks to rely on a strange classification which the Appellant nor the taxpayers nor the international community are accustomed to.
22.It supported it’s argument on legitimate expectation with the following cases:a.Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others Nairobi HCMA No. 743 of 2006[2007] KLR 240.b.Communications Commission of Kenya & 5 Others v Royal Media Services & 5 others.
ii. Whether the Appellant’s product is appropriately classifiable under heading 3202 or 3402
23.The Appellant stated that a tanning substance is defined as a chemical or natural agent used to convert animal skin to hide into durable leather. That the tanning process, crucial for producing leather, is divided into four main stages:
24.The Appellant was of the view that given this detailed process that its product goes through, it was evident that Maralen PCA is a product used in tanning and is thus appropriately classified under Heading 3202, as confirmed in the Respondent’s 2021 1st Ruling.
25.That the Respondent’s classification was not justified considering that:a.The product has not changed in any way,b.The Respondent has not demonstrated any change in the product, orc.That considering that the lab analysis finding from the 2nd Ruling has not been provided in evidence it follows that 1st Ruling should still be applied.
26.That Heading 3202 of the EAC/CET specifically includes “Synthetic organic tanning substances; organic tanning substances; tanning preparation, whether or not containing natural tanning substances: enzymatic preparations for pre tanning.” Meaning that Malaren PCA falls under this classification due to its use in the tanning process.
27.The Appellant averred that the General Rules of Interpretation (GIR) is clear as to how the classification of products under the Common External Tariff is to be undertaken. That the primary GIR used in classification is GIR 1 and it is only where classification is improbable with GIR 1 that the rest of the rules are to be applied sequentially. It then submitted that GIR 1 is sufficient for the classification of its Maralan PCA 85 product.
Appellant’s prayers
28.The Appellant’s prayer to the Tribunal was for orders that: -a.That this Appeal be allowed.b.That the Respondent’s review decision dated 25th September 2023 and demand for Kshs. 24,743,997.00 be set aside in their entirety.c.That the Appellant’s imported Maralen PCA 85 product be classified under Heading 3202 instead of 3402 as proposed by the Respondent.
Respondent’s Case
29.The Respondent's case is premised on its Statement of Facts dated 20th December 2023 and filed on 21st December 2023 together with attached documents and the written submissions dated 2nd August 2024 and filed on the same date.
30.The Respondent asserted that the 1st Ruling stated that Marlen PCA was a general leather re-tanning agent based on phenol sulphonic acid condensate while the subsequent 2nd Ruling reference No. KRA/CBC/BIA/THQ/008/01/2023, stated that Marlen PCA is a de-greasing agent containing polyglycol fatty acid, surfactants and additives. That this suggested that the two products were different in terms of description and composition.
31.On the issue on whether the Commissioner erred in fact and law by confirming that Maralen PCA 85 is classifiable under Hs code 3402.90.00, the Respondent stated that it was allowed under Sections 135, 235, 236, 249 of the EACCMA, 2004, to conduct a post clearance audit to assess and demand for the short-levied taxes within five years of importation.
32.That Maralen PCA 85 is considered to be a chemical formulation identified as a degreasing agent for the leather tanning industry containing polyglycol ether fatty alcohol, non-ionic surfactants and other proprietary additives classified under the EAC CET Code 3402.90.00 as guided by GIR 1 and 6.
33.On whether the Commissioner erred in fact and law by retrospectively applying the tariff classification Ruling dated 09th January 2023 on the Appellant’s products imported between 2018 and 2023, the Respondent stated that its tariff classification was in line with current legislation and relevant statute under Section 135 of EACCMA.
34.On whether the Respondent erred in fact and law by failing to appreciate that the Appellant classification under Heading 3202 was based on the Respondent Tariff Ruling dated 30th November 2011, the Respondent averred that the 1st Ruling was for a product described as Maralen PCA specified to be general leather re-tanning agent based on phenol sulphonic acid condensate while the 2nd Ruling was for Maralen PCA 85 which is specified to be a degreasing agent containing polyglycol fatty acids, surfactants and additives.
35.On whether the Respondent erred in fact and law by invoking the provisions of Section 229 of EACCMA even though the demand was never issued to the Appellant and no evidence of receipt of the same, the Respondent stated that a demand notice for Kshs. 24,743,997.00 was written and communicated to the taxpayer vide email addresses cfo@alpharama.co.ke and finance@alpharama.co.ke on 21st June 2023. that however, there was no confirmation of receipt of the same.
36.The Respondent averred that the above email addresses had previously been used to communicate to the Appellant in regards to the Preliminary audit reports. That it had also previously confirmed receipt of the consents sent through the same email.
37.On whether the Commissioner erred in fact and law by issuing a review decision, which is in breach of the Appellant’s right to legitimate expectation, presumption of regularity and fair administrative action, the Respondent affirmed that its review decision was issued, after the taxpayer’s response, in line with Section 229 (4) of EACCMA.
38.The Respondent posited that the Appellant had failed to make a written application for advance binding rulings before importation.
39.The Respondent maintained that its decision was issued in 12 days on 25th September 2023 which was within time and in line with the provisions of Section 229(4) of EACCMA considering that the Appellant had made its application for review on 21st July 2021.
40.The Respondent stated that having failed to challenge its tax demand, the Respondent was justified in upholding its demand notice considering that it had established that the product was misclassified.
41.The Respondent reiterated that the Appellant had failed to discharge its burden of proof in proving that its tax decision was incorrect as per the provisions of Section 30 of the Tax Appeals Tribunal Act.
42.The Respondent identified the following as the issues falling for determination in this Appeal:-i.Whether the Respondent erred in law and fact by confirming that Marlen PCA 85 is classifiable under Hs Code 3402.90.00 of the EAC/CET, and therefore, inter alia, subject to additional import duty at the rate of 25% and VAT summoning to Kshs. 24,743,997.00.ii.Whether the Respondent erred in fact and law by retrospectively applying the tariff classification Ruling dated 9th January, 2023 on the Appellant’s products imported between 2018 and 2023.iii.Whether the Respondent erred in fact and law by invoking the provisions of Section 229 of EACCMA despite the fact that the demand was never issued to the Appellant and no evidence of receipt of the same has been adduced.iv.Whether the Respondent erred in fact and law by issuing a review decision, which is in breach of the Appellant’s right to legitimate expectation, the presumption of regularity and fair administrative action.
i. Whether the Respondent erred in law and fact by confirming that Maralen PCA 85 is classifiable under 3402.90.00 of the EAC/CET, and therefore, inter alia subject to additional import duty at the rate of 25% and VAT amounting to Kshs. 24,743,997.
43.The Respondent submitted that it had imported Marlen PCA 85 from Maralen PCA on several previous occasions.
44.That the Respondent received a sample of Marlen PCA 85 to conduct a lab analysis and determine the components on 15th December 2022 which revealed the following results:
| Tests | Results | |
| 1. | Appearance | Clear colorless vicious liquid. |
| 2. | Total solids at 105 °C | 82.0239% w/w |
| 3. | Solubility test 20 °C | Forms a stable homogenous solution |
| 4. | Test for surface active agent | Indicated presence on non-ionic surface-active agents |
| 5. | Surface tension at 20 °C | 0.026 N/m |
| 6. | Qualitative test for nitrogen | Positive |
| 7. | Functional group identification (dry matter) | Indicated presence of ether, carbonyl and hydroxyl functional groups |
45.That the sample found that the chemical preparation contained non-ionic surface-active agents and other organic compounds characterized by carbonyl and hydroxyl functional groups dispersed in aqueous medium.
46.It was its view that Marlen PCA 85 is specified to be a chemical preparation containing polyglycol ether fatty alcohols, non-ionic surfactants and other additives intended for use as degreasing agents in tanning for the leather industry.
47.That Marlen PCA 85 is therefore considered to be a surface-active preparation containing non-ionic surface-active agents and other additives intended for use as a degreasing agent in the leather industry classified in EAC/CET HS Code 3402.90.00 which covers classification organic surface agents (other than soap); surface active preparations, washing preparations (including auxiliary washing preparations) and cleaning preparations whether or not containing soap, other than those of Heading 34.01.
48.That the Heading also includes the classification of surface-active preparations such as soaking agents (for raw hides), degreasing agents, wetting agents levelling agents or toners for the leather of fur industries.
49.The Respondent submitted that:a.HS Code declared by the Appellant 3202.90.00 was therefore erroneous.b.From the description the GIR 1 which directs that titles of Sections, Chapters and sub-chapters are provided for ease of reference only; for legal purposes, classifications shall be determined according to the terms of Headings and relative Section and Chapter Notes.c.GIR 6 directs that classification shall be determined according to the terms of that subheading and any related subheading Notes. In addition, the Explanatory Notes to the HS constitute the official interpretation of the harmonized system at the international level and are an indispensable complement to the system.
50.It submitted that Heading 34.02 covers the classification or organic surface-active agents (other than soap); surface active preparations, washing preparations (including auxiliary washing preparations) and cleaning preparations, whether or not containing soap, other than those of Heading 34.02.
51.That Heading includes the classification of surface-active preparations are used for their cleansing, wetting, emulsifying, or dispersing properties in many industrial applications for example soaking agents (for raw hides), degreasing agents, wetting agents (for use in dyeing), levelling agents or tonners for the leather of fur industries.
52.That based on the above information Marlen PCA 85 was considered to be a chemical formulation as a de-greasing agent for the leather tanning industry polyglycol ether fatty alcohol, non-ionic surfactants and other propriety additives under the 2022 EAC/CET HS Code 3402.90.00
53.The Respondent posited that the Ruling issued on 30th November 2011 indicated that the samples drawn from Marlen PCA were specified to be general leather tanning agents based on phenol sulphomnic acid condensate. That the samples of colorless viscous liquid tested were found to be chemical preparations containing inorganic compounds characterized by the presence of aromatic hydrocarbons functional group and non-ionic organic surface agents.
54.That Heading 32.02 covers the classification of aromatic syntans such as condensation products of formaldehyde with phenol-cresol or naphthalene sulphonic acids, sulphonated aromatic hydrocarbons of high molecular weight, polysulphonamides and polyhydroxy-polyarysulphone-sulphonic acids.
55.That Marlen PCA was considered a leather re-tanning chemical preparation containing aromatic hydrocarbon compounds classified in EAC/CET HS Code 3202.10.00.
56.That the Appellant’s products were different in terms of description and composition from the product contained in its 1st Ruling and hence the reason why it was classified under EAC CET Code 3402.90.00 as guided by GIR 1 and 6.
ii. Whether the Respondent erred in fact and law by retrospectively applying the tariff classification ruling dated 09.01.2023 on the Appellant’s products imported between 2018 and 2023.
57.The Respondent predicated that it is empowered by the East African Customs Management Act, 2004 to conduct a Post Clearance Audit to determine whether there are any taxes which were not properly accounted for as provided for in Sections 235 and 236 of East African Community Customs Management Act, 2004, hereinafter referred to as EACCMA as was stated in Bharat General Agency vs Kenya Revenue Authority [2020] eKLR.
58.That it conducted a Post Clearance Audit of the Appellant’s customs entries of importers products classified under Chapter 31 from 2017 to 2022 pursuant to Sections 235 and 236 of the EACCMA.
iii. Whether the Respondent erred in fact and law by invoking the provisions of Section 229 of EACCMA even though the demand was never issued to the appellant and no evidence of receipt of the same has been adduced.
59.The Respondent submitted that the Appellant failed to discharge its burden of proof by failing to provide all relevant documents to support its objection or to demonstrate that the Tariff Ruling was erroneous.
iv. Whether the Respondent erred in fact and law by issuing a review decision, which is in breach of the appellant’s right to legitimate expectation, the presumption of regularity and fair administrative action.
60.The Respondent submitted that the review decision was issued, after the Appellant’s objection as is provided under Section 229 (4) of EACCMA.
61.That the Appellant failed to make a written application for advance binding rulings before the importation of its products as is provided in Section 248 (A) of the EACCMA.
62.That its re classification of the product under HS Code 3402.90.00 and demanding additional tax of Kshs. 24,743,997 was justified.
Respondent's Prayer
63.The Respondent prayed that this Tribunal do find: -i.That the review decision issued on 25th September 2023 upholding the demand for Kshs. 24,743,997.00 being both Import Duty and VAT be found to be proper in law and to be upheld.ii.That the correct classification for the imported goods is Tariff Code 3402.90.00 and that the same be upheld.iii.That this Appeal be dismissed with costs to the Respondent as the same lacks merit.
Issues for Determination
64.The Tribunal, having considered the pleadings, submissions and evidence adduced by the parties, is of the considered view that the issues that crystallized for its determination are:a.Whether the Respondent erred in fact and law in demanding short-levied taxes vide its tax decisions dated 25th September 2023.b.Whether the Respondent was justified in reclassifying Maralen PCA 85 imported by the Appellant
Analysis and Determination
65.The issues falling for determination are analyzed as follows:a.Whether the Respondent erred in fact and in law in demanding short-levied taxes vide its tax decisions dated 25th September 2023.
66.The Appellant’s argument that the Respondent had retrospectively applied the 2nd Ruling to its product does not hold water because it needed to prove the composition of its products to confirm that the 2nd Ruling was applied to it. Secondly, and on the face of it, the Respondent’s review decision dated 25th September 2023 indicated that it had uplifted duty because of the composition of the Appellant’s products and not because it was applying the 2nd Ruling.
67.Whereas the retrospective application of a Ruling to similar products is frowned upon by the law, the Respondent is at liberty to carry out a post-clearance audit to determine if a product was previously misclassified. This post-clearance audit under Sections 235 and 236 of EACCMA can result in an uplift, like it was in this case, to recover short levied taxes. This doesn’t amount to retrospective application of the law or a Ruling.
68.In this respect Sections 235 and 236 of the EACCMA, 2014 are couched in the following terms:
69.Section 135 of EACCMA also speaks to this as follows regarding the Respondent’s legitimacy in its demand for short-levied taxes.
70.The Tribunal has previously pronounced itself on the matter of post-clearance audits and short-levied taxes in Tax Appeal No 11 of 2021, Jumbo Steel Mills Limited v Commissioner of Customs and Border Control, where the Tribunal held as follows: -
71.The Tribunal does not wish to depart from the finding and decision it held on short-levied taxes in Tax Appeal No. 11 of 2021. It thus finds and holds that that the Respondent did not err in demanding short-levied taxes vide its decision of 25th September 2023. Its actions were thus justified.
b. Whether the Respondent was justified in reclassifying Maralen PCA 85 imported by the Appellant.
72.The parties disagreed on the Customs classification of the Appellant’s imported product - Maralen PCA 85. The Appellant argued that it properly classified the item under Tariff sub-headings under Hs Code 3202.10.00 while the Respondent contended that the correct Tariff code was Hs Code 3402.90.00.
73.The Appellant had the burden under Section 30 of the TAT Act to prove that its preferred tariff code was the correct one. It provided the following documents to prove its case:a.Preliminary desk audit findings dated 29th May 2023b.Appellant’s workings on misclassificationc.Appellant’s response to the Respondent’s desk audit findings dated 13th September 2023d.Review decision dated 25th September 2023e.The 1st Tariff Rulingf.The 2nd Tariff Ruling
74.The Tribunal posits that the source documents from the foreign suppliers of the products as well as the Customs documents used for importation of the same were crucial in guiding it on the components or composition of Marlen PCA 85.
75.The manufacturer’s catalogue would have helped the Tribunal to confirm that the composition of the imported product was as pleaded by the Appellant. The custom documents would have also helped the Tribunal to confirm if the Appellant had indeed previously imported this product regularly and that it was the same product that the Respondent now seek to move from HS Code 3202.10.00 to HS Code 3402.90.00.
76.The Tribunal further takes judicial notice that these two documents should typically be in the possession of the Appellant and thus their production as evidence would not have caused it any inconvenience or difficulty.
77.The position that the Appellant is behoved in such cases to provide source documents to prove its case was affirmed in the Judgment in TAT E057 Of 2024 Sheffield Steel Systems Limited Vs. Commissioner Customs and Border Control where the Tribunal stated as thus:
78.Simply put, the Appellant’s case herein is premised on mere averments. Apart from averring that its classification was correct and that the Respondent had not proved its case with a laboratory report, the Appellant has not provided any evidence to support its averments. The burden to prove its case lay with it. The evidential burden would have shifted to the Respondent only if the Appellant had managed to prove its case. And this it failed to do.
79.The Appellant’s failure to prove its case to rebut the Respondent’s assessment has led the Tribunal to the conclusion that the Respondent was justified in reclassifying Maralen PCA 85 from HS Code 3202.10.00 to HS Code 3402.90.00.
Final Decision
80.The upshot of the foregoing analysis is that the Appeal is without merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s review decision dated 25th September 2023 be and is hereby upheld.c.Each party is to bear its own costs.
81.It is so ordered.
DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF NOVEMBER, 2024ERIC NYONGESA WAFULA - CHAIRMANABRAHAM K. KIPROTICH - MEMBERGLORIA A. OGAGA - MEMBERDR. RODNEY O. OLUOCH - MEMBER