Tax Appeals Tribunal Decision HS Classification Chapter 39>Tax Consultant Kenya

The Respondent undertook a Post Clearance Audit (“PCA”) on the Appellant’s imports for the period 2016-2021. As a result of this exercise, the Respondent concluded that the Appellant’s product, Esprene SPO Vo141, had been misclassified and proceeded to re-classify it under HS Code 3811.29.00 instead of 3901.90.00.

 

JUDGMENT

BACKGROUND

1. The Appellant is a private company incorporated in Kenya under the Companies Act. The Company is licensed by NEMA to manufacture Process Lubrication Oils (“PLO”) using waste (used) oil through a refining and reconditioning process.
2. The Respondent is a principal officer appointed under Section 13 of the Kenya

Revenue Authority Act. Under Section 5(1) of the Act, KRA is an agency of the Government of Kenya mandated to assess, collect, receive and account for Government revenue.

3. The Respondent undertook a Post Clearance Audit (“PCA”) on the Appellant’s

imports for the period 2016-2021. As a result of this exercise, the Respondent concluded that the Appellant’s product, Esprene SPO Vo141, had been misclassified and proceeded to re-classify it under HS Code 3811.29.00 instead of 3901.90.00.

 

4. On 23^rdJuly 2021, the Respondent issued a Demand Notice for KShs 5,891,123.94 being additional import duty, VAT, penalty and interest.
5. Vide a letter dated 29^thJuly 2021, the Appellant applied for a review of the demand to which the Respondent reverted on 19^th August 2021 and issued its Objection Decision which affirmed its earlier decision that the product was classifiable under Heading 3811. The amount demanded increased to

6,114,783.57 on account of interest which had continued to accrue on the assessed amount.

6. Aggrieved by the Respondent’s actions, the Appellant filed a Notice of Appeal at the Tribunal on 13^thSeptember 2021.

THE APPEAL

7. In its Memorandum of Appeal dated 17^thSeptember 2021 and filed on 20^th September 2021, the Appellant’s Appeal is premised on the following grounds,
8. :
9. That the Respondent erred in law and on fact by raising and confirming the Assessment dated 19^thAugust 2021 of 6,114,783.57.
10. That Esprene SPO V0141 is an ethylene-propylene copolymer which matches the definition of Tariff No. 3901.90.00 under the EAC Common External Tariff (“EAC CET”) which covers “other polymers of ethylene, in primary forms”(including: ethylene-propylene copolymers) contrary to the Respondent’s assertion that the raw material in its primary form falls under Tariff No. 3811.29.00 that attracts duty at the rate of 10%.

• That the raw material imported by the Appellant is in solid crystalline

granule state, not a prepared viscosity improver product as misinterpreted by the Respondent. It is thereafter converted into viscosity improver in a state to be used in lubricating oils.

1. That prepared viscosity improver for lubricants referred by the

Respondent is in liquid state, whilst the raw material for the same which the Appellant imported is in granule/pellet state.

1. That the viscosity improver in its liquid state is ready for use whereas the

Appellant’s imported raw material is in solid-state, as indicated in the packing list, and must be blended with specific base oil to achieve the liquid state.

1. That the Appellant’s product is a polymer ethylene in its primary solid

form whilst the one referred by Respondent is in a prepared liquid Form.

• That the most key difference is that HS Code 3811.29.00 is a prepared

formulation whilst HS Code 3901.90.00 is in its primary solid form to be converted/changed into a prepared formulation.

• That the tariffs are clearly defined on this basis and both the product’s

supplier and manufacturer confirmed the same in writing vide their letters dated 27^th April 2021 and 6^th May 2021 respectively.

1. That the tax demanded by the Respondent is incorrect and erroneous for failure to consider the “In Dup/um Rule”in the computation of interest thereon.
2. The Appellant prays that:
3. The Appeal be allowed with costs;
4. The Respondent’s Assessment dated 19^thAugust 2021 be set aside; and

• The Respondent’s decision dated 19^thAugust 2021 be set aside.

APPELLANT’S CASE

9. In its written submissions dated 28^thFebruary 2022 and filed on 4^th March 2022, the Appellant presents its case to be:
10. That used oil is the Appellant’s main raw material in the manufacture of

PLO together with other raw materials in their primary form such as Esprene SPO V0141 which is mainly imported.

1. That the Respondent, in a letter 26^thFebruary 2021, alleged that Esprene

SPO VO141 is considered to be a polymeric organic compound containing ethylene-propylene copolymers, especially formulated for use as a viscosity index improver for lubricating oils and is therefore classifiable under HS Code 3811.29.00 of EAC CET.

• That vide a letter dated 4^thJune 2021, the Appellant clarified to the

Respondent that its product was not a prepared viscosity improver product since it was imported in its raw state, and had to be converted into viscosity improver in a state to be used in lubricating oils. The Appellant further clarified that whilst prepared viscosity improver for lubricants is in liquid state would fall under HS Code 3811.29.00, the raw material for the same was in granule/pellet state and should be classified HS Code 3901.90.00.

1. That on 23^rdJuly 2021, the Respondent issued a demand notice for KShs

5,891,123.64, being taxes together with penalty and interest.

1. That on 29^thJuly 2021, the Appellant objected to the above demand in its

entirety under Section 229 of the East African Community Customs Management Act, 2004 (“EACCMA”).

1. That the Respondent issued its Review Decision on 19^thAugust 2021 and

confirmed the earlier demand. However, the amount demanded had increased to KShs 6,114,783.57.

• That on 13th September 2021, the Appellant filed a Notice of Appeal with

the TAT.

10. Based on the foregoing, the Appellant framed the key issues for determination to be:
11. Whether the Appellant’s raw material is in solid crystalline granule state or

is a prepared viscosity improver product as alleged by the Respondent?

1. Whether the Appellant’s raw material, Esprene SPO V0141, matched the

definition of Tariff No. 3901.90.00 or Tariff No. 3811.29.00; and

• Whether the Respondent could disregard the manufacturer’s evidence on

the use of Esprene SPO V0141 without justification?

RESPONDENTS CASE

11. In its Statement of Facts dated and filed on 19^thOctober 2021 and written submissions dated 20^th February 2022 and filed on 22^nd February 2021, the Respondent states its case as hereunder.
12. That the assessment was correctly issued and conformed to the Custom

Laws, and that the onus of proving otherwise is on the taxpayer.

1. That the Appellant failed to provide evidence that would support a

contrary assessment or that would have guided the Respondent at arriving at a different Objection Decision. The documents and literature furnished by the Appellant did not provide any additional information which would have led to a change on the classification.

• That the classification of goods for purposes of levying customs duty is

governed by the International Convention on Harmonized Commodity Description and coding system or harmonized system (“HS Code”).

1. That the Appellant had mis-classified its product, Esprene SPO VO141, and

also under-declared the transaction value. The Respondent has determined the transaction values declared by importers including the Appellant to be too low, and not a true reflection of the correct transaction value for the imports.

1. That there were variances in the transaction value used and the

Respondent therefore chose to use the second and third valuation methods, i.e., identical and similar goods per Section 1(2) (a) of Part 1 of the Fourth Schedule.

1. That the Respondent is not restricted by law to accept the Appellant’s

documents. Under Section 122(4) of the EACCMA, the Respondent is allowed to depart from the transactional value method if there is doubt.

• That the Respondent having found that the value of the imports as given

by the Appellant was much lower than the actual value it increased to the value as charged on other importers which it is empowered to do.

SUBMISSION BY THE PARTIES

On whether Esprene SPO V0141 should be classified under Tariff Code. 3901.90.00 or Tariff No. 3811.29.00.

12. The Appellant submits that, Esprene SPO V0141, is in solid crystalline granule state in its imported form, and not a prepared viscosity improver product as alleged by the Respondent. It thereafter converted into a viscosity improver to be used in lubricating oils.

13.lt is the Appellant’s contention that the viscosity improver in its liquid state is ready for use, whilst the Appellant’s imported raw material, Esprene SPO V0141, is in a solid state and has to be blended with specific base oils to achieve the liquid state.

14. The Appellant submits that its product is a polymer ethylene in its primary solid form whilst the one referred by Respondent is in a prepared liquid form. The Appellant avers that the Respondent’s classification of Esprene SPO VO141 was solely based on the fact that the chemical composition of the ethylenepropylene copolymer is allegedly similar to compounds used as viscosity index improvers.
15. The Appellant submits that Esprene SPO V0141 is an ethylene-propylene copolymer which matches the definition of Tariff No. 3901.90.00 under the EAC CET which covers “other polymers of ethylene, in primary forms” (including Ethylene-propylene copolymers) contrary to the Respondent’s assertion that the raw material in its primary form falls under Tariff No. 3811.29.00.
16. The Appellant submits that the alleged laboratory tests carried out by the Respondent did not indicate that Esprene SPO VO141 is not ethylene-

propylene in its primary form and whether Esprene SPO VO141 can, in its imported form, be “used” as a viscosity index improver. This would have helped to conclusively determine whether it is a viscosity index improver as alleged by the Respondent and determine the correct classification.

17. The Appellant disputes the Respondent’s claims of failing to adduce sufficient evidence and submits that it had, in its letter dated 4^thJune 2021 which challenged the Respondent’s classification of Esprene SPO V0141, annexed the letters from both the supplier and manufacturer of the product.

18.On its part, the Respondent contends that the Appellant had all along declared the Esprene SPO VO141 products using erroneous entries and transaction values. That the Respondent had since determined that the values declared by importers including the Appellant were too low and not a true reflection of the prices charged by the manufacturer when compared to those previously declared by unrelated party/importer.

19. The Respondent also argued that the transaction value applied was lawful and justified under Section 122(4) of EACCMA which provides that:

“(4) Nothing in the Fourth Schedule shall be construed as restricting or calling into question the rights of the proper officer to satisfy himself or herself as to the truth or accuracy of any statement, document or declaration presented for customs valuation purposes. ”

20. The Respondent submits that the Explanatory Notes to Heading 3811 included additives for mineral oils or for other liquids used for the same purposes to eliminate or reduce undesirable properties or to impart or enhance desirable properties. That the Heading also includes additives for lubricating oils, which includes viscosity improvers, based on polymers such as polymethacrylates, polybutenes, polyakylstyrenes, etc.
21. The Respondent further submits that Explanatory Note 2(h) to Chapter 39 excludes “additives for mineral oils (including gasoline) or for other liquids used for the same purposes as mineral oils (Heading 38.11)” from the Chapter.
22. The Respondent submits that the samples of the Appellant’s product were tested and found to contain ethylene-propylene copolymer and other additives, and to be specially formulated for use as a viscosity Index improver for lubricating oils hence its classification under HS Code 3811.29.00.
23. The Respondent submits that the Transactional Value Method proposed by the Appellant was not justified since there were no documents provided to back up the same plus there were discrepancies between the values declared by the Appellant and those declared by other parties/importers.
24. The Respondent submits that it is not restricted by law to accept the documents presented by the Appellant or any taxpayer. Under Section 122(4) of the EACCMA, it is allowed to depart from the Transactional Value Method where there is a doubt. For this reason, EACCMA provides other valuation methods to be used where the Transactional Value Method fails.

On whether the Respondent erred by failing to take into consideration the manufacturer’s evidence on the use ofEsprene SPO V0141

25. The Appellant contends that on 27^thApril 2021, its supplier of Esprene SPO V0141, Kemipex Innovating Solutions of UAE, issued a letter confirming that Esprene SPO V0141 to be an ethylene-propylene copolymer which matches the definition of HS Code 3901.90.00. The product’s manufacturer, Sumimoto Chemical, also confirmed the same vide a letter dated 6^th May 2021.
26. The Appellant submits that the Respondent’s classification of Esprene SPO VO141 as a “viscosity index improver” under HS Code 3811.29.00 was solely based on the fact that the chemical composition of the ethylene-propylene copolymer is allegedly similar to compounds used as viscosity index improvers.
27. The Appellant also submits that it was neither involved in the collection of samples for the purported laboratory tests nor privy to the results of the alleged tests by the Respondent, and therefore could not vouch for the credibility of the results. That the Appellant was also not accorded an opportunity to scientifically challenge those results or cross-examine the author of the report which constitutes a violation of the Appellant’s rights under Article 47 and 50 of the Constitution.
28. The Appellant nonetheless sought clarification on the proper classification of Esprene SPO VO141 from both the product’s manufacturer and supplier. The manufacturer, Sumitomo Chemical, in a letter dated 6^thMay 2021 confirmed that Esprene SPO V0141 as supplied to the Appellant in its primary form is not and cannot be directly used as a Viscosity Index Improver.
29. The Appellant further submits that the Respondent is not an expert in the chemical composition and/or use of Esprene SPO VO141 yet it has disregarded expert opinion from the product’s manufacturer. That the Respondent places emphasis on a datasheet and/or description of the product on the manufacturer’s website which is of no probative value, reason being the description is superseded by the manufacturer’s clarification contained in the letter dated 6^thMay 2021, and also due to the fact that the website contains a disclaimer on the use of information or data therein. As such, no evidential value can be attached to this description.
30. The Appellant submits that Sections 48(1) and (2) of the Evidence Act which provide that:

“(1) when the court has to form an opinion upon a point of foreign law, or of science or art, or as to identity or genuineness of handwriting or finger or other impressions opinions upon that point are admissible, if made by persons specially skilled in such foreign law, science or art on questions as to identify the genuineness of the handwriting or finger or other impressions.

(2) such persons are called experts. ”

31. The Appellant cites the decision in the case of Stephen Kinini Wang’ondu-vs- The Ark Limited F20161 eKLR,where the High Court, inter alia, stated that:

“…the weight to be given to expert evidence will derive from how that evidence is assessed in the context of all other evidence. Expert evidence is most obviously needed when the evaluation of the issues requires technical or scientific knowledge only an expert in the field is likely to possess. ”

32. It is the Appellant’s submission that by failing to give any due consideration to the manufacturer’s evidence, the Respondent failed to consider a relevant matter thereby reaching a decision that is manifestly wrong. The Appellant refers to the case ofRepublic -vs- Registrar of Societies ex-parte Mohamed Haii Issa『20041 eKLR in the Kisumu High Court emphasised that:

“it is essential to appreciate that facts are integral to the making of decision and the validity of a decision usually hinges upon the proper appreciation, comprehension and above aii interpretation of the facts to enable the person exercise his discretion property. The registrar was exercising statutory powers and in doing so must direct herself properly in law and procedure must consider all matters which are relevant and avoid extraneous matters. ”

33. The Appellant also contends that being an administrative body exercising quasi-judicial authority, the Respondent’s failure to give reasons for its

aforesaid decision is a gross violation of the Appellant’s right to fair administrative action as envisaged in Article 47 of the Constitution.

34. The Appellant submits that the key difference between the two classifications is that HS Code 3811.29.00 is a prepared formulation whereas HS Code 3901.90.00 is in its primary solid form to be converted/changed into a prepared formulation.
35. The Respondent meanwhile submits that the assessment was correctly issued and conforms to the Tax Procedures Act (“TPA”) and that the Appellant did not provide evidence that would have altered the tax assessment based on the transaction value used.
36. The Respondent also submits that Section 56(1) of the TPA places the onus of proof in tax objections on the taxpayer. That the Appellant failed to present evidence that would have supported a contrary assessment, or that would have guided the Respondent at arriving at a different transaction value.
37. It was stated by the Respondent that there existed a previous unrelated party/importer and the Respondent was keen to ensure that the Esprene SPO VO141 products were correctly valued.

38.On the failure to adhere to the “in dup/um rule”, the Respondent submits that the interest chargeable was pursuant to Section 249 of EACCMA which provides for payment of interest of 2% per month or part of the month on any amount of duty or other sums of money which is due under the Act that remains unpaid after the date upon which it is payable. EACCMA has no provision limiting the accrual of interest for any debt owed to Customs.

ISSUES FOR DETERMINATION

39. Upon careful scrutiny of the parties’ pleadings, documentation and submissions, the Tribunal forms the view that the sole issue for determination is:

Whether the Respondent erred in law and on fact by classifying the Appellant’s goods under HS Code 3901.90.00.

ANALYSIS AND FINDINGS

40. The Appellant submitted that Esprene SPO V0141 is solid crystalline granule state in its import form, and not a prepared viscosity improver. The product is later converted into a viscosity improver to be used in lubricating oils by blending it with specific base oils thereby enabling it achieve a liquid state.

41 .The Appellant further argued Esprene SPO V0141 is a polymer ethylene in its primary solid form whilst the product referred to by Respondent is in a prepared liquid form.

42. In the Appellant’s view, the Respondent’s classification of Esprene SPO VO141 was influenced by the fact that the chemical composition of the ethylenepropylene copolymer is allegedly similar to compounds used as viscosity index improvers.
43. Thus, the Appellant submitted that Esprene SPO V0141 is an ethylenepropylene copolymer which matches the definition of Tariff No. 3901.90.00 under the EAC CET which covers “other polymers of ethylene, in primary forms”(including Ethylene-propylene copolymers) contrary to the

Respondent’s assertion that the raw material in its primary form falls under Tariff No. 3811.29.00.

44. The Respondent, on the other hand, contended that the typical application of Esprene SPO V0141 is as a viscosity index improver for lubricating oils and is therefore classifiable under Heading 3811 which covers “anti-knock preparations, oxidation inhibitors, gum inhibitors, viscosity improvers, anticorrosive preparations and other prepared additives, for mineral oils (including gasoline) or for other liquids used for the same purposes as mineral oils”
45. The Respondent additionally argued that the results of a laboratory analysis of the product had established that it contained ethylene-propylene copolymer and other additives specially formulated for use as a viscosity index improver for lubricating oils and hence classifiable under HS Code 3811.29.00.
46. Inasmuch as the Respondent has, in its submissions, questioned the Appellant’s declared transaction value, the Tribunal considers the dispute to be primarily on the classification of Esprene SPO V0141, and will therefore not dwell on the issue of valuation. In this respect, the Tribunal’s view is influenced by the fact that the correspondences between the parties culminating into the Respondent’s Objection Decision dated 19^thAugust 2021, was purely in respect of classification. At no point did the question of valuation arise.
47. On tariff classifications, the EACMMA and EAC CET specify that products must be interpreted in line with WCO’s General Interpretation Rules for the classification of Goods (‘GIRs’). Rule 1 or 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 require, the provisions of GIRs 2 to 6.
48. As such, classification is determined by the words (terms) in the Headings and the Section and Chapter Notes that apply to them, unless the terms of the Heading and the Notes provide otherwise. In other words, if the goods to be classified are covered by the words in a Heading and the Section and Chapter Notes do not exclude classification in that Heading, the Heading applies.
49. In considering this issue, the Tribunal is guided by the holding of the Canadian Court in Puratos Canada lnc,vs- Canada (Customs & Revenue), 2004 CANLII 57069『CA erm.The Court laid down the following guidelines:

“The General Rules for the Interpretation of the Harmonized System referred to in section 10 of the Customs Tariff originated in the International Convention on the Harmonized Commodity Description and Coding System. They are structured in cascading form so that, if the classification of the goods cannot be determined in accordance with Rule 1. then regard must be had to Rule 2 and so on The above legislation requires the Tribunal to follow several steps before arriving at the proper classification of goods on an appeal: first to examine the schedule to see if the goods fit prima facie within the language of a tariff heading; second, to see if there is anything in the chapter or section notes that precludes the goods from classification in the heading; and third, to examine the Classification Opinions and the Explanatory Notes to confirm classification of the goods in the heading.

50. Heading 39.01 of EAC CET covers “polymers of ethylene, in primary forms”. Note 6 to Chapter 39 states that, “in Headings 39.01 to 39. i4, the expression “primary forms” applies only to the following forms:

(a) Liquids and pastes, including dispersions (emulsions and suspensions) and solutions;

(b) Blocks of irregular shape, lumps, powders (including moulding powders), granules, flakes and similar bulk forms”

51. Heading 3811, which has been applied by the Respondent to classify the Appellant’s product, is in respect of “anti-knock preparations, oxidation inhibitors, gum inhibitors, viscosity improvers, anti-corrosive preparations and other prepared additives, for mineral oils (including gasoline) or for other liquids used for the same purposes as mineral oils”
52. In the Tribunal’s view, the Respondent’s decision appears to have been influenced by the classification of “viscosity improvers” under Heading 3811. However, the Tribunal took into account the Appellant’s contention that Esprene SPO V0141 is in “crystalline granules” in its imported state and not a prepared viscosity improver and had to be blended with specific base oil in order to be converted into viscosity improver in a state to be used in lubricating oils. The Respondent’s classification appears to put it in “liquid form”.
53. The Respondent alluded in its letter dated 26^thFebruary, 2021 that it undertook a laboratory analysis of a sample of the commodity where it was found to be a polymeric organic compound identified as ethylene-propylene copolymer. The Tribunal has taken note that no such certificate showing the results of the analysis was shared with either the Appellant or the Tribunal. In the circumstances, the Tribunal is unable to determine the basis of the Respondent’s classification. The Respondent should have gone further by providing the laboratory analysis or results.
54. This Tribunal in the recent case of Kenya Breweries Limited-vs-Commissioner of Customs and Border Control TTAT Appeal No. 282 of 20201adopted the same view and concurred with the Appellant that its product, Apple

Concentrate, did not constitute a beverage owing to the fact that it was not a product ready for human consumption in its import state since it had to undergo further manufacturing processing to make it a consumable product. As such, the product could not be classified under Chapter 22 of EAC CET which covers beverages, spirits and vinegar which classification the Respondent had adopted.

55. From the information provided, it is the Tribunal’s considered opinion that the Appellant’s product, Esprene SPO V0141, is a raw material used together with other substances and compounds in the production of viscosity improver for use in lubricating oils. Since the product cannot be used as viscosity improver in its imported form, it would this follow that Esprene SPO V0141 ought to be under Heading 39.01 as opposed to Heading 38.11. Therefore, it should be classified under HS Code 3901.90.00.
56. The Tribunal finds that the Respondent erred in classifying Esprene SPO V0141 under HS Code 3811.90.00.

FINAL DECISION

57. The Appeal succeeds and the Tribunal consequently makes the following Orders:
58. The Respondent classifies the Appellant’s product, Esprene SPO V0141,

under HS Code is 3901.90.00.

1. The Respondent’s Review Decision dated 19^thAugust, 2021 be and is

hereby set aside.

• Each party to bear its costs.

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