Coffee Management Services Ltd v Commissioner of Customs & Border Control (Appeal 1317 of 2022) [2024] KETAT 263 (KLR) (23 February 2024) (Judgment)

Neutral citation: [2024] KETAT 263 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1317 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

February 23, 2024

Between

Coffee Management Services Ltd

Appellant

and

The Commissioner of Customs & Border Control

Respondent

Judgment

1.The Appellant is a company incorporated in Kenya under the Companies Act, 2015 whose principal business activity is the provision of coffee marketing and management services to coffee farmers.

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

3.The Respondent conducted a desk audit of the Appellant’s transactions with an emphasis on Biofol Triple Max and Biofol Boron Max products. The findings on the two products were shared with the Appellant via tariff rulings letter dated 20^th July 2022.

4.The Respondent went ahead to issue a demand notice for the taxes to be paid through a letter dated 26^th July 2022 to which the Appellant objected on 24^th August 2022.

5.The Respondent then issued an objection decision through a letter dated 23^rd September 2022.

6.Aggrieved by the Respondent’s decision, the Appellant filed a Notice of Appeal of dated 21^st October, 2022 on even date.

THE APPEAL

7.The Appeal as contained in the Memorandum of Appeal dated 4^th November 2022 and filed on even date is premised on the following grounds:a.That the Respondent erred in law and fact by determining that the products, Biofol Triple Max and Biofol Boron Max are not fertilizers under the Harmonised Commodity Description and Coding System Code (hereinafter ‘HS Code’) 3105.10.00 or 3105.20.00 whereas the products contain two or three of the fertilizing elements nitrogen, phosphorus and potassium.b.That the Respondent erred in law by disregarding the World Customs Organisation (hereinafter “WCO”) Explanatory Notes on Chapter 31 of East African Community Common External Tariff Explanatory Notes, 2017 (hereinafter “EACCET”),which specifically describes mineral or chemical fertilizers containing two or three of the fertilizing elements nitrogen, phosphorus and potassium; other fertilizers; goods of this chapter in tables or similar forms or in packages of gross weight not exceeding 10kg under Heading 31.05 of EACCET.c.That the Respondent erred in law and in fact by issuing a decision without due consideration of additional information, explanation and evidence adduced by the Appellant.d.That the Respondent erred in both law and fact in finding that the Appellant had a duty to pay additional taxes contrary to the provisions of the Value Added Tax Act No. 35 of 2013 (hereinafter ‘VAT Act’) and the East African Community Customs Management Act, 2004 (hereinafter “EACCMA”) as read with the WCO and EACCET.e.That the Respondent’s post clearance audit exercise did not comply with the key processes set out in the EAC Customs Post Clearance Audit Manual and hence did not follow due process.f.That the Respondent violated the legitimate expectation relayed to the Appellant over the seven years the Appellant has been importing the same product at the same tariff.g.That the Respondent breached the Appellant’s fundamental rights of fair administrative action under Article 47 of the Constitution of Kenya, 2010 (hereinafter ‘the Constitution’) and Section 4(1) of the Fair Administrative Actions Act, No. 4 of 2015 (hereinafter ‘FAA’) by shifting grounds and approaches in raising additional assessment and not undertaking a laboratory analysis of the two fertilizers.h.That the Respondent erred in fact by including Biofol Zinc Xtra uptake in the Objection decision dated 23 September 2022 yet this was not included in the initial post clearance audit (“PCA”) assessment dated 26 July 2022.

THE APPELLANT’S CASE

8.The Appellant in its Statement of Facts dated 4^th November,2022 and filed on even date stated as hereunder.

Product Composition and Uses

9.The Appellant submitted that Biofol Triple Max is a Nitrogen, Phosphorous and Potassium (NPK) suspension fertilizer with 23.1% of each of the 3 macro nutrients that is Nitrogen, Phosphorous and Potassium. Biofol Triple Max is a highly concentrated NPK foliar fertilizer for the supplementary nutrition of coffee to prevent or control the occurrence of macro and micronutrient deficiencies. It helps the coffee crop to cope with stress situations such as critical weather situations and pesticide treatments and is also a specific supplement to soil fertilization during the critical stages of plant development (physiological stress).

10.The Appellant averred that Biofol Boron Max fertilizers on the other hand, is a special boron-based NPK suspension for foliar fertilisation which guarantees an extremely efficient uptake of boron into the leaf and blossom tissue. It is a low concentrated NPK foliar fertilizer with 18% cumulated NPK and 7.75% Boron. These fertilizers contain high amounts of the fertilizing elements Nitrogen, Phosphorous and Potassium as essential constituents and hence classifiable under Chapter 31 of EACCET.

11.The Appellant stated that Biofol foliar feeding allows nutrients to be absorbed directly through the leaves of the plant, adding that they work their way down the roots and stimulate activity in the leaves, which in turn stimulates root development, because the plant starts to demand more water. Applying the foliar fertilizer increases uptake of nutrients from the soil by encouraging plants to take up more water in addition to providing immediate benefits for a plant which may be suffering from deficiency.

12.The Appellant submitted that Biofol Foliar fertilizers act more quickly, and far more efficiently, as most of the fertilizer ends up in the plant, rather than in the soil. Uptake of nutrients from the soil can be very inefficient, and it can take several days for noticeable effects to occur.

13.The Appellant stated that the Kenya Fertilizers and Animals Foodstuffs Act, Cap 345 of the laws of Kenya (hereinafter ‘KFAF’), defines a fertilizer to mean any substance or mixture of substances which is intended or offered for improving or maintaining the growth of plants or the productivity of the soil, but does not include manure, compost, wood ash, gypsum or refuse when sold in its original condition and under the same name, nor does it include organic fertilizers, other than lime.

14.The Appellant added that the Standards Act which is Cap 496, laws of Kenya through a Legal Notice (“LN”) No. 78 of 2005, further requires that the Kenya Bureau of Standards (“KEBS”) shall publish a list of goods which shall be subjected to verification of conformity to Kenya Standards or approved specifications. This requirement was subsequently expanded to include all imported products and KEBS requires that all imported goods must be inspected at the country of origin to ensure verification of conformity to Kenya Standards or approved specification. Upon satisfying itself of conformity to the Kenya Standards or approved specification, KEBS issues a Certificate of Conformity (“CoC”). In this case, KEBS issued CoCs for each consignment assessed by the Respondent.

15.The Appellant stated that the applicable Kenya Standard for the imported product is the Fertiliser and Soil Conditioners ISO 8157:2015 which provides that the following definitions to be:a.Fertilizer- substance containing one or more recognized plant nutrient(s), which is used for its plant nutrient content and which is designed for use or claimed to have value in promoting plant growth.b.Plant nutrient -chemical element, which is essential for plant growth.c.Fertilizer nutrient-plant nutrient applied in the course of fertilization and include:i.primary nutrient (element) elements nitrogen, phosphorus, and potassium only;ii.secondary nutrient (element) elements calcium, magnesium, and sulfur;iii.Micronutrient (trace elements) such as boron, manganese, iron, zinc, copper, molybdenum, cobalt, and/or chlorine, which are essential, in relatively small quantities, for plant growth.

16.The Appellant averred that it is trite law that issuance of the CoCs by KEBS, pursuant to the provisions of LN 78 of 2005, is proof of conformity of the products to the provisions of KS ISO 8157: 2015 recognizing the product as ‘fertilizer’.

17.The Appellant submitted that Certificates of Analysis issued by AGLUKON, the exporter and manufacturer of the shipments availed by the Appellant describe the products and the Respondent has not subjected the products to laboratory test to ascertain and confirm the pre-requisite for classification of the products as fertilizer.

18.The Appellant submitted that determination of the applicable tariff code of a product, the guiding principles instruments are EACCMA and EACCET. The EACCET provides for the respective tariff rates applicable to various products and the same must be interpreted in accordance with the Harmonised System specifically the General Interpretative Rules (“GIR”).

19.The Appellant stated the applicable tariff code must be determined in accordance with the GIR of the Harmonised System. EACCET which is used in determining the HS codes for various imported goods borrows heavily from the GIR as published by WCO. These rules govern the classification of goods under the Harmonized Commodity Description and Coding System (hereinafter ‘HS Code’). Specifically, GIRs 1, 3(b) and 6 apply in the determination of a tariff code for both Biofol Triple Max and Biofol Boron Max.

20.That GIR 1 provides that:“The titles of 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…”

21.The Appellant submitted that based on product composition of NPK 23.1:23.1:23.1 for Biofol Triple Max and cumulative NPK 18% and Boron 7.75% for Biofol Boron Max, fertilizers are categorized under Chapter 31 “Fertilizers” under Section VI of the 2017 and 2022 versions of the EACCET. The Appellant further added that GIR 1 has been used by the Appellant to classify this product by the terms of Heading 31.05 which provides as follows:-“Mineral or chemical fertilisers containing two or three of the fertilising elements nitrogen, phosphorus and potassium; other fertilisers; goods of this Chapter in tablets or similar forms or in packages of a gross weight not exceeding 10 kg.”

22.That GIR 3 states as follows;“When by application of Rule 2 (b) or for any other reason, goods are, prima facie, classifiable under two or more headings, classification shall be effected as follows:i.The heading which provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods.ii.Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3 (a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable.”

23.The Appellant averred that GIR 3 should be used to classify goods that are made of different components, adding that in applying Rule 3, it relied on WCO Harmonized System Interpretative Explanatory Notes to Heading 31.05 which provides that;“For the purposes of heading 3105, the term “other fertilizers” applies only to products of a kind used as fertilizers and containing, as an essential constituent, at least one of the fertilizing elements nitrogen, phosphorus or potassium.”

24.The Appellant claimed that fertilizers are categorized under Chapter 31 “Fertilisers” under both the 2017 and 2022 version of the EACCET as follows:-“Mineral or chemical fertilisers containing two or three of the fertilising elements nitrogen, phosphorus and potassium; other fertilisers; goods of this Chapter in tablets or similar forms or in packages of a gross weight not exceeding 10kg.”

25.That GIR 6 which states 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.”

26.The Appellant averred that GIR 6 should be used to classify the goods to HS Codes 3105.10.00 or 3105.20.00: Goods of this Chapter in tablets or similar forms or in packages of a gross weight not exceeding 10 kg or Mineral or chemical fertilizers containing the three fertilizing elements nitrogen, phosphorus and potassium extracts, essences and concentrates. It further added that in applying Rule 6, it relied on WCO Harmonized System Interpretative Explanatory Notes to Heading 31.05 which provides guidance on the products classifiable under Heading 31.05 as follows:-“products of a kind used as fertilizers and containing two or three of the fertilizing elements nitrogen, phosphorous or potassium.”

27.The Respondent submitted that the fertilizers contain all the fertilizing elements as their main constituents with Biofol Triple Max having a cumulated percentage of 70% and Biofol Boron Max having a cumulated Percentage of 18% of the 3 fertilizing elements and hence are classifiable under HS Code 3105.20.00 (Mineral or chemical fertilisers containing the three fertilising elements nitrogen, phosphorus and potassium).

28.The Appellant submitted that Heading 31.05 relates to mineral or chemical fertilisers containing two or three of the fertilizing elements nitrogen, phosphorus and potassium; other fertilisers; goods of this Chapter in tablets or similar forms or in packages of a gross weight not exceeding 10 kg:a.The expression ‘containing the three fertilizing elements nitrogen, phosphorus and potassium’ means that the elements indicated are in sufficient quantity to exercise a real fertilizing action and are not simply impurities.b.Nitrogen may be present in the form of nitrates, ammonium salts, urea, calcium cyanamide or other organic compounds.c.Phosphorus is generally present in the form of phosphates which are more or less soluble or, occasionally, in organic form.d.Potassium is present in the form of salts (carbonate, chloride, sulphate, nitrate, etc.).e.In trade, the nitrogen, phosphorus and potassium content are expressed, respectively, as N, P2O5 and K2O.f.These subheadings include the fertilisers referred to in the HS Explanatory Notes to Heading 31.05, (B) and (C), provided that they contain the three fertilizing elements nitrogen, phosphorus and potassium. They are sometimes called ‘NPK fertilisers.

29.The Appellant contended that Kenya is a contracting state to the WCO and follows the WCO instruments in customs administration of duties paid at importation. Based on the WCO Harmonized System Interpretative Explanatory Notes, Biofol Triple Max and Biofol Boron Max are classifiable under HS Codes 3105.20.00 (Mineral or chemical fertilisers containing the three fertilising elements nitrogen, phosphorus and potassium) and 3105.10.00 (Goods of this Chapter in tablets or similar forms or in packages of a gross weight not exceeding 10 kg).

30.The Appellant further stated that the fertilising elements being the macro-nutrients (N.P.K) make all the Biofol product become NPK fertilisers since without the macro-nutrients (N.P.K), both Biofol Triple Max and Biofol Boron Max would not work as they are essential elements in both fertilizers. The inclusion of boron and zinc is part of the fortification of the NPK fertiliser just like Unga in Kenya is fortified with essential minerals and vitamins and that fortification does not change the use or character of the products.

31.The Appellant submitted that the PCA process is governed by EACCMA and the EAC Customs Post Clearance Audit Manual (“PCA Manual”). The purpose of the PCA Manual is set out in its preface which provides that:“Customs Post Clearance Audit manual is an EAC publication which sets out guidelines on operationalization of the EAC Customs Post Clearance Audits as set out in the EAC Customs Management Act, 2004 in order to verify taxpayers’ compliance with provisions of the EAC Customs Management Act, 2004. The manual spells out in detail the process of conducting Customs Post Clearance Audit.”

32.That the Manual thus acts as a guide for the PCA process and it should be followed by all Customs officers. Paragraph 1.6.1 of the Manual provides that:“The Customs Post Clearance Audit (PCA) Manual outlines the principles and policies of post clearance audits conducted in line with the East African Community Customs Management Act, 2004 and national laws. This manual is designed primarily as a compendium to assist Customs auditors and Customs officers in carrying out the planning, execution, reporting, follow-up of Post Clearance Audits and Post Audits Management.”

33.The Appellant averred that Chapter 3 of the PCA Manual sets out the key steps of the PCA process, namely: Pre-Planning which includes; selection of audit cases, allocation of audit cases and pre-audit survey; Planning which includes; development of an audit plan notification of a client, client profile updates and development of audit program/check list ; Execution which includes ;entry conference, systems review and audit approach, audit options, review and audit sampling and review and evaluation of the audit program; Reporting which involves the communication of the audit findings to the client and is comprised of:-i.Preliminary audit report – this includes a summary of the findings to be shared with the Customs officer supervising the process.ii.Exit conference –the taxpayer is informed of the audit findings, liability, appropriate action that will be taken by the Customs team, written report confirming the points in the exit conference, and procedures, where the taxpayer is not in agreement with the audit findings.iii.Final report – addresses any issues arising subsequent to the preliminary report. The final report should be submitted to the supervisor after the last visit to the client or when all additional tests have been conducted and reviewed.iv.Management letter – after the exit meeting, and all adjustments made to the preliminary report, the final audit findings are communicated to the taxpayer through the management letter with the following details: period covered by the audit, legal basis for the audit, objective of the audit, documents examined, work done, findings, conclusions and recommendations.

34.Finally, that there is the follow-up which includes: issuance of the demand note/assessment, internal management report, and closure of audit and file archiving. The Appellant submitted that the Respondent’s PCA exercise failed to comply with the key processes set out in the EAC Customs PCA Manual and hence did not follow due process and that the Respondent’s tariff rulings were arbitrary, unreasonable and not based on any factual analysis of post clearance audit. They were therefore a contravention of its right to fair administrative action.

35.That the Appellant’s contention is due to the following reasons:a.Lack of an exit conference – there was no exit conference which would have afforded the Appellant an opportunity to explain the two fertilizers under audit, and which would have given the Respondent a better understanding of the HS code applied by the Appellant upon importation. The only meeting akin to an exit conference was a meeting held on 29^th September 2022, i.e., after the issuance of the demand notice (26^th July 2022) confirmation of the demand notice (23^rd September 2022).b.Lack of management letter – There was no management letter issued by the Respondent which would have afforded the Appellant an opportunity to review and countercheck the findings of the audit before the issuance of the demand notice/assessment.c.The Appellant’s objection to the Respondent vide a letter dated 24 August 2022 provided explanations for the HS code adopted by the Appellant. Due to the lack of clarity of the demand notice and the Respondent’s failure to adhere to due process, the Appellant submits that this objection was part of the audit process of providing clarification at reporting, not the follow-up stage.

36.The Appellant further stated that the Respondent’s confirmation of its decision without following due process contravenes the provisions of the PCA Manual, EACCMA and offends Article 47 of the Constitution which stipulates that all citizens have a right to fair administrative action. Encompassed within this right, is the fact that administrative action taken by a public body ought to be expeditious, efficient, lawful, reasonable and procedurally fair. The decision also violates the principles of natural justice.

37.The Appellant claimed that the Respondent failed to carry out laboratory analysis of the product against which the tariff rulings dated 26^th July 2022 and 23^nd September 2022 were issued, adding that in the Respondent’s letter dated 26^th July 2022, the tariff ruling was arrived at after conducting desk audit and it is improper of the Respondent to come up with a tariff ruling based on a desk audit instead of conducting a proper technical analysis.

38.The Appellant averred that since it was importing and trading these two products, it legitimately expected the two products to be declared under Heading 31.05 as this was the practice for many years and the Respondent had never objected to this practice. The Respondent is bound by the promises it makes to taxpayers, whether these are made expressly or by way of conduct in the discharge of its functions. Article 47 of Constitution read together with Section 4(1) of the FAA provide that:“every person has the right to administrative action, which is expeditious, efficient, lawful, reasonable and procedurally fair.”

39.The Appellant averred that the Respondent’s ruling is contrary to the Government of Kenya’s directive to reduce the prices of fertilizers in Kenya. This has been necessitated by the spiralling costs of agricultural inputs which have negative effect on the overall costs of living and impacts local farmers negatively.

Appellant’s Prayers

40.The Appellant prayed that the Tribunal allows the Appeal and;a.Sets aside and annuls the objection decision by the Respondent dated 23^rd September 2022.b.Determines that the declared tariff classification by the Appellant was correct;c.Orders that the Respondent pays the costs of this Appeal; andd.Make such other orders that it may deem appropriate.

RESPONDENT’S CASE

41.Through its Statement of Facts dated 2^nd December 2022 and filed on even date, the Respondent opposed the Appellant’s assertions and raised the hereunder issues:-

42.The Respondent contended that the Biofol Triple Max is a foliar fertilizer for supplementary nutrition of coffee to prevent or control the occurrence of macro and micronutrients deficiencies.

43.The Respondent reiterated that Biofol Boron on the other hand is a boron-based suspension for folio fertilization.

44.The Respondent averred that Chapter 31 of EACCET as relied on by the Appellant in its classification excludes micronutrient preparations that are applied to the seeds, foliage or soil to assist in seed germination and plant growth. They may contain small amounts of fertilizers but not as essential constituents.

45.The Respondent submitted that Section 223 of EACCMA places the burden of proof on the Appellant and that it was at all times the Appellant’s burden to provide the necessary documentation to ensure that the tariff they chose was accepted, adding that the failure of the Appellant to discharge the burden of proof cannot be occasioned on the Appellant.

46.The Respondent averred that any additional information and documentation provided must be relevant and capable of changing its decision, and when that fails, it cannot be claimed that it failed to consider them unless there is proof to that effect.

47.The Respondent submitted that the law charges different rates of tax dependent on the classification. It is therefore wrong for the Appellant to claim that tax was charged contrary to the law.

48.The Respondent stated that since it found the products were classified under HS code 3824.99.90, it meant that the products would be under different tax bracket adding that the Appellant’s contention that it did not follow due procedure is unfounded and no explanation has been offered on how the Respondent failed to do so.

49.The Respondent averred that a tariff classification was issued to the Appellant, the taxes re-assessed and the relevant documents availed to the Appellant. Subsequently, the Appellant was given its statutory timelines within which to object, which it did, and a review decision issued within the statutory timelines.

50.The Respondent claimed that its actions were in line with Sections 235 and 236 of EACCMA as read together with Sections 135 and 229 (4) of EACCMA and this guided its actions.

51.The Respondent submitted that breach of legitimate expectation claim by the Appellant cannot run afoul the law since it rightly raised a demand and no legitimate expectation can arise outside the law.

52.The Respondent averred that Biofol Zinc Xtra uptake captured in the objection decision was a typing error and was not among the reclassified products, thus no weight should be placed on it. This is evidenced by the fact that Biofol Zinc Xtra uptake was not included in the assessment or the workings for the re-assessed taxes.

Respondent’s Prayers

53.The Respondent prayed that this Honourable Tribunal:i.Upholds the Respondent’s decision dated 26^th July 2022 as proper and in conformity with the provisions of the Law.ii.That this Appeal be dismissed with costs to the Respondent as the same is devoid of merit.

PARTIES SUBMISSIONS

54.The Appellant’s written submissions dated 2^nd October 2023, highlighted two issues for determination as follows:-a.Whether the products (Biofol Triple Max and Biofol Boron Max) should be classified under Chapter 31 (HS Code 3105.10.00 and 3105.20.00) as the correct tariffs classification as provided in the EACCET.

55.The Appellant submitted that the determination of the applicable tariff code is in accordance with the GIR of the Harmonised System, particularly in respect to the two products, the following GIR are applicable:GIR 1 which provides that:“The titles of 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…”

56.The Appellant submitted that the terms of the headings and any relative sections or chapter notes are paramount and take primacy in determining classifications, adding that based on the use and composition of the products, the products are classifiable under Chapter 31 of EACCET as fertilizers. GIR1 has been used by the Appellant to classify this product by the terms of Heading 31.05 which states that:-“Mineral or chemical fertilisers containing two or three of the fertilising elements nitrogen, phosphorus and potassium; other fertilisers; goods of this Chapter in tablets or similar forms or in packages of a gross weight not exceeding 10 kg.”

57.That GIR 3 states that:-“When by application of Rule 2 (b) or for any other reason, goods are, prima facie, classifiable under two or more headings, classification shall be affected as follows:i.The heading which provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods.ii.Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3 (a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable.”

58.The Appellant stated that GIR 3 should be used to classify goods that are made of different components and that in applying GIR 3, the Appellant stated that it relied on WCO Harmonized System Interpretative Explanatory Notes to Heading 31.05 which provides that:“For the purposes of heading 31.05, the term “other fertilizers” applies only to products of a kind used as fertilizers and containing, as an essential constituent, at least one of the fertilizing elements nitrogen, phosphorus or potassium.”

59.The Appellant stated that fertilizers are categorized under Chapter 31 “Fertilisers” under both the 2017 and 2022 version of the EACCET as “mineral or chemical fertilisers containing two or three of the fertilising elements nitrogen, phosphorus and potassium; other fertilisers; goods of this Chapter in tablets or similar forms or in packages of a gross weight not exceeding 10 kg”. Their core or essential character is as fertilizers containing the essential fertilizing elements nitrogen, phosphorus and potassium. The Appellant submitted that imported Biofol Triple Max and Biofol Boron Max fertilizers contain all of the essential constituent elements.

60.That GIR 6 which states:-“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.”

61.The Appellant submitted that GIR 6 is used to classify the goods to HS Codes 3105.10.00 or 3105.20.00: goods of this Chapter in tablets or similar forms or in packages of a gross weight not exceeding 10 kg or Mineral or chemical fertilizers containing the three fertilizing elements nitrogen, phosphorus and potassium extracts, essences and concentrates.

62.That applying Rule 6, the Appellant has relied on WCO Harmonized System Interpretative Explanatory Notes to Heading 31.05 which provides guidance on the products classifiable under 31.05 products of a kind used as fertilizers and containing two or three of the fertilizing elements Nitrogen, Phosphorous or potassium. This is line with the Harmonized System (“HS”) Handbook for Customs Administration in the East Africa Region which provides at part 4.4.4 (Chapter 31: Fertilizers) that:-“ScopeThis Chapter covers fertilizers natural fertilizers either from vegetables or animals in heading 31.01, chemically produced fertilizers in headings 31.02 to 31.05.Special featuresPacking of fertilizer either in bags of up to 10kgs or in tablet forms is a unique feature of heading 31.05. Therefore, all types of fertilizer are classified in this heading provided they are packed in this design.”

63.The Appellant further submitted that both Biofol Triple Max and Biofol Boron Max are fertilizers with both containing all the three fertilizing elements which give them their core character. The Appellant also stated that pursuant to GIR 1, GIR3(b) and GIR 6, the products are thus classifiable under Chapter 31 of EACCET as a fertilizer and specifically Heading 31.05.

64.The Appellant averred that the Biofol Triple Max and Biofol Boron Max fertilizers contain all the fertilizing elements nitrogen, phosphorus and potassium as their main constituents and hence are classifiable under HS Code 3105.20.00 adding that the existence of other micronutrients does not change the nature and essential character of the products as fertilisers.

65.The Appellant averred that HS Code 3824.99.90 as advanced by the Respondent is a residual tariff that contains “prepared binders for foundry moulds or cores; chemical products and preparations of the chemical or allied industries (including those consisting of mixtures of natural products), not elsewhere specified or included”, is meant for the chemical products used in the chemical and allied industries thus inapplicable in this case. It does not apply to fertilizers classifiable under Heading 31.05.

66.The Appellant submitted that the Respondent never provided any contrary evidence to support its position and dispute the Appellant’s contention. It is trite law that ‘he who alleges must prove’, and the Respondent failed to provide any evidence to disprove the contents of the products or their use as fertilizers. This was crucial as the Appellant provided requisite evidence and discharged its burden of proving the contents of the products and their use.

67.The Appellant also stated that it is trite that tax laws are to be interpreted strictly and not by intendment and that what the Respondent was attempting to do is to bring the products under the provisions of HS Code 3824.99.90 by intendment, which interpretation this Tribunal should disregard.

68.The Appellant concluded that from the foregoing reasons, the Respondent was wrong in relying and classifying the products under HS Code 3824.99.90b.Whether the Respondent’s review decision was contrary to the right to fair administrative action.

69.The Appellant submitted that the Respondent did not carry out a laboratory analysis or testing of the products in question before issuing of the tariff ruling, which was marred by irregularities and in bad faith.

70.The Appellant stated that the amounts in the demand notice are excessive and marred by erroneous calculations. The demand notice of Kshs. 29,288,106.00 was in conflict with the schedule of workings attached to the demand notice by the Respondent due to double counting of customs entries. The Appellant added that schedule of workings contained in the Appellant’s bundle of documents showed an amount of Kshs. 12,777,417.00

71.The Appellant averred that the PCA process is governed by EACCMA and the PCA Manual and the Manual thus acts as a guide for the PCA process and it should be followed by all customs officers because it contains the minimum procedures that custom officials should use in conducting a post clearance audit to ensure the exercise is within a set procedure. The Appellant added that the PCA Manual provides the minimum fair administrative action standards that was required of the Respondent in the PCA. However, the Respondent’s PCA exercise failed to comply with the key processes set out in the PCA Manual and hence did not follow due process.

72.The Appellant further claimed that the Respondent’s tariff rulings were arbitrary, unreasonable and not based on any factual analysis of PCA. They were therefore a contravention of the Appellant’s right to fair administrative action. It added that the Respondent’s ruling and confirmation of its decision without following due process contravened the provisions of the PCA Manual, EACCMA and offended Article 47 of the Constitution which stipulates that all citizens have a right to fair administrative action. Encompassed within this right, is the fact that administrative action taken by a public body ought to be expeditious, efficient, lawful, reasonable and procedurally fair. The decision also violated the principles of natural justice.

73.The Appellant relied on the decision in Lachlan Kenya v Commissioner of Customs and Border Control [Appeal No.160 of 2019] which it claimed determined a similar matter; that Nitrozinc was classifiable as a fertilizer under Chapter 31 of EACCET and not a chemical under Chapter 38 of EACCET. The Tribunal ruled that where a compound contained any of the three fertilizing elements, then it properly fell under Chapter 31 of EACCET and the Tribunal also found that the fertilizer could not be classified under Heading 38.24 as it would have been classified elsewhere. Nitrogen is specified in Chapter 28, zinc is specified in Chapter 79 and crucially, fertilizers are classified in Chapter 31 of EACCET.

74.The Appellant cited and relied on the Tribunal’s decision in Lachlan Kenya v Commissioner of Customs and Border control [Appeal no.160 of 2019] which it claimed ruled on a similar matter that Nitrozinc was classifiable as a fertilizer under Chapter 31 of EACCET and not a chemical under Chapter 38 of EACCET. The Appellant also relied on the following cases:a.High Court Case of Republic vs. Commissioner of Domestic Taxes Large Tax Payer’s Office Ex-Parte Barclays Bank of Kenya Ltd [2012] eKLR;b.Republic V Commissioner General & Another Ex-Parte Awal Ltd [2008] eKLR;c.Export Trading Company V Kenya Revenue Authority [2018] eKLR;d.GlaxoSmithKline (Kenya) Limited V Commissioner of Customs and Border Controle.Petition No. 20 of 2020 (E021 OF 2020) Kenya Revenue Authority Versus Export Trading Company Limited (the Supreme Court).

75.In support of its case, the Appellant relied on Martin Ngare, as an expert witness. The matter was heard on 27^th September 2023. On cross-examination, the witness stated the following:-a.KFAF defines a fertilizer to mean any substance or mixture of substances which is intended or offered for improving or maintaining the growth of plants or the productivity of the soil, but does not include manure, compost, wood ash, gypsum or refuse when sold in its original condition and under the same name, nor does it include organic fertilizers, other than lime;b.The applicable Kenya Standard for the imported product is the fertiliser and Soil Conditioners ISO 8157:2015. The standard provides that the following definitions to be:i.Fertilizer-substance containing one or more recognized plant nutrient(s), which is used for its plant nutrient content and which is designed for use or claimed to have value in promoting plant growth.ii.Plant nutrient-chemical element, which is essential for plant growth.iii.Fertilizer nutrient-plant nutrient applied in the course of fertilization and include:

- Primary nutrient (element) elements nitrogen, phosphorus, and potassium only;
- Secondary nutrient (element) elements calcium, magnesium, and sulfur;
- Micronutrient (trace elements) such as boron, manganese, iron, zinc, copper, molybdenum, cobalt, and/or chlorine, which are essential, in relatively small quantities, for plant growth.

a.Fertilizers can be applied in two ways as follows:i.Ground feeding; andii.Liquid feeding (foliar feeding)b.Foliar fertiliser (feeding) is used in instances when uptake of the nutrients is impaired due environmental stress factors such as extremely high or low temperatures, waterlogging of the soil and nematodes.c.Foliar fertilisers are also used when faster uptake is needed e.g. when specific nutrients are needed or during environmental stress periods.d.The products forming the subject of this Appeal, Biofol Triple Max and Biofol Boron Max, are both foliar fertilizers containing Nitrogen, Phosphorus and Potassium (“NPK”) as the essential constituent elements;e.Biofol Triple Max and Biofol Boron Max (‘the Products’) are used as fertilisers and with no other applicable use.

76.The Respondent in its written submissions dated 2^nd December 2023 and filed on even date, submitted on the single issue for determination as outlined below and went ahead to analyse it as follows:-a.Whether the Respondent’s tariff ruling dated 20th July 2022 classifying the subject goods is proper in law.

77.The Respondent submitted that it is settled law that tax statutes must be interpreted strictly and that the court in Cape Brandy Syndicate vs. Inland Revenue Commissioners (1920) 1 KB 64 stated at page 240 that:-“...in a taxing Act, one has to look merely at what is clearly said. There is no room for intendment as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used...If a person sought to be taxed comes within the letter of the law he must be taxed; however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.”

78.The Respondent averred that the legal regime guiding the HS Classification of goods is the EACCET as read together with the WCO Explanatory Notes. The Respondent submitted that this position was upheld by the Tribunal in the case of Engineering Supplies 2001 Limited v Commissioner Domestic Taxes and Keroche Breweries Limited v Commissioner of Domestic Taxes.

79.The Respondent restated the Explanatory Notes on interpretation of the GIR rules which appear sequentially as herein below:i.Rule 1 begins therefore by establishing that the titles are provided “for ease of reference only”. They accordingly have no legal bearing on classification.ii.The rule provides that classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes.iii.The rule is self-evident that while many goods are classified in the nomenclature without recourse to any further consideration of the Interpretative Rules [e.g., live horses (heading 01.01), pharmaceutical goods specified in Note 4 to Chapter 30 (heading 30.06)]. There is a proviso as below:iv.The proviso under the rule reads “provided such headings or Notes do not otherwise require” is intended to make it quite clear that the terms of the headings and any relative Section or Chapter Notes are paramount, i.e., they are the first consideration in determining classification. For example, in Chapter 31, the Notes provide that certain headings relate only to particular goods. Consequently, those headings cannot be extended to include goods which otherwise might fall there by reason of the operation of Rule 2 (b).v.Finally, where appropriate, provided the headings or Notes do not otherwise require, the provisions of Rules 2, 3, 4, and 5 apply.

80.The Respondent averred that Chapter 31 of EACCET, the GIR provides for fertilizer, however, as per Rule 1 of the GIR, the Chapter only applies to items that fall within the terms of the chapter. It further added that the Explanatory Notes under Chapter 31 from the onset guide that;“This Chapter also excludes micronutrient preparations which are applied to seeds, to foliage or to soil to assist in seed germination and plant growth. They may contain small amounts of the fertilising elements nitrogen, phosphorus and potassium, but not as essential constituents (e.g., heading 38.24).”

81.The Respondent further submitted that Heading 31.02 applies only to the following goods, provided that they are not put up in the forms or packages described in Heading 31.05:“Heading 31.02 applies only to the following goods, provided that they are not put up in the forms or packages described in heading 31.05:a.Goods which answer to one or other of the descriptions given below:(i)Sodium nitrate, whether or not pure;(ii)Ammonium nitrate, whether or not pure;(iii)Double salts, whether or not pure, of ammonium sulphate and ammonium nitrate;(iv)Ammonium sulphate, whether or not pure;(v)Double salts (whether or not pure) or mixtures of calcium nitrate and ammonium nitrate;(vi)Double salts (whether or not pure) or mixtures of calcium nitrate and magnesium nitrate;(vii)Calcium cyanamide, whether or not pure or treated with oil;(viii) Urea, whether or not pure.b.Fertilisers consisting of any of the goods described in (a) above mixed together.c.Fertilisers consisting of ammonium chloride or of any of the goods described in (a) or (b) above mixed with chalk, gypsum or other inorganic non-fertilising substances.d.Liquid fertilisers consisting of the goods of subparagraph (a) (ii) or (viii) above, or of mixtures of those goods, in an aqueous or ammoniacal solution.”

82.The Respondent averred that the mineral or chemical products described in the limitative list above are classified in this heading even when they are clearly not to be used as fertilisers. On the other hand, the Heading does not include nitrogenous products, whether chemically defined (such as ammonium chloride, Heading 28.27) or not, which are not described above, even if used as fertilisers. The Respondent submitted that from the Section and relevant Explanatory Notes, the Section is exclusionary, described as a limitative list. Additionally, the Section excludes nitrogenous products, whether chemically defined or not. The Respondent emphasized that Heading 31.02 only applies to goods that have been explicitly described within the Section.

83.The Respondent stated that Headings 31.03 and 31.04 dealing with phosphates and potassium enjoy replica provisions to Heading 31.02 mutatis mutandis to the specified chemical compounds and that that Headings 31.03 and 31.04 only provide for items expressly captured under the Sections and not those excluded.

84.In order to analyse what is the legal consequence of exclusionary provisions of the EACCET, the Respondent relied on the following cases:a.In R (Rentokil Initial plc) v Commissioners for Customs and Excise [2004] UKHL 19, in which the House of Lords held that the exclusionary provision for goods has the effect alienating goods that are not expressly provided for in the section. In the case the House of Lord’s held, exclusionary phrase "of a kind used in machinery" did not apply to pesticide bait stations, even though they were used in pest control machinery.b.In the case of Commissioner of Customs (Import), Chennai v. M/s. Nokia India Pvt. Ltd. (2012), the court at Madras, High Court, held that the exclusionary provision for goods "wholly made of wood" did not apply to goods that were made of wood but also contained other materials, such as metal or plastic. In this case, the Court held that the exclusionary provision should only be applied to goods that were made entirely of wood.c.The High court in Kenya in Commissioner of Customs (Import) v. M/s. Airtel Networks (Kenya) Limited (2011) similarly concluded, the exclusionary provisions within the HS Code are those that specifically exclude certain products from classification under a particular heading or subheading.

85.The Respondent stated that the Appellant erroneously, interpreted Heading 31.05 to mean composition of nitrogen, phosphorus and potassium and any other mineral. Put differently, that as long as an item was the subject of analysis that contains nitrogen, phosphorus and potassium and any other additional mineral it met the criteria under the Section. This was erroneous for the simple reason that the Section expressly provides for the mandatory constituent elements.

86.The Respondent averred that the Latin Maxim “expressio unius est exclusio alterius” which means” the expression of one thing implies the exclusion of others." was particularly apt in the present case.

87.The Respondent submitted that boron and zinc are the essential constituent element of the two items in question and that:i.Firstly, the Appellant’s own records and evidence classify boron and zinc as a micronutrient.ii.Secondly, according to the product composition at page 3 of the Appellant records, Biofol Boron Max is a special boron base NPK suspension for foliar fertilization which guarantees extremely efficient uptake of Boron. It is a low concentrated NPK foliar fertilizer.iii.Biofol Triple Max is described as aiding plant’s cope with stress situations such as critical weather situations.

88.The Respondent submitted that the explanations it gave lead to the conclusion that Biofol Triple Max and Biofol Boron Max cannot be placed under Chapter 31 or Heading 31.05 of the EACCET.

Issues For Determination

89.Having gleaned through the pleadings and the document submitted, the evidence adduced and the submissions filed by both parties, the Tribunal is of view of that there is a single issue for determination as follows:Whether the Respondent’s review decision re-classifying Biofol Triple Max and Biofol Boron Max under HS Code 3824.99.90 was just and proper in law.

Analysis And Findings

90.The matter in contention in this dispute is the re-classification of the two products namely; Biofol Triple Max and Biofol Boron Max. The Respondent contended that the goods are classifiable under HS Code 3824.99.90 and not under HS Code 3105.10.00 or 3105.20.00 as declared by the Appellant.

91.The argument of the Respondent was to the effect that it applied the GIR 1 - 6 to the HS Code in arriving at the HS Code of 3824.99.90 and that Chapter 31 of EACCET as applied by the Appellant excludes micronutrient preparations that are applied to seeds, foliage or soil to assist in seed germination and plant growth, adding that they may contain small amounts of fertilizing elements; nitrogen, phosphorous and potassium, but not as essential constituents.

92.The argument of the Appellant on the other hand was that HS Code 3824.99.90 applied by the Respondent is applicable to chemicals used in binding materials such as foundry and cement and ought not to apply to Biofol Triple Max and Biofol Boron Max which contain the three fertilizing elements of nitrogen, phosphorous and potassium and are used for agricultural purposes to prevent the occurrence of macro and micronutrient deficiencies in coffee and help it blossom.

93.The Appellant claimed that the Respondent’s PCA confirmation did not comply with the provisions of the PCA Manual, EACCMA and offended Article 47 of the Constitution which stipulates that all citizens have a right to fair administrative action. However, the Tribunal notes that the Respondent is empowered to carry out PCA on taxpayers pursuant to Sections 235 and 236 of the EACCMA and the PCA Manuals.

94.The Tribunal having reviewed Kenya Fertilizers and Animals Foodstuffs Act, Cap 345 of the laws of Kenya (hereinafter ‘KFAF’) finds that the said Act defines a fertilizer to mean any substance or mixture of substances which is intended or offered for improving or maintaining the growth of plants or the productivity of the soil, but does not include manure, compost, wood ash, gypsum or refuse when sold in its original condition and under the same name, nor does it include organic fertilizers, other than lime.

95.The Tribunal notes that fertilizers are classified under Chapter 31 of EACCET. Heading 31.05 provides for Mineral or chemical fertilisers containing two or three of the fertilizing elements nitrogen, phosphorus and potassium, other fertilizers and goods of this Chapter in tablets or similar forms or in packages of a gross weight not exceeding 10 kg.

96.The Tribunal further notes that both parties agree that the two products are fertilizers with Biofol Triple Max being a foliar fertilizer for supplementary nutrition of coffee to prevent the occurrence of macro and micronutrient deficiencies while Biofol Boron Max is a boron-based suspension for folio fertilization.

97.The Tribunal is guided on the GIRs of the harmonized system which states as follows;“Rule 1The titles of 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 and, provided such headings or Notes do not otherwise require, according to the following provisions:The legal elements of classification are:• the terms of headings;• Section or Chapter Notes; and• if not prevented by the two elements above, the remaining General Interpretative Rules.For legal purposes classification is determined by the terms of the headings, the Section or Chapter Notes where relevant, and, if necessary and allowable, the other GIRs. Where the terms of the headings and any relevant Notes leave only one heading open for consideration, or they direct either the classification or the means of classification, then only GIR 1 is used at heading level.“Rule 2a.Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article. It shall also be taken to include a reference to that article complete or finished (or falling to be classified as complete or finished by virtue of this rule), presented unassembled or disassembled.b.Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances. Any reference to goods of a given material or substance shall be taken to include a reference to goods consisting wholly or partly of such material or substance. The classification of goods consisting of more than one material or substance shall be according to the principles of Rule 3.”“Rule 3When by application of Rule 2 (b) or for any other reason, goods are prima facie, classifiable under two or more headings, classification shall be affected as follows:a.The heading which provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods.b.Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3 (a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable.c.When goods cannot be classified by reference to 3 (a) or 3 (b), they shall be classified under the heading which occurs last in numerical order among those which equally merit consideration.”“Rule 4Goods which cannot be classified in accordance with the above Rules shall be classified under the heading appropriate to the goods to which they are most akin.”“Rule 5In addition to the foregoing provisions, the following Rules shall apply in respect of the goods referred to therein:a.Camera cases, musical instrument cases, gun cases, drawing instrument cases, necklace cases and similar containers, specially shaped or fitted to contain a specific article or set of articles, suitable for long‑term use and presented with the articles for which they are intended, shall be classified with such articles when of a kind normally sold therewith. This Rule does not, however, apply to containers which give the whole its essential character;b.Subject to the provisions of Rule 5 (a) above, packing materials and packing containers presented with the goods therein shall be classified with the goods if they are of a kind normally used for packing such goods. However, this provision is not binding when such packing materials or packing containers are clearly suitable for repetitive use.”“Rule 6For 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.”

98.The Tribunal takes note of the Respondent’s assertion of the existence of an exclusionary criterion in describing the product under Heading 31.05 of EACCET especially in consideration of the content of nitrogen, phosphorus and potassium (NPK) vis-à-vis other contents of the products. However, the Respondent did not provide a laboratory analysis to elucidate the percentage composition of the elements not allowable in each of the two products.

99.The Tribunal further takes note that in accordance with the certificate of analysis, the two products in question constitute boron, copper, iron, manganese and zinc in addition to nitrogen, phosphorus and potassium. The three fertilizing elements of nitrogen, phosphorus and potassium (NPK) constitute approximately 45% in Biofol Triple Max while in Biofol Boron Max they constitute 18%.

100.It is the Tribunal’s view that the inclusion of boron and zinc in Biofol Triple Max and Biofol Boron Max as part of the fortification for the fertiliser does not change the use of the products. The Respondent has not adduced evidence to controvert the Appellant’s assertion that Biofol Triple Max and Biofol Boron Max are fertilisers.

101.The Tribunal is of the further view that GIR1 should be used to classify both products as fertilizers by the terms of Heading 31.05 of EACCET namely:-“Mineral or chemical fertilisers containing two or three of the fertilising elements nitrogen, phosphorus and potassium; other fertilisers; goods of this Chapter in tablets or similar forms or in packages of a gross weight not exceeding 10kg.”

102.Based on the foregoing, the Tribunal finds that the Respondent was not justified in re-classifying both Biofol Triple Max and Biofol Boron Max under HS Code 3824.99.90.

FINAL DECISION

103.The Tribunal finds that the Appeal is merited and accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 23^rd September 2023 be and is hereby set aside.c.Each party to bear its own costs.

104.It’s so ordered.

DATED and DELIVERED at NAIROBI this 23^rd DAY of February 2024.********…………………………ERIC NYONGESA WAFULACHAIRMAN………………………… ……………………….DELILAH K. NGALA CHRISTINE A. MUGAMEMBER MEMBER………………………… ………………………..GEORGE KASHINDI MOHAMED A. DIRIYEMEMBER MEMBER……………………….SPENCER S. OLOLCHIKEMEMBERJUDGMENT APPEAL NO. 1317 OF 2022- COFFEE MANAGEMENT SERVICES LTD VS. COMMISSIONER OF CUSTOMS & BORDER CONTROL Page 43