Drifield Kenya Limited v Commissioner of Customs & Border Control [2023] KETAT 957 (KLR)

Drifield Kenya Limited v Commissioner of Customs & Border Control (Tax Appeal 937 of 2022) [2023] KETAT 957 (KLR) (24 November 2023) (Judgment)

Neutral citation: [2023] KETAT 957 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 937 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, Jephthah Njagi, AK Kiprotich & B Gitari, Members

November 24, 2023

Between

Drifield Kenya Limited

Appellant

and

Commissioner of Customs & Border Control

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act, whose principal business is the importation of irrigation systems and equipment known as drip irrigation system; flat driplines and lateral driplines.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority (KRA) Act, and KRA 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. The Respondent conducted a desk audit on import transactions by the Appellant for the period starting April 2017 to April 2022.

4. The Respondent subsequently applied the tariff for P.E pipes and flat dripline pipes as 3917. 21. 00 and 3917. 39. 00, respectively; which attract import duty at the rate of 25% as well as VAT. Consequently, a demand for taxes amounting to Kshs.133,592,893. 00 was served on the Appellant vide a letter dated 26th May, 2022.

5. The Appellant objected to the demand notice vide a letter dated 22nd June, 2022.

6. The Respondent vide a letter dated 20th July, 2022 issued a review decision of the adjustments of the initial assessment from the initial value of Kshs. 133,592,893. 00 to Kshs 116,333,315. 00.

7. Following its dissatisfaction with the Respondent’s decision, the Appellant commenced the appeal process by filing a Notice of Appeal to the Tribunal dated 18th August, 2022.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 30th August, 2022 and filed on 1st September, 2022:-i.That the Respondent erred in law and in fact by violating Sections 235 and 236 of the East Africa Community Customs Management Act, 2004. ii.That the Respondent erred in law and in fact by failing to adhere to Sections 21 & 23 of the East Africa Community Customs Management Act, 2004. iii.That the Respondent erred in law and in fact by contravening the East Africa Community Post Clearance Manual 2013 during the execution of post clearance customs audit.iv.That the Respondent erred in law and in fact by contravening Article 47 of the Constitution of Kenya.v.That the Respondent erred in law and in fact by allowing Post Clearance Audit Unit to contradict the ruling made by Valuation and Tariff Unit.vi.That the Respondent erred in both law and fact by confirming and demanding Kshs. 116,333,315. 00 vide demand notice ref: HQ/PCA/RRI/024/2022 dated 20th July, 2022 against the legitimate expectation of the Appellant.vii.That the Respondent erred in law and in fact by declining to review the objection of the Appeal.

Appellant’s Case 9. The Appellant’s case is premised on the following documents:i.The Appellant’s Statement of Facts dated 30th August, 2022 and filed on 1st September, 2022 together with the documents attached thereto and proceedings before the Tribunal.ii.The Appellant’s written submissions dated 12th May, 2023 and filed on 16th May, 2023.

10. That since 2017, the Appellant has specialized in the importation of irrigation systems and equipment for the blossoming farming sector of Kenya. That the irrigation systems and equipment imported are; drip irrigation systems, complete with accessories; flat driplines and lateral driplines.

11. That from February 2017 to November 2021 the Appellant imported thirty-four (34) containers; an assortment of agricultural or horticultural irrigation products as can be seen from a copy of the commercial invoice and the certificate of conformity based on the table below:-No. Agriculture Or Horticultural Irrigation Products

- Drip Irrigation System Complete with Accessories

1. Flat Dripline: 6mm/0. 40mm/1. 5-LPH/15cmx500mtr

2. Flat Dripline:16mm/0. 40mm/1. 5-LPH/20cmx1000mtr

3. Flat Dripline: 16mm/0. 40mm/1. 5-LPH/30cmx1000mtr

4. 16mm PE Pipex200mtr

5. 16mm Start Connector with Ring Lock

6. 16mm Stat Connector without Ring Lock

7. 16mm Rubber Grommet

8. Venturi Injector with Suction Pump:1"

9 16mm Joiner

10. Screen Filter T-Type-2"

11. Disc Filter-2"

12. 16mm End Cap Regular(figure-8types)

13. PP Ball Valve-2. 5"

14. PP Ball Valve-1"

12. That the products were entered and declared vide Tariff Codes 8424. 81. 00 and 8424. 82. 00 for dripline irrigation systems complete with accessories, flat driplines and lateral driplines. That Tariff Code 8424. 90. 00 was entered for parts as can be seen from the copies of entries and supporting documents attached to the 34 entries audited from January 2017 to November 2021 as stipulated in the table below:-2017 8424. 81. 00

NO. IMPORT ENTRIES ENTRY DATES DUTY (KSHS)

1. 2017MSA 6413648 13/09/2017 263,397

2. 2017MSA 6413648 31/03/2017 258,425

3. 2017MSA 6460332 18/05/2017 331,037 TariffRulingmade on R-10677800-R10668641

4. 2017MSA 6529289 28/06/2017 560,712

5. 2017MSA 6609561 30/06/2017 639,922

6. 2017MSA 6683626 25/10/2017 569,430

2018

7. 2018MSA 6845769 21/03/2019 507,312 Rulingmade on5/04/2018 10770418551741

8. 2018MSA 6920435 12/06/2018 810,155

9. 2018MSA 6983685 17/08/2018 240,232

10. 2018MSA 7056930 05/11/2018 393,141

11. 2018MSA 7100716 18/12/2018 363,669

2019

12. 2019NBI 1717440 24/01/2019 0 Rated ExportEntry

13 2019ICD 81051 15/02/2019 369,684

14. 2019MSA 7113469 03/01/2019 583,567

15 2019ICD 89388 21/03/2019 481,596

16 2019ICD 98558 25/04/2019 803,825

17. 2019ICD 122459 17/07/2019 285,487

18 2019ICD 133569 23/08/2019 133,569

19 2019ICD 14273 12/10/2019 495,864

20. 2019ICD 155267 05/11/2019 324,246

2020

21. 2021ICD 242067 12/10/2020 795,356

22. 2020 ICD 239701 01/10/2020

23. 2020ICD 177369 21/01/2020

24 2020ICD 225486 07/08/2020

25 2020ICD 190712 12/03/2020

NO. IMPORT ENTRIES ENTRY DATES DUTY

26. 2020ICD 208320 03/06/2020 1,982,801

27. 202ICD 244489 21/10/2020 2,392,354

2021

28 2021ICD 265186 16/01/2021 1,668,305

29. 2021MSA 7764183 19/03/2021 981,817

30 2021MSA 7772415 31/03/2021 895,843

31 2021MSA 7842825 23/07/2021 984,357

32. 2021ICD 315839 27/08/2021 991,990

33 2021ICD 327932 19/10/2021 1,098,748

34 2021ICD 334025 16/11/2021 1,202,848

13. That in May 2017 while clearing import entry number 2017MSA6460332 dated 8th May, 2017 which contained 1432 packages drip irrigation system complete with accessories & flat dripline equipment, the Respondent's Valuation & Tariff Section queried the TI 8424. 81. 00. That samples were produced and the Valuation & Tariff made a ruling on the entry vide reference R-10677800 TI approved on 16th May, 2017. That the ruling upheld the Tariff the Respondent had applied.

14. That in March 2018 when the Appellant entered and declared import entry number 2018MSA6845769 dated 21st March, 2018, the entry was once again stopped to verify the quality to determine the correct tariff and again the Respondent's Valuation & Tariff Department made a ruling on the entry vide "R-101271" dated 21st March, 2018. Once again, the ruling upheld the tariff 8424. 81. 00 for drip irrigation system complete with accessories plus flat dripline.

15. That in January, 2021 after entering import Entry No.2021ICD265186 dated 16th January, 2021, the Respondent’s verification officer once again raised the TI issue. That this time the Appellant decided that the ruling of TI on the entry was subjecting it to challenges, therefore appealed to the Respondent for an official documented ruling on drip irrigation systems, flat dripline and lateral driplines instead of per entry.

16. That the Respondent’s Valuation and Tariff Department delivered a Tariff Classification Guidance ruling CUS/V&T/TARI/GEN/021/2021 dated 10th February, 2021. That in this ruling the Respondent stated that the most appropriate HS Code for the items in question is:i.Flat Drip Line is 3917. 39. 00 of the EAC CET 2017 based on GIRs 1 & 6. ii.Lateral Pipe is 3917. 39. 00 of the EAC CET-2017 based on GIRs 1 & 6. iii.Other accessories/fittings of plastic is 3917. 40. 00 of the EAC CET 2017 based on GIRs 1 & 6.

17. That the Appellant vide a letter dated 15th February, 2021 appealed against the tariff guideline ref: CUS/V&T/TARI/GEN/021/2021 dated 10th February, 2021. That while appealing against the guideline of the Respondent’s Valuation & Tariff, the Appellant presented samples of the material in question to Valuation and Tariff ICDN office, accompanied by Memo Ref: ICD/TAR/06/02/2021 addressed to the Respondent's Valuation & Tariff Hqrs for tariff ruling.

18. That the Appellant not only presented the sample but also invited a representative of the supplier, that is Captain Polyplast Company from India, who demonstrated to the panel the working of the irrigation system as well as explained in detail the material used to manufacture the irrigation material components.

19. That the shipper who is the manufacturer and exporter of irrigation systems from India had on each of his shipping documents, i.e. bill of lading, commercial invoice, parking list and the Certificate of Origin classified the irrigation system under Heading 8424 as the HS Code is an international Tariff Identification Code that is supposed to be similar internationally.

20. That from the demonstration and after physical observation of the quality of the material used to manufacture the pipes the Valuation & Tariff Hqrs were satisfied that the goods are classified vide the Heading 8424 and not Heading 3917 as it had ruled earlier vide ruling referenced CUS/V&T/TARI/GEN/021/2021 and dated 10th February, 2022.

21. That the Respondent subsequently revoked its earlier ruling ref: CUS/V&T/TARI/GEN/021/2021 dated 10th February, 2021 and delivered a ruling under Ref: CUS/V&T/TARI/GEN/029/2021 dated 19th February, 2021. That this Ruling upheld the fact that the correct TI for the irrigation materials imported by the Appellant falls under the TI of Heading 8424.

22. That following this ruling the Appellant continued to import using the Heading 8424 throughout 2021 and part of 2022 without a problem.

23. That on 30th May, 2022 the Appellant received a demand notice ref: HQ/PCA/RRI/024/2022 and dated 26th May, 2022. That the demand notice referred to an earlier letter of findings dated 18th May, 2022, which the Appellant never received.

24. That the Respondents' demand notice informed the Appellant that it had failed to respond to the Respondent’s letter of findings within the requested period, and that was why the letter ref: HQ/PCA/RRI/024/2022 dated 26th May, 2022 was confirming the Kshs. 133,593,893. 00 shot levied debt purportedly owed to the Respondent.

25. That the Appellant physically visited the Respondent’s office at Sameer Business Park to complain about having not received the said letter of findings in accordance to the Respondent’s email which showed that the was no attachment.

26. That the Respondent failed to show or give the Appellant a copy of the letter dated 18th May, 2022 and up to the time of writing its Statement of Facts, the Respondent had not been able to secure the letter of findings as quoted in the its demand notice ref: HQ/PCA/RRI/024/2022 dated 26th May, 2022.

27. That the Appellant on proper scrutiny of the demand notice noted that the Respondent’s Post-Clearance Audit team carried out a Post Clearance Audit on thirty-four (34) of the Appellant’s import entries and had computed a purported short levied duty from the 34 entries based on the wrong Tariff 3917 other than the correct tariff of 8424.

28. The Appellant noted from the demand notice HQ/PCA/RRI/024/2022 dated 26th May, 2022 that the Respondent had also calculated import duty, VAT, penalty and interest on a zero-rated export entry No. 2019NBI 1717440 for 2 units drip irrigation system & dripline connector ball exported through Malaba border station to Bujumbura.

29. That the Appellant on 22nd June, 2022 filed an objection to the demand notice comprehensively stating the reasons for its objection as per Section 229(1) & (2) of the EACCMA stating the grounds upon which the objection stands.

30. That on 20th July, 2022 the Respondent in responding to the Appellant’s objection vide letter ref: HQ/PCA/RRI/024/2022 affirmed not to have erred in law and stated that the Appellant can only apply tariff 8424. 82. 00 on an irrigation system imported and mounted in a complete form but not itemized units. That the Respondent therefore affirmed its decision to demand Kshs. 116,333,315. 00 from the Appellant.

31. That upon importation of the 34 consignments the Appellant strictly observed the requirement under the East African Customs Common External Tariff 2017 and the Harmonized Commodity Description and Coding developed by the World Customs Organization (WCO), and looked at the “exclusion" & "inclusion” Notes in both Chapter 39 and Section XVI of Chapter 84 and was satisfied that its Flat Drip Line Irrigation system was properly covered under Section XVI of Chapter 84.

32. That the Appellant further looked at the General Interpretation Rules 1 & 6 and vide Rule 1 classified its goods as per Section XVI and Note 4, and Heading 8424 and also General Interpretation Rule 6 and confirmed that its goods are properly classified under subheading 8424. 81. 00 since its goods are not only mechanized but also functional units as the flat drip line irrigation systems answer to the description under Heading 8424 based on their characteristics as appliances whether or not hand operated for projecting, dispersing of liquids.

33. The Appellant submits that although the Respondent had properly claimed that “irrigation systems” consisting of various components linked together are classified in heading 8424 as functional units it failed to note that the Appellant's importations were complete systems with accessories as described by documentation and by the Respondent's own verification and Valuation & Tariff sections who physically examined the stated products as consisting of various components when linked together qualify to be classified under section 8424 as functional units.

34. The Appellant further submits that the Respondent claim of referring to the (“PE Pipes” and flat drip Line pipes”) as “Accessories” to the irrigation system is an absurdity given that even in the HS Code 3917 there is no place where such components are looked upon as accessories other than main components of the irrigation systems.

35. The Appellant submits that for the Respondent's Post Clearance Audit Unit to absurdly transpose the proper classification of the Appellant’s goods to a different HS Code by changing the description of the goods from main components to accessories aimed at manipulating the HS code to meet the Respondent's aim of collecting more taxes in disregard of Section 210 of the Constitution on “Imposition of taxes” which provides that:- “(1) No tax or licensing fee may be imposed, waived or varied except as provided by legislation.”

36. That according to the General Interpretation Rules (GIR) for the classification of goods, before one classifies a product, one must first read through the Section and Chapter Notes pertaining to that particular product in order to be certain that the product is either included or excluded from that particular Section.

37. The Appellant submits that Chapter 39 Note 2(s ) excludes “Articles of Section XVI (Machines and mechanical or Electrical appliances)”.

38. That Section XVI Note (g) excludes “Parts of general use, as defined in Note 2 to Section XV, of base metal (Section XV), or similar goods of plastics (Chapter 39).

39. That the Appellant was satisfied that its products were excluded in Chapter 39 and Section XVI also excludes the products under Chapter 39 and therefore concluded that its goods are properly included under Section XVI.

40. That the terms of the Heading as provided for by Rule 1 of the General Interpretation Rule informed the classification of the Appellant’s products under the Heading 8424. That the terms of Heading 8424 describes the product as:-“Mechanical Appliances (whether or not hand-operated) for projecting, dispersing or spraying liquids or powders; fire extinguishers, whether or not charged; spray guns and similar appliances, steam or sand blasting machines and similar jet projecting machines.”

41. That by the provision of Rule 6 of the General Interpretation Rule which proved the classification of goods by the terms of subheading of the heading, it classified its goods under Rule 6 which provides that:-“For legal purposes, the classification of goods in the subheadings of a heading shall be determined related Subheading Notes and, mutatis mutandis, to the above Rules, on the understanding that only subheadings at the same level are comparable…”

42. That based on Rule 6 and in the interest of legal certainty and ease of verification the decisive criterion for the classification of goods is in general to be sought in their objective characteristics and properties as defined in the wording of the relevant subheading of the heading.

43. That therefore the intended use of the product constitutes an objective criterion for classification if it is inherent to the product and that the inherent character must be capable of being assessed on the basis of the product’s characteristics and properties.

44. That from the above reasons therefore, subheading 8424. 81. 00 met the objective criterion and the characteristics of the product as it clearly states the principle function of the flat drip irrigation system as a:-“8424. 82. 00 - Mechanical appliances for Agricultural or horticultural Irrigation Systems as functional units to qualify to be classified under Section XVI based on Note 4. ”

45. That Section XVI Note 4 provides that:-“Where a machine (including a combination of machines) consist of individual components (whether separate or interconnected by piping, by transmission devices, by electric cables or by other devices) intended to be covered by one of the headings in Chapter 84 or Chapter 85, then the whole falls to be classified in the heading appropriate to that function.”

46. That in order to demonstrate the single and principle function of all the components of the flat drip line irrigation systems that contributed together to irrigate agricultural or horticultural farming, the Appellant describes and defines each component and its function in the table provided below:-NO. ITEMS of Flat Drip line irrigation system complete with accessories

1 Flat Drip line 16mm 0. 40mm/1. 5 LPH/15cmX500mtr

2 Flat Drip Line 16mm/0. 40mm/1,5-1ph/20cmX1000MTRs

3 Flat Drip Line 16mm/0. 40mm/1. 5-LPH/30CMX1000MTRSPE pipes 16mmX200mtrs

- The above mentioned Drip line irrigation system includes marked mainlines sub-mainline and integral drip linelateral. These are water delivery system acting as water deliver pathway made of polyethylene tubing for above or surface delivery. This water delivery system includes various parts that transfer water from source to thecrops through a network of mainlines, pipelines and drip lines all connected by connectors to allow for customsystem design.The above mentioned Flat Drip line irrigation pipes are connected to "screen filters" whose main duty is toprevent silt and other debris from entering the system that can block water from reaching the plants. The screen filers is also fitted with a "Pressure Gauge" that control the operating pressures of the drip systems.The Flat Drip Line pipe is further fitted with a Fertilizing System known as "Venture injector" fitted to inject or transfer measured amount of soluble fertilizer in to the irrigation water flat drip line main lines which is transferred to the root of the crops.The Flat Drip line pipes are further infused with Emitters or Drippers: Emitter or drippers are main components of Drip Irrigation System for discharging water from lateral to the soil where the crop is. They are made of plastic, such as polythene or polypropylene and classified according to its working as either regulated on non-regulated dischargeThe flat drip line pipes are also connected to "16mm start connector with ring lock" and "16mm start connectorwithout lock" these Start Connectors/ Take Off connectors are used to supply water from the sub-mainpipe to drip lines/dip tape.Laterals : Laterals are small diameter flexible pipes or tubing made of low density polyethylene (LDP) or liner low density polyethylene (LLDPE) of 12mm, 16mm, and 20mm size they are connected to sub-main at predetermined distance..The "Ball valves" are used to control the flow of water through the pipes and are installed on filtration system, mainline, and on sub-main.Rubber Grommet are usually connected to the lateral to sub-main, a hole is punched with hand drill ofpredetermine size in sub-main. Grommet is fixed into the hole. Take off is pressed into the hole. Take off ispressed into the grommet with take of punch up to the step provided. Grommet acts as a seal.16mm End Caps regular figure 8 are used to close the lateral ends, sub main ends or mainline ends. Sub mains and mains are preferably provided with flush valve used for flushing water out of the line.

47. That based on the illustration in the table above, the Appellant submits that a component or components of a machine can only be classified as contributing to the function of the overall machine when it contributes to the performance of the specific function of the overall machine; in the current case, in irrigating agricultural or horticultural farms.

48. That Section XVI Note 5 expresses exactly what a machine is in accordance to Section XVI of Chapter 84 as:-“For the purposes of these Notes, the expression “machine” means any machine, machinery, plant, headings of Chapter 84 or 85. ”

49. That the World Customs Organization Explanatory Note of ref: XVI-8424-3 is very explicit and removes any ambiguities and having regards to the description and classification of irrigation systems.

50. That the Explanatory Note drawn up for Heading 8424 in regard to Irrigation Systems preciously stipulates the components that make up an irrigation system and stipulate the components under XVI-8424-3 as follows:-“(E)Irrigation SystemThese irrigation systems, consisting of various components linked together usually include:-i.a control station (mesh, filters, fertilizer injectors, metering valves, non-return valves, pressure regulators, pressure gauges, air vents, etc.);ii.an underground network (distribution lines and branch lines which carry the water from the control station to the irrigation zone and the drippers).Such systems are classified in this heading as functional units within the meaning of Note 4 to Section XVI (see the General Explanatory Note to that section).”

51. That the Appellant also wishes to further draw the attention of the Tribunal to the page 11/10 of the Harmonized Commodity System which provides the following clear terms:-“Section XVI, comprising Chapters 84 and 85, is one of the most important Sections in terms of the number of headings and subheadings; these Chapters cover machinery and mechanical appliances, and electrical equipment. In particular the first 24 headings of Chapter 84, which covers machinery and mechanical appliances in general, identify them with reference to their function (reactors, turbines, pumps) and, in principle, take precedence over the remaining 62 headings, based primarily on the purpose for which the goods are used (agriculture, paper industry, textiles industry).”

52. That the subheading 8424. 81. 00 that was later changed to 8424. 82. 00, terms of subheading classifies the goods as other Appliances for Agricultural or Horticultural as well as the Explanatory Note (E) Irrigation Systems clearly shows the intended use of the stated products, and that inherent character must be capable of being assessed on the basis of the product's objective characteristics and properties.

53. That from the explanation of the working of each product and its use in the irrigation system it's very clear that the irrigation system is a functional unit and rightly so classified under cover of Section XVI, Chapter 84, Heading 8428 and subheading 8424. 81. 00 and cannot be classified under Section VII Chapter 39, Heading 3917 and subheading 3917. 21. 00 and 3917. 39. 00.

54. That based on Section XVI, Note 4, the Heading, and subheading, demonstrates that the irrigation systems as imported by the Appellant were rightly classified under subheading 8424,81,00 and therefore the Respondent’s claim of misclassification of PE Pipes and flat drip line pipes which it termed as accessories is totally misplaced and has no legal backing.

55. That in Re Kiriti Industries (India) Limited registered under Goods and Services Tax GST number 23AAACK7078B IZU the Authority held that the sprinkler; drip irrigation system including laterals, PVC Pipes and other components and accessories are classified under tariff heading No. 8424.

56. The Appellant submits that it looked at the Chapter 39 Note 1 which clearly gave an expression of plastics as follows:“Throughout the Nomenclature the expression "plastics" means those materials of headings 39. 01 to 39. 14 which are or have been capable, either at the moment of polymerization or at some subsequent stage, of being formed under external influence (usually) heat and pressure, if necessary with a solvent or plasticizer by moldings casting, extruding, rolling or other process into shapes which are retained on the removal of the external influence.”

57. That the Appellant looked at Note 8 of Chapter 39 and it is the only Note that talked of Heading 3917 and affirms the classification of these goods. That Note 8 covers the goods as follows:-“For the purposes of heading 3917 the expression "tubes, pipes and hoses" means hollow products, whether semi-manufactured, or finished products of a kind generally used for conveying, conducting or distributing gases or liquids (for example ribbed garden hose, perforated tubes). This expression also includes sausage casing and other lay-flat tubing. However, except for the last-mentioned, those having an internal cross-section other than round, oval, rectangular (in which the length does not exceed 1. 5 times the width) or in shape of a regular polygon are not to be regarded.”

58. That Note 8 gives specifics that must be satisfied for an item to be classified under HS Code 3917. The Appellant submits that the specification as stated is concerned with the general usage of product as conveyance, conducting or distribution of gases or liquids.

59. The Appellant submits that the above goods differ from the components imported by the Appellant that is Flat Drip Line Irrigation System, PE Lateral Pipes X- 200mtrs complete with accessories 16mm start connector with ring locks, 16mm start connector without ring lock, 16mm Rubber Grommet, Venturi Injector with Suction Pump 1", 16mm Joiner, Screen Filter T Type 2", Disc Filter 2"16mm end cap Regulator (figure-8 types), PP Ball Valve 2. 5" & PP Ball Valve 1" which when linked together form a functional unit and therefore are properly classified under 8424. 82. 00

60. The Appellant submits further that, the highlighted Heading Notes, and the terms of the Sub-heading Notes to Heading 3917 do not specifically describe the goods under dispute.

61. That for this reason therefore the Respondent's Post Clearance Audit Section erred by transposing HS. Code 8424. 81. 00 whose terms is mechanical appliance used in Agricultural or Horticultural and replaced it with HS Code 3917. 21. 00 for pipes of Polymer of ethylene in toto disregard of the Article 3(1 )of the latter convention which requires that:-“Each contracting party undertakes to ensure that its customs tariff and statistical nomenclatures will be in conformity with the HS, to use all of the headings and subheadings of the HS without addition or modification, together with their related codes, and to follow the numerical sequence of that system. Each contracting party also undertake to apply the general rules for the interpretation of the HS and all the section, chapter and sub-heading notes of the HS, and not to modify their scope.”

Appellant’s Prayers 62. The Appellant prayed that:i.The impugned decision be annulled by this Honourable Tribunal.ii.The Respondent's impugned assessment be amended to nil and vacated.iii.The cost of the Appeal be provided for.

Respondent’s Case 63. The Respondent’s case is premised on the following documents:i.The Respondent’s Statement of Facts dated 30th September, 2022and filed on 4th October, 2022 together with the documents attached thereto and proceedings before the Tribunal.ii.The Respondent’s written submissions dated 29th May, 2023 and filed on the same date.

64. The Respondent avers that Section 235 of EACCMA empowers the Commissioner to within five years of the date of importation, exportation or transfer or manufacture of any goods require the owner of the goods or any person who is in possession of any documents relating to the goods or answer any question in relation to the goods. That Section 235 provides as follows:-“(1)The proper officer may, within five years of the date of importation, exportation or transfer or manufacture of any goods, require the owner of the goods or any person who is in possession of any documents relating to the goods-(a)to produce all books, records and documents relating in any way to the goods; and(b)to answer any question in relation to the goods;”

65. That, Section 236 of EACCMA empowers the Commissioner to 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. That the Section provides as follows;“The Commissioner shall have the powers to;-(a)verify the accuracy of the entry of goods or documents through examination of books, records, computer stored information, business 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; “

66. The Respondent avers that Section 21 of the EAC (Compliant and Enforcement) Regulation 2021 relates to conduction of Field Audits or in-depth Comprehensive Audits where the Commissioner may require an auditee to provide all records, documents, accounting journals and computer files or database information related to the exported, imported, transferred or manufactured goods. That however, in this matter under review, the Commissioner conducted a desk audit and production of documents may not be required.

67. That additionally, Section 23 of the EAC (Compliant and Enforcement) Regulations 2021 provides that Post Clearance Audit shall be conducted in accordance with the Community’s PCA Manual. That this desk audit was done within the provisions of EAC PCA Manual, which provides for both field audits and desk audits.

68. The Respondent avers that Section 3. 2 of the EAC Manual provides that when undertaking a desk audit, a planning Memorandum may not be necessary as is in the case of a comprehensive audit. That this exercise was therefore conducted within the framework of the EAC Manual as required.

69. That Article 47(2) of the Constitution reads as follows:“If a right or fundamental freedom of a person has been or is likely to be adversely affected by administrative action, the person has the right to be given written reasons for the action.”

70. That the adjustments of the initial assessment from the initial value of Kshs. 133,592,893. 00 to Kshs. 116,333,315. 00 is sufficient proof that the Respondent acted within the requirements of Article 47 of the Constitution of Kenya.

71. The Respondent avers that the subject tariff ruling relates to samples drawn from a shipment cleared through ICDN. That the last paragraph of the said ruling informs the Appellant that particular tariff classification is based on the material information provided at the time.

72. That it is important to note these components are classifiable under HS Heading 8424. 81. 00 only “when imported as part of a completed irrigation system.” That if imported separately from other items that form the complete irrigation system, then they must be classified in their appropriate HS Codes, which are 3917. 21. 00 and 3917. 39. 00.

73. The Respondent avers that a legitimate expectation has to be grounded in law. The Appellant’s customs declarations are in contravention of Custom laws and regulations, then the Commissioner is empowered to require the Appellant to account for the contraventions and collect any Customs duties found to have been short-levied due to the contravention. That the Commissioner acted within the framework of the law.

74. The Respondent avers that the Commissioner reviewed the objection of the Appellant dated 23rd June, 2022 and issued the Commissioner’s review decision in writing as required by law on the 20th July, 2022.

75. That the two valid grounds of objection as communicated in the Commissioner’s review decisions were;i.Some of the entries assessed for extra taxes were outside the statutory period of five years provided by law under Section 235 of the EACCMA. Such assessments were deducted in as communicated by the review letter.ii.The assessments of extra VAT payable did not take into account a period when the VAT dropped to 14%. This was also found to be a valid ground of objection and adjusted appropriately. Therefore, it is not correct for the Appellant to state that the Commissioner did not review its objection in line with the provisions of Section 229 of the EACCMA.

76. That Section 229 of EACCMA reads as follows;“A person directly affected by the decision or omission of the Commissioner or any other officer on any matter relating to customs shall within thirty days of the date of the decision or omission is lodge an application for the review of that decision or omission.”

77. The Respondent avers that the General Interpretation Rules (GIR) as cited in the East Africa Community Common External Tariff (herein “EAC/CET”) govern classification of goods. According to GIR1, classification shall be determined according to the terms of the headings and any relative section or chapter notes and, provided the headings or notes do not require otherwise, according to GIR 2 through 6.

78. 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 and, provided such headings or Notes do not otherwise require, according to the following provisions:”

79. That the irrigation systems that the Appellant imported consisted of various components linked together and could only be classified under Heading 8424 as functional units only if they were imported as a complete system.

80. That the Appellant averred that later the Respondent revoked the Ruling dated 10th February, 2021 and delivered another Ruling ref: CUS/V&T/TARI/GEN/029/2021 dated 19th February 2021. That this Ruling upheld the fact that the correct tariff classification for the goods in question was 8424.

81. That following this Ruling the Appellant continued to import using the Heading above up until they received a demand notice dated 26th May, 2022. That however, the Respondent explained and stated that irrigation systems consisting of various components linked together are classified in Heading 8424 as functional units only if they are imported as a complete system.

82. The Respondent stated that the accessories to the irrigation system are to be classified in their appropriate HS Code according to their constituent material. That in this case, PE pipes and flat dripline pipes are classified under HS Codes 3917. 21. 00 and 39. 17. 39. 00, respectively, which attract a 25% ID and 16% VAT.

Respondent’s Prayers 83. The Respondent prayed that the Tribunal:i.Upholds the Respondent’s objection decision as proper and in conformity with the provisions of the law and taxes amounting to Kshs.133,592,893. 00 be paidii.Dismisses this Appeal with costs to the Respondent as the same is devoid of any merit.

Issue For Determination 84. The Tribunal has carefully reviewed the pleadings and documentation filed by both parties and is of the respectful view that the singular issue for its determination is as follows:- Whether the Respondent was justified in reclassifying the Appellant’s products.

Analysis And Determination 85. The Tribunal having ascertained the issue for determination as set out above proceeds to deal with the same as hereunder.

86. This dispute arose from the Respondent’s action of reclassifying the Appellant’s imports to tariff codes 3917. 21. 00 and 3917. 39. 00 as opposed to the Appellant’s declarations under tariff codes 8424. 81. 00 and 8424. 89. 00.

87. The Tribunal reviewed the parties’ pleadings in detail and observed that the items in dispute were dripline irrigation systems complete with accessories, flat driplines and lateral driplines and that the period under dispute is April 2017 to April 2022.

88. Heading 8424 of the East African Community Common External Tariff (EACCET) 2017 covers Mechanical appliances (whether or not hand-operated) for projecting, dispersing or spraying liquids or powders; fire extinguishers, whether or not charged; spray guns and similar appliances; steam or sand blasting machines and similar jet projecting machines. (Emphasis added). The same heading under the EACCET 2022 covers the same appliances.

89. The Explanatory Notes to Heading 8424, in relevant part, cover Irrigation Systems and state in part as follows:“These irrigation systems. consisting of various components linked usually include; i) a control station (mesh filters, fertiliser injectors, metering valves, non-return valves, pressure regulators, pressure gauges, air vents, etc.);ii)an underground network (distribution lines and. branchlines which carry the water from the control station to the irrigation zone); and(iii)a surface network (dripper lines incorporating the drippers).Such systems are classified in this heading as functional units within the meaning of Note 4 to Section XVI (see the General Explanatory Note to that Section).”

90. The Explanatory Notes also provide as follows regarding Parts:“PARTSSubject to the general provisions regarding the classification of parts (see the General Explanatory Note to Section XVI), the heading includes parts for the appliances and machines of this heading. Parts falling in this heading thus include, inter alia, reservoirs for sprayers, spray nozzles, lances and turbulent sprayer heads not of a kind described in heading 84. 81. ”

91. Heading 3917 of the EACCET covers tubes, pipes and hoses, and fittings therefor (for example, joints, elbows, flanges), of plastics. (Emphasis added)

92. The Explanatory Notes to Heading 3917 provide that “ tubes, pipes and hoses” means:“(i)hollow products, whether semi-manufactured or finished products, of a kind generally used for conveying, conducting or distributing gases or liquids (for example, ribbed garden hose, perforated tubes), provided that they have an internal cross-section which is round, oval, rectangular (in which the length does not exceed 1. 5 times the width) or in the shape of a regular polygon; and(ii)sausage casings (whether or not tied or otherwise further worked) and other lay-flat tubing.This heading also includes fittings of plastics for tubes, pipes and hoses (for example, joints, elbows, flanges). Tubes, pipes and hoses and fittings therefor may be rigid or flexible and may be reinforced or otherwise combined with other materials. (For the classification of tubes, pipes, etc., of plastics combined with other materials, see the General Explanatory Note to this Chapter.)”

93. The General Interpretative Rules (GIRs) to the CET are the guidelines by which items should be classified under the CET. The Rules are reproduced hereunder for reference:“1. 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.”2. (a)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. 3.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 :(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.4. Goods 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.5. In 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.6. 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.”

94. The Tribunal notes that Heading 8424 provides for mechanical appliances for projecting, dispersing or spraying liquids. The Heading further provides, under subheadings 8424. 41 and 8424. 49, for agricultural or horticultural sprayers. Additionally, sub heading 8424. 82 provides for other agricultural or horticultural appliances.

95. The Tribunal notes that GIR 1 provides that classification shall, inter alia, be determined according to the terms of the headings and any relative Section or Chapter Notes. Heading 8424 and its sub headings cover agricultural and horticultural systems that project, disperse or spray liquids. On this basis, it is apparent to the Tribunal that Heading 8424 provides a specific reference to agricultural and horticultural appliances for dispersion, projection or spraying of liquids.

96. The Tribunal notes that GIR 6 provides that for legal purposes, the classification of goods in the subheadings of a heading shall be determined according to the terms of those subheadings and any related Subheading Notes and, mutatis mutandis, to the above Rules, on the understanding that only subheadings at the same level are comparable. For the purposes of this Rule the relative Section and Chapter Notes also apply, unless the context otherwise requires.

97. Based on Rule 6, the Tribunal reviewed the subheadings under Heading 8424 and the relevant the Explanatory Notes which provide that the Heading includes parts for the appliances and machines of this heading. The Notes provide that parts falling in this Heading include, inter alia, reservoirs for sprayers, spray nozzles, lances and turbulent sprayer heads not of a kind described in heading 84. 81. Heading 84. 81 covers taps, cocks, valves and similar appliances for pipes, boiler shells, tanks, vats or the like, including pressure-reducing valves and thermostatically controlled valves and therefore does not cover the accessories imported by the Appellant together with its Irrigation Systems.

98. In comparison, the Tribunal noted that Heading 3917 provides for items of plastic; specifically, tubes, pipes and hoses, and fittings therefore (for example, joints, elbows, flanges) for general use.

99. Further, a review of the Explanatory Notes to Heading 3917 established that the tubes, pipes and hoses falling under this Heading are “of a kind generally used for conveying, conducting or distributing gases or liquids”. (emphasis ours) It was therefore clear to the Tribunal that this Heading does not cover specialised tubes.

100. The Tribunal also observed that Section Note 1 under Section XVI of the EACCET (under which Chapter 84 falls) provides that:“This Section does not cover:(g)Parts of general use, as defined in Note 2 to Section XV, of base metal (Section XV), or similar goods of plastics (Chapter 39);”

101. Additionally, Section Note 4 under Section XVI of the EACCET provides that:“Where a machine (including a combination of machines) consists of individual components (whether separate or interconnected by piping, by transmission devices, by electric cables or by other devices) intended to contribute together to a clearly defined function covered by one of the headings in Chapter 84 or Chapter 85, then the whole falls to be classified in the heading appropriate to that function.”

102. Based on the above provision, it is apparent to the Tribunal that in the case of machines composed of various components that form a whole, one must determine the main function of the whole as opposed to the various components. In the instant case, the items imported form part of a whole whose function is irrigation for horticultural or agricultural purposes. In line with Section Note 4 under Section XVI of the EACCET, all the items fall to be classified in the heading appropriate to the function; in this case, Heading 8424.

103. Due to the foregoing, and in reference to GIRs 1 and 6, it is clear to the Tribunal that Heading 8424, read together with its Chapter Notes and subheading descriptions provides a specific reference to the irrigation systems and accessories imported by the Appellant. Further, it is clear from the Explanatory Notes to this Heading that parts of these irrigation systems are also classifiable under this Heading contrary to the Respondent’s assertion that they are classifiable under Heading 3917.

104. The Tribunal therefore concludes that the Appellant correctly classified its imports of irrigation systems under Tariff Code 8424. 81. 00 and the accompanying accessories under Tariff Code 8424. 89. 00. The Respondent was therefore not justified in reclassifying the Appellant’s imports.

Final Decision 105. In view of the foregoing, the Tribunal finds that the Appeal is merited and accordingly makes the following Orders: -a.The Appeal be and is hereby upheld.b.The Respondent’s review decision dated 20th July, 2022 be and is hereby set aside.c.Each Party to bear its own costs.

106. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 24TH DAY OF NOVEMBER, 2023ERIC NYONGESA WAFULA...........CHAIRMANCYNTHIA B. MAYAKA..........................MEMBERDR. RODNEY O. OLUOCH...................MEMBERJEPHTHAH NJAGI.................................MEMBERABRAHAM K. KIPROTICH.................MEMBERBERNADETTE GITARI.........................MEMBER