Executive summary

The Tax Appeals Tribunal (TAT) recently ruled that K-Lube ATF IID - Automatic Transmission Fluid is classified as a non-lubricating oil. The appeal involved an operator/distributor in the petroleum sector (the Appellant) and the Commissioner of Customs — Kenya Revenue Authority (the Respondent).

Background

The Appellant is a leading company in the petroleum sector, specializing in the importation and sale of petroleum products, including automatic transmission fluids. In 2019, the Appellant sought an advance ruling from the Respondent on the classification of ATF.

The Respondent issued a ruling that classified ATF under tariff subheading 2710.19.56 (non-lubricating oils), which attracted a 25% import duty. The Respondent later reclassified ATF as a lubricant in liquid form under tariff subheading 2710.19.51 that attracts 35% import duty and demanded additional duties. The Appellant appealed the issue to the TAT.

Facts of the case

The contention was whether ATF should be classified under subheading 2710.19.56 as a non-lubricating oil, which attracts 25% import duty, or as a lubricant in liquid form under subheading 2710.19.51, which attracts 35% import duty.

The Appellant contended that the Respondent had created a legitimate expectation by issuing an advance ruling, and because there had been no changes in the product's characteristics or chemical composition, nor any specific change in law specifying a different rate for the product, the ruling was still valid.

The Appellant further argued that although ATF possesses lubrication properties, it also has other multifunctional properties (such as anti-oxidation, rust prevention, and anti-foaming), making it essential as a non-lubricating fluid for functions beyond lubrication, including hydraulic power transmission, cooling, and cleaning.

The Respondent maintained that the product qualified as a lubricant attracting 35% import duty based on laboratory tests and the product's description on the Appellant's website. Additionally, the Respondent asserted that the ruling was not binding because it had expired pursuant to Section 248(A)(3) of the East African Community Customs Management Act, 2004 (EACCMA), which stipulates that an advance tariff ruling on tariff classification is binding for a period not exceeding 12 months.

Analysis and determination

Basing its analysis on section 248A of EACCMA and in a Supreme Court of Kenya opinion, the TAT held that the ruling was not binding on the Respondent, and that the Appellant was not justified to claim a legitimate expectation because 12 months had lapsed since its issuance.

In settlement of the tariff dispute, the TAT invoked General Interpretation Rule 3 (GIR 3), which provides that goods lacking a specific description or an identifiable material that gives them their essential character will be classified under the heading that occurs last in numerical order among those that equally merit consideration. ATF was therefore correctly classified as a non-lubricating oil under tariff 2710.19.56, the TAT concluded.

Based on Section 56(1) of the Tax Procedures Act (TPA), Section 30 of the Tax Appeals Tribunal Act (TATA) and Section 109 of the Evidence Act, the TAT held that the burden of proof lies on the party asserting the existence of a particular fact. In this case, the Appellant provided import certificates of analysis for all disputed products, which the Respondent did not challenge or controvert. Consequently, the TAT relied on the precedent set in a 2022 High Court at Nairobi decision, which held that the burden of proof in tax matters swings like a pendulum between the taxpayer and the tax authority, though it predominantly favors the taxpayer. The Respondent did not challenge the analysis provided by the Appellant.

As a result, the TAT concluded that the Respondent had erred in reclassifying the Appellant's products under HS Code 2710.19.51 and in demanding the short-levied duties.

Implications

The ruling reinforces the importance of seeking guidance from the GIRs and examining the material composition and usage of a product in determining its tariff classification.

The decision also highlights the validity and significance of advance tariff rulings, emphasizing that such rulings should be adhered to within their binding period to ensure consistency and predictability in tariff classifications.