Republic v Commissioner of Customs Services ex Parte Kenya Petroleum Refineries Limited [2017] KEHC 3430 (KLR)

Full Case Text

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT NAIROBI

MISCELLANEOUS CIVIL APPLICATION. NO. 46 of 2012

REPUBLIC …………………………….....………………….APPLICANT

VERSUS

THE COMMISSIONER OFCUSTOMS SERVICES……RESPONDENT

EX PARTE.........................KENYA PETROLEUM REFINERIES LIMITED

JUDGEMENT

Introduction

1. By a Notice of Motion dated 29th February, 2012, the ex parteapplicant herein, Kenya Petroleum Refineries Limited, seeks the following orders:

1. An Order of Certiorari to remove into the High Court for purposes of it being quashed the decision and order of the Commissioner of Customs Services dated 31st January 2012 and consequently the demand dated 5th December 2011.

2. An order of Prohibition to prohibit the Commissioner of Customs Services from demanding the tax, penalties and interest claimed in her decision dated 31st January 2012 and consequently the demand dated 5th December 2011.

3. An Order that the Respondent do pay the cost of the proceedings.

Ex ParteApplicant’s Case

2. According to the applicant, it seeks to quash the decision of the Commissioner of Customs Services (“the Respondent”) made on 31st January 2012 and consequently her demand made on 5th December 2011 wherein she has demanded payment of tax with penalties and interest for the sum of Kshs 1,633 ,968,090. 00.

3. According to the applicant, it is fifty percent owned by the Government of Kenya and carries out the business of refining crude oil. It operates the sole refinery in Kenya (“the Refinery”) and some of its products are also supplied to consumers in Uganda and Rwanda.

4. It was averred that on 5th December, 2011 the Respondent wrote to the Applicant claiming that the Applicant had been using some of the fuel oil that is refined from crude oil to run its machines. The Respondent took the view that this amounted to local consumption of warehoused goods and demanded that the Applicant pay taxes and penalties amounting to Kshs 1,633,968,090 within a period of 14 days. According to the applicant, a refinery is defined in the East African Community Customs Management Act (“the Act”) as a bonded warehouse.

5. It was deposed that the Applicant, through its tax advisers KPMG requested for more time to respond to the demand and the Respondent allowed the Applicant to respond to the demand letter by 20th January 2012. In its response by way of a letter from its tax advisers KPMG on 18th January 2012, the applicant Respondent’s attention to the provisions of s.51 (1)(d)(i) of the Act which specifically provides that duty shall only be charged on goods produced from crude petroleum or partly refined petroleum oils delivered from the refinery for home consumption. The Applicant’s tax advisers explained that the fuel oil used by the Refinery was derived during the refining process and therefore the fuel oil was used before delivery for home consumption had taken place and therefore by virtue of the provisions of section 51 (1)(d)(i) of the Act, duty was not payable.

6. However, the Respondent replied to the Applicant on 31st January 2012 and in complete disregard of the clear wording of section 51(1)(d)(i) of the Act, demanded payment of the sum of Kshs 1,633,968,090. 00 and threatened to take enforcement measures. The said demand letter was copied to all the Chief Executive Officers of all the oil marketers in Kenya.

7. It was the applicant’s case that it was incorporated in 1960 as the East African Oil Refineries Limited and commenced its operations in 1963. Since inception, the Applicant’s Refinery has always been recognized as a bonded warehouse and accordingly, a customs officer has always been stationed at the Refinery. As far back as 1965, the Commissioner of Customs and Excise had issued instructions to his staff stating that oil removed to a refinery is not charged with duty until delivery for home consumption and that oils used in the refinery whether received as such or produced in the plant are not charged with duty. The Commissioner specified that oils may be used as duty free in the refinery for refining or propelling refinery machinery. These instructions, it was averred were formally copied to the Applicant and no contrary instructions have ever been issued by the Respondent to the Applicant. The applicant’s case was that the said instructions issued were completely in line with section 51(1)(d)(i) of the Act which specifically states that duty is only chargeable on goods produced from the crude petroleum once they have been delivered from the Refinery.

8. The applicant revealed that for over 45 years, it had used the fuel oil derived from the refining process to operate its furnaces and boilers and the Respondent was always aware of this as its officers are stationed at the Refinery.

9. It was the applicant’s case that crude oil processed by the Applicant is owned by the oil marketers who import the crude oil. The refined products produced from processing are also owned by the oil marketers who agreed that some of the fuel oil derived during the processing of their crude oil cargo will be used to run the Refinery’s machinery. It was the applicant’s case that the Respondent had on a monthly basis received returns showing the refinery crude oil consumed in the processing of crude and that the Respondent had also carried out numerous tax audits during the 45 year period that the Applicant has been using the fuel oil and had never once queried the Applicant’s use of the fuel oil.

10. Based on legal counsel, the applicant contended that the Respondent has no jurisdiction to claim the taxes and penalties as no tax is chargeable on the same by dint of the clear provisions of section 51(1)(d)(i) of the Act.

11. Other than the said clear provisions of the law, the applicant averred that the Respondent created a legitimate expectation that duty would not be payable on the fuel oil used by the Applicant during the refining process by the issuance of instructions by the Commissioner of Customs to his staff, which was copied to the Applicant and which the Applicant has relied upon for the last 45 years; and not questioning the use of the fuel oil by the Applicant for the last 45 years despite having actual knowledge of the fact that the same was being used by the Applicant.

12. It was therefore contended that it was unfair and unreasonable for the Respondent to demand payment of the tax and duties thereon when it is clear by virtue of s. 51(1)(d)(i) of the Act that no duty was chargeable on the fuel oil and the Applicant has been using the fuel oil for the last 45 years without any issue having been raised by the Respondent.

13. The applicant also charged that the Respondent had also acted in blatant abuse of its powers by copying the decision dated 31st January 2012, in which it threatened to institute recovery measures, to the Chief Executive Officers of all the oil marketers in the Country yet the initial demand dated 5th December 2011 was not copied to the oil marketers. Not content with merely copying the decision, the Respondent went as far as circulating the decision by e-mail to all the oil marketers. These actions, it was contended were tainted with malice and the sole purpose for circulating the decision is to put the Applicant under undue pressure.

14. It was disclosed that the Applicant was in the process of expanding the Refinery and as a result of the Respondent circulating the demand letter, the Applicant’s business reputation was already suffering as its financiers had raised queries and there was a real danger that some of the projects which were under implementation might stall.

15. It was submitted on behalf of the applicant that Applicant was incorporated in 1960 as the East African Oil Refineries Limited and commenced its operations in 1963. Since inception, the Applicant’s Refinery has always been recognized as a bonded warehouse and accordingly, a Customs Officer has always been stationed at the Refinery. Since it began its operations, the Applicant has used the fuel oil derived from the refining process to operate its furnaces and boilers and the Respondent has always been aware of this as its officers are stationed at the Refinery.

16. It was submitted that the customs law that was applicable at the time that the Applicant begun its operations specifically allowed the Applicant to use the fuel oil derived from the refining process to operate its furnaces and boilers without having to pay duty on the same. As far back as 1965, the Respondent issued instructions to its staff stating that oil removed to a refinery is not charged with duty until delivery for home consumption and that oils used in the refinery whether received as such or produced in the plant are not charged with duty. No contrary instructions have ever been issued by the Respondent.

17. According to the applicant, the various changes in the customs law since the Applicant began its operations have never changed position and even under s.51 (1)(d)(i) of the current Act in force which is the East African Community Customs Management Act (“ the Act” ) it is specifically provided that duty shall only be charged on goods produced from crude petroleum or partly refined petroleum oils delivered from the refinery for home consumption.

18. After reiterating the contents of the verifying affidavit, the applicant referred to section 51(1)(d)(i) of the Act which states as follows;

Provided that-

where the finished article is entered for home consumption, duty shall be charged on the goods forming part thereof according to the first account taken upon the warehousing of the goods except in the case of imported crude petroleum or partly-refined petroleum oils which are warehoused in a refinery, in which case duty shall be charged on the goods produced from crude petroleum or partly refined petroleum oils delivered from the refinery for home consumption and shall be the same as that which would be payable on the importation of similar goods;

19. According to the applicant, a “refinery” is defined in s.2 of the Act as follows “refinery means a bonded warehouse licenced by the Commissioner for the treatment of oils”.It was therefore submitted thatas the entire refinery is a bonded warehouse, for purposes of s.51(1)(d)(i) the entire premises of the refinery is licenced as a bonded warehouse. This is not denied by the Respondent as the Respondent has described the refinery premises in the Replying Affidavit as Customs Bond no.30. It was submitted that the proviso to s.51(1)(d) of the Act which is set out in s.51(1)(d)(i) states that duty is chargeable on goods produced from crude petroleum and partly refined petroleum oils delivered from the refinery. The operative words in the proviso are “delivered from” the refinery. Therefore duty cannot be charged on fuel oil unless it has been delivered from the refinery. It is not disputed that the refinery constitutes the entire premises. With respect to the word “delivered” the applicant relied on Maxwell on the Interpretation of Statutes, 10th Edition which states that:

“The first and most elementary rule of construction is that it is assumed that words and phrases of technical legislation are used in their technical meaning if they have acquired one, and otherwise, in their ordinary meaning; and secondly that the words and phrases are to be construed according to the rules of grammar. It is very desirable in all cases to adhere to the words of an Act of Parliament, giving to them that sense which is their natural import in the order in which they are placed. From these presumptions it is not allowable to depart where the language admits of no other meaning. Nor should there be any departure from them where the language under consideration is susceptible of another meaning, unless adequate grounds are found, either in the history or cause of the enactment or in the context or in the consequences which would result from the literal interpretation for concluding that that interpretation does not give the real intention of the legislature. If there is nothing to modify, nothing to alter, nothing to qualify the language which the statute contains, it must be construed in the ordinary and natural meaning of the words and sentences…The underlying principle is that the meaning and intention of a statute must be collected from the plain and unambiguous expressions used therein rather than from any notions which may be entertained by the court as to what is just or expedient……..However unjust, arbitrary or inconvenient the meaning conveyed may be, it must receive its full effect. When once the meaning is plain, it is not the province of a court to scan its wisdom or its policy. Its duty is not to make the law reasonable, but to expound it as it stands, according to the real sense of the words.”

20. It was submitted that as the word “delivered” is not defined in the Act, it has not acquired a technical meaning and therefore the ordinary meaning of the word would have to be applied in interpreting the proviso set out in s. 51(1)(d)(i) of the Act. In this regards the applicant relied on the word “delivery” is defined in Blacks Law Dictionary“The formal act or transferring something, such as a deed; the giving or yielding possession or control of something to another”and contended that applying the natural and ordinary meaning of the words “delivered from the refinery”, the fuel oil would have to removed from or leave the premises of the refinery for possession or control to be taken by an oil company or an entity other than the refinery for delivery to have taken place. As long as the fuel oil remains in possession of the Applicant within the refinery’s premises, it cannot be said to have been delivered from the refinery. It was therefore submitted that duty was only chargeable on fuel oil that had been delivered from the refinery for home consumption and which had therefore left the premises of the refinery for home consumption.

21. In this case the Applicant has stated in the Verifying Affidavit that it used the fuel oil derived from the refining process to operate its furnaces and boilers which are within the refinery premises which fact was not disputed by the Respondent in its Replying Affidavit and relied on the Respondent’s 1965 instructions to its staff as regards the meaning of delivery from the refinery which instructions were copies to the Applicant which at the time was known as East African Oil Refineries Ltd. At paragraph 15 of the instructions the Respondent stated:

15. KIND OF USE PERMITTED

As under the law (Kenya Customs Tariff Act, paragraph 3(3)) oil removed to a refinery is not charged with duty until delivery for home consumption, oil used in the refinery, whether received as such or produced in the plant, are not charged with duty. It is necessary, however, to distinguish between oils, used in a refinery and oils used at a refinery, the latter being deemed to have been delivered from the refinery before use and therefore subject to duty. The following examples, while not exhaustive, should be followed in appropriate cases:-

(a)Duty-free use permissible

Oils may be used duty-free in the refinery for refining, chemical process, production of solids or gases, consumption for making heat, light or power, testing in the refinery laboratory, lubricating or propelling refinery machinery (including locomotives within the refinery) or for the purpose of testing in engines in premises approved as part of the refinery.

(b) Duty-free use not permissible

Duty-free use is not permissible of oils used for a vehicle licensed for use on the public highway, or for use outside the approved bounds of the refinery. However, no objection need to be taken to the use of duty-free oil in a specialized vehicle, e.g. a mobile crane, which normally operates within the bounds of the refinery and which makes occasional excursions outside the refinery premises, e.g. to repair refinery-controlled pipelines.

22. It was contended that the relevant law at the time that the above instructions were issued was set out in s. 3(3) the Customs Tariff Act which stated:

Notwithstanding subsection (1) of this section, where any imported crude petroleum or partly-refined petroleum is removed for refining to a refinery licensed as a bonded warehouse, the import duties and suspended duties on the crude petroleum or partly-refined petroleum shall, instead of being charged on importation of the petroleum or partly-refined petroleum, be charged on the foods produced from the crude petroleum or party-refined petroleum and delivered from the refinery for home use and shall be the same as that which would be payable on the importation of like goods.

23. To the applicant, the words “delivered from the refinery” in s.3(3) of the Customs Tariff Act are the same as the words “delivered from the refinery” in s.51(1)(d)(i) . The only difference is that s.3(3) of the Customs Tariff Act, states “delivered from the refinery for home use” whereas s. s.51(1)(d)(i) of the Act states “delivered from the refinery for home consumption”. It was however submitted that the words “use” and “consumption” have the same meaning since the word “consume” is defined in the Concise Oxford Dictionaryas “use up”.

24. It was therefore submitted that it is clear that the Respondent was considering the meaning of delivery from the refinery for home consumption and to the applicant, in the instructions given by the Respondent as to what constituted duty free use of fuel oil, it was specifically stated that oils may be used duty-free in the refinery for refining, consumption for making heat, light or power or propelling refinery machinery including locomotives within the refinery. Accordingly, the Applicant’s use of the fuel oil to operate its furnaces and boilers falls squarely within this example as the furnaces and boilers are used to generate heat and also form part of the refinery machinery. As the fuel oils were used within the bounds of the premises of the refinery and before the same had been delivered from the refinery, no duty was payable on the same.

25. In support of its submissions the applicant relied on HC Misc. Appl. No.1223 of 2007- Republic vs. The Commissioner of Domestic Taxes Large Tax Payer’s office ex-parte Barclays Bank of Kenya Ltd and submitted that the proviso to s.51(1)(d) of the Act which is contained in s.51(1)(d)(i) clearly states that duty is only chargeable on fuel oils once they have been delivered from the refinery. As the Applicant used the fuel oil before the same were delivered from the refinery, the Respondent has no jurisdiction to claim duty on the same or alternatively is acting in excess of its jurisdiction.

26. As to whether the Respondent’s instructions issued in 1965 created a legitimate expectation that oils used in the Refinery would not be charged with duty, the applicant relied on Rvs. Registrar of Societies Exparte Waswa and 2 Others [Misc Appl. No.769 0f 2004] and submitted that a legitimate expectation arose from the instructions given by the Respondent to its staff in 1965 and which were expressly copied to the Applicant which instructions have never been revoked hence the Applicant was entitled to continue relying upon them. By demanding payment of duty on the fuel oils used by the Applicant, the Respondent has breached the Applicant’s legitimate expectation.

27. According to the applicant, legitimate expectation was also created by the Respondent’s subsequent conduct wherein the Respondent did not demand any duty on the fuel oil used by the Applicant to run its furnaces and boilers notwithstanding the fact that the Respondent had stationed its officers at the Refinery, a fact which was not denied by the Respondent. The Applicant has also stated that the Respondent receives returns on a monthly basis showing the fuel oil consumed by the refinery. Again this fact has not been denied by the Respondent. This has been going on for a period of 45 years and it is clear that the Respondent has always been aware for a period as long as 45 years that the Applicant has been using duty free fuel oil to run its furnaces. The Respondent has conducted several tax audits during this period and has never once raised any issue regarding the use of the fuel oil by the Applicant.

28. It was submitted that the instructions from the Respondent as regards the duty free use of fuel oil in the refinery as well as the subsequent conduct of the Respondent in not questioning the use of the fuel oil for a period of 45 years despite knowing that the Applicant was using the fuel oil created a legitimate expectation that the Applicant was entitled to use fuel oil without payment of duty to run its furnaces and boilers. In this respect the applicant relied on Ecobank Kenya Limited vs. Commissioner of Domestic Taxes ITA No.8 of 2010 where the Judge relied on the English Case of Council of Civil Services Unions vs. Minister for Civil Service 1985 AC 374.

29. It was submitted that the conduct of the Respondent for a period of 45 years created a legitimate expectation that the Applicant was entitled to use the fuel oil without payment of duty and by demanding payment of duty, the Respondent has thwarted the Applicant’s legitimate expectation.

30. As to whether there was lack of legal certainty and predictability in the Respondent’s actions the applicant relied on Rvs. Registrar of Societies Exparte Waswa and 2 others [Misc Appl. No.769 0f 2004]and Ecobank Kenya Limited vs. Commissioner of Domestic Taxes ( ITA No.8 of 2010).

31. It was submitted that the Respondent acted in an uncertain and unpredictable manner in suddenly demanding payment of duty on fuel oil used by the refinery despite the fact that it was aware that the Applicant had always used the fuel oil duty free since it began its operations 45 years ago. Further, the Respondent acted in an unpredictable manner and uncertain manner in demanding that the Applicant pay duty on fuel oil despite the fact that it had issued instructions to its staff and copied the said instructions to the Applicant that fuel oil used for heating purposes and for operating the machinery within the refinery premises may be used duty free.

32. The applicant therefore contended that in order for the sum of Kshs 1. 6 billion claimed to be payable, it must fall clearly within the letter of the law. However other than relying on the clear provisions of the law, the Applicant has, since it began its operations, also relied on the clear instructions given by the Respondent to the effect that duty was not chargeable where the fuel oil was consumed in the furnaces and boilers to produce heat and to run the Applicant’s machinery. The Applicant has been using the fuel oil duty free for a period of 45 years with the Respondent’s knowledge and to allow the Respondent to suddenly claim duty in respect of the same would set a precedent in allowing the Respondent to act in an uncertain and unpredictable manner. This would be catastrophic not only for the Applicant but for all businesses in Kenya as it would make the entire business environment completely unpredictable and uncertain. The Applicant is the only Refinery in East Africa and the unlawful demand by the Respondent which amounts to a colossal sum of money would shut down the refinery and this would be catastrophic for the entire region. In support of its case the applicant cited Rv The Commissioner of Income Tax Ex-parte SDV Transami (Kenya) Ltd.

33. The Applicant therefore prayed that an order of certiorari be granted to quash the unlawful demand made by the Respondent and an order of prohibition be granted to prohibit the Respondent from claiming the unlawful amount.

Respondent’s Case

34. It was the Respondent’s case that the fuel oil used by the Ex parte Applicant to run its furnaces and boilers without payment of duty amount to local consumption of imported goods. It was disclosed that since August 2005, the Ex parte Applicant had consumed more than 183,276,621 M3 of fuel without any payment of duty and exemption contrary to section 50(1)(a) of the East African Community Customs Management Act, 2004 which provides for payment taxes for goods locally consumed. Section 51(1)(d)(1) thereof, it was averred provides that all refined or partly refined products shall be paid for all taxes if they are consumed locally having been removed from a bonded warehouses for purposes of home consumption. To the Respondent the use by the Ex Parte Applicant of the fuel oil in the refinery process amounts to home use as envisaged by section 2 by definition of home use/consumption under the East African Community Customs Management Act and section 2 of the Customs and Excise Act, Cap 472 Laws of Kenya and taxes ought to be paid.

35. It was the Respondent’s case that even though the fuel oil used to run the refinery boilers are not physically removed from the premises of Customs Bond No. 30 it does not mean that it is not removed for home use in Kenya as per the provisions of the Customs & Excise Act or that such fuels are exempt or not supposed to be taxable.

36. It was the Respondent’s case that it has the statutory jurisdiction and mandate to demand the payment of the taxes of Kshs. 1,633,968,090. 00 as demanded by the letter dated 5th December 2011 and the decision of 31st January 2012. It therefore denied that it had exceeded its statutory mandate by demanding taxes from the Ex parte Applicant as it is an obligation of a taxpayer to pay its fair share of taxes. He Respondent further denied that it had acted with bad faith or abused the office or power as alleged by the Ex parteApplicant.

37. According to the Respondent, the failure of the Exparte Applicant to declare the fuel it uses for running its furnaces and boilers to Customs and to pay the relevant taxes is a contravention of the law under section 61(a) of the East African Community Customs Management Act, 2004. The Respondent’s position was that other than the Import Declaration Fees, the oil marketing companies whose oil is processed do not pay taxes for the oil used by the refinery in the refinery process and this remains an obligation of the consumer in this case the Ex parte Ex parte Applicant. It was its case that even though the Ex parte Applicant does not charge the oil marketing companies (refinery users) the tax element of the fuel consumed locally to run the refinery, it is not exempted from payment of taxes on the consumed fuel oil.

38. The Respondent contended that even though the fuel oil used by the Ex Parte Ex parte Applicant in the refinery process is not tested and certified for use by an inspection company such as SGS Ltd or Intertek Testing Services (ITS) Ltd does not exempt the ex parte Applicant from payment of taxes under the HS code 2710. 19. 41 and 2710. 19. 42. It was its position that it is not privy to the contract/agreement between the Ex-parte Ex parte Applicant and the oil marketing companies which allows the ex parte Applicant to use wholly or partly refined products to run their machines/boilers. However the agreement does not exempt the Ex parte Applicant from the payment of owed taxes to the Respondent on fuel oil consumed locally in the refining process since the oil marketing companies do not have the legal mandate or the power to exempt the refinery from payment of taxes by an agreement/contract with the Ex parte Applicant since the power on granting exemptions is vested on the Minister for Finance under section 138 of the Customs and Excise Act, Cap 472 Laws of Kenya.

39. It was asserted that the Ex- parte Applicant is not one of the organizations exempted from the payment of taxes under the Fifth Schedule of the East African Community Customs Management Act, 2004. The Respondent reiterated that the demand for which these proceedings were brought relates to fuel oil consumed by the Ex- parte Applicant in the refinery process and does not relate to raw products. The same is diverted from going into the finished product tanks (fuel oil tanks) into utility tanks Nos. T2731A and T2731B. The products is drawn from the storage tanks holding processed fuel oil that is ready for delivery to the oil marketing companies into the utility tanks Nos. T2731A and T2731B which are holding tanks for fuel used by the refinery’s boilers.

40. According to the Respondent, it is untenable and unbelievable that even with the many transitions that have taken place the Ex parte Applicant wants all and sundry to accept its argument that the instructions given way back in 1965 have the force of law. In its view, it cannot possibly be imagined that the interpretations that have been assigned to the matters deposed to in the Verifying Affidavit to wit that there was legitimate expectation created by the issuance of instructions to officers copied to the Ex parte Applicant. Its case was that the Ex parte Applicant has the obligation, duty and responsibility of first understanding the tax regime before entering into negotiations and agreement which offend not only the statutory requirements but also Constitutional obligations.

41. The Respondent contended that to explain the ramifications of not collecting the taxes will lead to Kenya as Member of the East African Community for failure and refusing to implement directives and matters supporting the Customs union and the Common market Protocols of the Community yet the Constitution of Kenya has recognized that the fact that treaties which have been ratified by Kenya are part of laws of the country which all involved should observe and enforce.

42. The Respondent’s position was that its action was legal and the information passed by the Respondent by copy of a latter had no intention of hiding its action which was going to affect the operations of every business in that sector. The information was passed to serve notice so that no complaint and adverse situations was to be caused to the public without notice.

43. To the Respondent the principle of legitimate expectation cannot oust the application of clear provisions of the statute to wit the Customs and Excise Act and the East African Community Customs Management Act 2004.

Determinations

44. I have considered the issues raised in this application by way of affidavits, Statement of Facts, grounds and submissions by the respective parties.

45. In this case, the applicant’s case is hinged on two grounds. The first ground is that based on the relevant law, the applicant is not under a legal duty to pay the taxes demanded by the Respondent. This ground is based on the provisions of s.51 (1)(d)(i) of the East African Community Customs Management Act 2004 which specifically provides that duty shall only be charged on goods produced from crude petroleum or partly refined petroleum oils delivered from the refinery for home consumption.

46. In order to determine this issue the Court would have to unravel what the phrase “delivered from the refinery for home consumption” means. With due respect that is an issue that can only be properly resolved through an appeal either to the Tax Appeals Tribunal or the High Court. See Mombasa C.A.C.A 154 of 2007: Pili Management Consultants Ltd vs. Kenya Revenue Authority:

47. The next issue for determination is whether legitimate expectation inured to the benefit of the applicant herein.

48. In Republic vs. Kenya Revenue Authority ex parte Shake Distributors Limited Hcmisc. Civil Application No. 359 of 2012 it was held that:

““According to Harry Woolf, Jeffrey Jowell and Andrew Le Sueur at page 609 of the 6th Edition of DE SMITH’S JUDICIAL REVIEW, ‘Such an expectation arises where a decision maker has led someone affected by the decision to believe that he will receive or retain a benefit or advantage (including that a hearing will be held before a decision is taken)’. It follows therefore that the cornerstone of legitimate expectation is a promise made to a party by a public body that it will act or not act in a certain manner. For the promise to hold, the same must be made within the confines of law. A public body cannot make a promise which goes against the express letter of the law. In the case before me there is no evidence of a written or verbal promise made to the Applicant that its goods would be allowed in Kenya once he obtained the necessary licenses. One may argue that the legitimate expectation was based on the understanding that goods from Uganda would be admitted into Kenya at a duty rate of 0%. However, that argument cannot hold when one considers the fact that the Respondent has a statutory duty to ensure that all the necessary taxes for goods entering Kenya have been paid. The Applicant’s argument that its legitimate expectation was breached therefore fails.”

49. The three basic questions were identified in R (Bibi) vs. Newham London Borough Council [2001] EWCA Civ 607 [2002] 1 WLR 237 at [19] as follows:

“In all legitimate expectation cases, whether substantive or procedural, three practical questions rise, the first question is to what has the public authority, whether by practice or by promise, committed itself to; the second is whether the authority has acted or proposes to act unlawfully in relation to its commitment; the third is what the court should do.”

50. It was further held in R vs. Jockey Club ex p RAM Racecourses [1993] 2 All ER 225, 236h-237b that the basic hallmarks of an unqualified representation are:

“(1) A clear and unambiguous representation. (2) That since the [claimant] was not a person to whom any representation was directly made it was within the class of persons who are entitled to rely upon it; or at any rate that it was reasonable for the [claimant] to rely upon it without more…(3) That it did so rely upon it.(4) That it did so to its detriment…(5) That there is no overriding interest arising from [the defendant’s] duties and responsibilities.”

51. According to De Smith, Woolf & Jowell,“Judicial Review of Administrative Action” 6thEdn. Sweet & Maxwell page 609:

“A legitimate expectation arises where a person responsible for taking a decision has induced in someone a reasonable expectation that he will receive or retain a benefit of advantage. It is a basic principle of fairness that legitimate expectations ought not to be thwarted. The protection of legitimate expectations is at the root of the constitutional principle of the rule of law, which requires predictability and certainty in government’s dealings with the public.”

52. However it was held in South Bucks District Council vs. Flanagan [2002] EWCA Civ. 690 [2002] WLR 2601 at [18] that:

“Legitimate expectation involves notions of fairness and unless the person making the representation has actual or ostensible authority to speak on behalf of the public body, there is no reason why the recipient of the representation should be allowed to hold the public body to the terms of the representation. He might subjectively have acquired the expectation, but it would not be a legitimate one, that is to say it would not be one to which he was entitled.”

See also Rowland vs. Environment Agency [2002] EWHC 2785 (Ch); [2003] ch 581 at [68]; CA [2003] EWCA Civ 1885; [2005] Ch 1 at [67].

53. Similarly, in Republic vs. Attorney General & Another Ex Parte Waswa & 2 Others [2005] 1 KLR 280 it was held:

“The principle of a legitimate expectation to a hearing should not be confined only to past advantage or benefit but should be extended to a future promise or benefit yet to be enjoyed. It is a principle, which should not be restricted because it has its roots in what is gradually becoming a universal but fundamental principle of law namely the rule of law with its offshoot principle of legal certainty. If the reason for the principle is for the challenged bodies or decision makers to demonstrate regularity, predictability and certainty in their dealings, this is, in turn enables the affected parties to plan their affairs, lives and businesses with some measure of regularity, predictability, certainty and confidence. The principle has been very ably defined in public law in the last century but it is clear that it has its cousins in private law of honouring trusts and confidences. It is a principle, which has its origins in nearly every continent. Trusts and confidences must be honoured in public law and therefore the situations where the expectations shall be recognised and protected must of necessity defy restrictions in the years ahead. The strengths and weaknesses of the expectations must remain a central role for the public law courts to weigh and determine.”

54. In this case it was contended which contention was not controverted that the Applicant was incorporated in 1960 as the East African Oil Refineries Limited and commenced its operations in 1963. Since inception, the Applicant’s Refinery has always been recognized as a bonded warehouse and accordingly, a Customs Officer has always been stationed at the Refinery. Since it began its operations, the Applicant has used the fuel oil derived from the refining process to operate its furnaces and boilers and the Respondent has always been aware of this as its officers are stationed at the Refinery.

55. It was submitted that the customs law that was applicable at the time that the Applicant begun its operations specifically allowed the Applicant to use the fuel oil derived from the refining process to operate its furnaces and boilers without having to pay duty on the same. As far back as 1965, the Respondent issued instructions to its staff stating that oil removed to a refinery is not charged with duty until delivery for home consumption and that oils used in the refinery whether received as such or produced in the plant are not charged with duty. No contrary instructions have ever been issued by the Respondent.

56. According to the applicant, the various changes in the customs law since the Applicant began its operations have never changed position and even under s.51 (1)(d)(i) of the current Act in force which is the East African Community Customs Management Act (“the Act”) it is specifically provided that duty shall only be charged on goods produced from crude petroleum or partly refined petroleum oils delivered from the refinery for home consumption.

57. While not contesting the factual position, the Respondent contended that it is untenable and unbelievable that even with the many transitions that have taken place the Ex parte Applicant wants all and sundry to accept its argument that the instructions given way back in 1965 have the force of law. In its view, it cannot possibly be imagined that the interpretations that have been assigned to the matters deposed to in the Verifying Affidavit to wit that there was legitimate expectation created by the issuance of instructions to officers copied to the Ex parte Applicant. Its case was that the Ex parte Applicant has the obligation, duty and responsibility of first understanding the tax regime before entering into negotiations and agreement which offend not only the statutory requirements but also Constitutional obligations.

58. However as was stated by Laws,LJ in R (Bhatt Murphy) vs.Independent Assessor [2008] EWCA Civ 755 in paragraph 50:

“A very broad summary of the place of legitimate expectations in public law might be expressed as follows. The power of public authorities to change policy is constrained by the legal duty to be fair (and other constraints which the law imposes). A change of policy which would otherwise be legally unexceptionable may be held unfair by reason of prior action, or inaction, by the authority. If it has distinctly promised to consult those affected or potentially affected, then ordinarily it must consult (the paradigm case of procedural expectation). If it has distinctly promised to preserve existing policy for a specific person or group who would be substantially affected by the change, then ordinarily it must keep its promise (substantive expectation). If, without any promise, it has established a policy distinctly and substantially affecting a specific person or group who in the circumstances was in reason entitled to rely on its continuance and did so, then ordinarily it must consult before effecting any change (the secondary case of procedural expectation). To do otherwise, in any of these instances, would be to act so unfairly as to perpetrate an abuse of power.”

59. As appreciated by In support of this submission the Applicant relied on De Smith, Woolf & Jowell, “Judicial Review of Administrative Action” 6thEdn. Sweet & Maxwell page 609:

60. In this case according to the applicant, the policy in question has been in place for 45 years. As was held in Council of Civil Services Unions vs. Minister for Civil Service 1985 AC 374:

“In the English decision of COUNCIL OF CIVILSERVICES UNIONS V MINISTER FOR CIVIL SERVICE 1985 AC 374 Lord Fraser stated as follows:-

“a legitimate expectation may arise – either from an express promise given on behalf of a public authority or from the existence of a regular practice which the claimant can reasonably expect to continue.”

“I would add that the expectation herein is not just a legitimate expectation. It is an expectation backed by a written express waiver and a passive conduct in relation thereto for a period of twenty five years. All this time the Respondent was aware of section 15(7) of the Income Tax Act. In my finding, that expectation became so legitimate, and so strongly grounded, that it established an economic right that only an express, concise, and specific waiver clearly communicated and delivered, could uproot.”

61. As was held in Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others Nairobi HCMA No. 743 of 2006 [2007] KLR 240:

“…….legitimate expectation is based not only on ensuring that legitimate expectations by the parties are not thwarted, but on a higher public interest beneficial to all including the respondents, which is, the value or the need of holding authorities to promises and practices they have made and acted on and by so doing upholding responsible public administration. This in turn enables people affected to plan their lives with a sense of certainty, trust, reasonableness and reasonable expectation. An abrupt change as was intended in this case, targeted at a particular company or industry is certainly abuse of power. Stated simply legitimate expectation arises for example where a member of the public as a result of a promise or other conduct expects that he will be treated in one way and the public body wishes to treat him or her in a different way…..Public authorities must be held to their practices and promises by the courts and the only exception is where a public authority has a sufficient overriding interest to justify a departure from what has been previously promised.…..In order to ascertain whether or not the respondents decision and the intended action is an abuse of power the court has taken a fairly broad view of the major factors such as the abruptness, arbitrariness, oppressiveness and the quantumof the amount of tax imposed retrospectively and its potential to irretrievably ruin the applicant. All these are traits of abuse of power. Thus I hold that the frustration of the applicants’ legitimate expectation based on the application of tariff amounts to abuse of power.”

62. In this case the manner in which the Respondent sought to overlook its prior position as regards the applicant’s liability to pay taxes in the circumstances of this case was clearly unfair. The Respondent ought to have given the applicant sufficient notice of its intention to reverse its earlier position on the applicant’s liability to pay taxes where the fuel oil was consumed in the furnaces and boilers to produce heat and to run the Applicant’s machinery so as to enable the applicant change its position. To fail to do so amounted to an arbitrary action on the part of the Respondent in particular where the decision had retrospective operation. It ought to be remembered that the principle of legitimate expectation always involves notions of fairness.

63. It is therefore my view and I hold that the Respondent’s decision violated the applicant’s legitimate expectation that it would not be subjected to taxation where the fuel oil was consumed in the furnaces and boilers to produce heat and to run the Applicant’s machinery.

64. Accordingly, I find the Notice of Motion dated 29th February, 2012 merited.

Order

65. Consequently, I issue the following reliefs:

1. An Order of Certiorari removing into this Court for purposes of it being quashed the decision and order of the Commissioner of Customs Services dated 31st January 2012 and consequently the demand dated 5th December 2011 which decision is hereby quashed.

2. An order of prohibition prohibiting the Commissioner of Customs Services from demanding the tax, penalties and interest claimed in her decision dated 31st January 2012 and consequently the demand dated 5th December 2011.

3. As the Government of Kenya has state in both the applicant and the Respondent, the order that commends itself to me as regards the costs is that each party shall bear own costs of these proceedings.

66. Orders accordingly.

Dated at Nairobi this 2nd day of October, 2017

G V ODUNGA

JUDGE

Delivered in the presence of:

Miss Malik for the applicant

Mr Ontweka for the Respondent

CA Ooko