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Supreme CourtDismissedPetition 20 of 2020· [2022] KESC 31 (KLR)

Kenya Revenue Authority v Export Trading Company Ltd

Supreme Court of Kenya
17 June 2022
Philomena Mbete MwiluP.M. MwiluMohammed Khadhar IbrahimM.K. IbrahimSmokin Charles WanjalaS.C. WanjalaNjoki Susanna NdunguNjoki NdunguIsaac LenaolaI. Lenaola
8,101 words in judgment
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AI-assisted case brief
·~32 min to read original · ~4 min brief

The bottom line

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KRA cannot delay demanding extra taxes for years without a good reason, even if the law allows it.

What this practically means

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KRA demanded Kshs 378 million in extra import duty from a company four years after the goods had cleared. The company had paid the amount KRA's own system calculated, and KRA did not explain the long delay. The Supreme Court said this was unfair and violated the company's right to fair administrative action. The court also found the company had a legitimate expectation that all taxes were paid, based on KRA's conduct. KRA's appeal was dismissed, and each side paid its own costs.

Executive summary

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The Supreme Court dismissed an appeal by the Kenya Revenue Authority (KRA) against a Court of Appeal decision that had upheld a High Court judgment in favour of Export Trading Company Limited. The dispute arose from KRA's demand for Kshs 378,016,680/- in short-levied import duty on rice consignments imported from Burma, Vietnam and Thailand between 2008 and 2009. KRA had initially applied a 35% duty rate through its Tradex Simba system, which the respondent paid in full. Four years later, KRA claimed the correct rate was 75% and demanded the差额. The High Court found KRA's actions violated Article 47 of the Constitution (fair administrative action) and granted certiorari and a permanent injunction. The Court of Appeal affirmed. On further appeal, the Supreme Court framed two issues: whether KRA's actions violated Articles 10 and 47 of the Constitution, and whether a legitimate expectation arose. The Court held that KRA acted unfairly and irrationally by demanding the duty nearly four years after assessment without any satisfactory explanation, thereby violating Article 47. It further held that a legitimate expectation arose because KRA's own system applied the lower rate, its officers verified and cleared the goods, and it failed to respond to the respondent's inquiry, leading the respondent to reasonably believe all taxes were paid. The Court dismissed the appeal and ordered each party to bear its own costs, finding that while KRA acted unreasonably, no bad faith was exhibited and the case raised public interest issues. The judgment affirms that statutory power must be exercised fairly and that public bodies acting in a regulatory capacity should not ordinarily be condemned to pay costs unless they act unreasonably or in bad faith.

Key legal issues

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01

Whether the appellant's demand for short-levied duty four years after initial assessment violated Article 47 of the Constitution.

Holding

The demand violated Article 47 because it was made without sufficient explanation for the delay, rendering it irrational and procedurally unfair.

Reasoning

The court held that while section 135(1) of EACCMA grants the appellant power to demand short-levied duty within five years, the manner of exercising that power must comply with Article 47. The appellant failed to provide any satisfactory explanation for waiting nearly four years before conducting the post-clearance audit and issuing the demand. The High Court and Court of Appeal both found this delay irrational, and the Supreme Court agreed, reiterating that the question is not merely whether the power exists but whether the process was fair and reasonable.

p. 15
02

Whether a legitimate expectation arose in favour of the respondent that it had paid all due taxes.

Holding

A legitimate expectation arose because the appellant's own Tradex Simba system applied a 35% duty rate, the respondent paid that amount, and the appellant failed to respond to the respondent's inquiry about the correct rate, leading the respondent to reasonably believe all taxes were settled.

Reasoning

The court applied the principles from the CCK Case, requiring an express, clear, and unambiguous promise or consistent past practice. Here, the appellant's system applied the lower rate, the appellant's officers verified and cleared the goods, and the appellant failed to respond to the respondent's letter seeking clarification. These actions created a reasonable expectation that the respondent had fulfilled its tax obligations. The court rejected the appellant's argument that legitimate expectation cannot override clear law, noting that the expectation was not against the law but arose from the appellant's own conduct.

p. 16
03

Whether costs should be awarded against the appellant as a public body acting in its regulatory capacity.

Holding

No order for costs was made against the appellant; each party was ordered to bear its own costs because the case raised public interest issues and the appellant did not act in bad faith.

Reasoning

The court adopted the English approach from Competition Markets Authority v Flynn Pharma, holding that the starting point is that no order for costs should be made against a regulator acting purely in its regulatory capacity. This can be departed from for good reason, but the mere fact of losing is not enough. The court found that while the appellant acted unreasonably, no bad faith was exhibited, and the case raised constitutional issues of public interest. Therefore, discretion tilted in favour of each party bearing its own costs.

p. 17

Legal principles established

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  • A public body must act fairly and give a reason for delays, even if acting within a statutory time limit.
  • A taxpayer can have a legitimate expectation that all taxes are paid if KRA's own system and conduct indicate that.
  • A court can strike down a tax demand made years later without sufficient explanation as procedurally unfair.
  • KRA will not normally be ordered to pay costs when acting in its regulatory capacity, absent bad faith.
  • Constitutional rights to fair administrative action override the mere existence of statutory power to reassess tax.

Court orders

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  1. 1.The petition of appeal dated and filed on December 2, 2020 is hereby dismissed.
  2. 2.Each party shall bear its costs.

Authorities

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Legislation

  • Constitution of Kenya, 2010Article 10
  • Constitution of Kenya, 2010Article 40
  • Constitution of Kenya, 2010Article 47
  • Constitution of Kenya, 2010Article 47(1)
  • Constitution of Kenya, 2010Article 50
  • Constitution of Kenya, 2010Article 94
  • Constitution of Kenya, 2010Article 163(4)(a)
  • Constitution of Kenya, 2010Article 209
  • Constitution of Kenya, 2010Article 210
  • Constitution of Kenya, 2010Article 259(1)
  • East African Community Customs Management Act, 2004Section 135(1)
  • East African Community Customs Management Act, 2004Section 135(3)
  • East African Community Customs Management Act, 2004Section 229
  • East African Community Customs Management Act, 2004Section 229(5)
  • East African Community Customs Management Act, 2004Section 235
  • East African Community Customs Management Act, 2004Section 235(1)
  • East African Community Customs Management Act, 2004Section 236
  • Treaty for the Establishment of the East African Community, 2000Article 8
  • Legal Notice No 1 of 2005
  • Legal Notice No EAC/10/2007

Cases cited (19)

  • Ericsson Kenya Limited v Attorney General & 3 others
    [2014] eKLR
  • Communication Authority of Kenya & 5 others v Royal Media Services & 5 others
    Petition No 14 of 2014; [2014] eKLR
  • Republic v Commissioner General Kenya Revenue Authority ex-parte Mount Kenya Bottlers Ltd & Another
    [2016] eKLR
  • Commissioner Customs and others v Amit Ashok Doshi & two others
    Civil Appeal No 157 of 2007
  • Aryuv Agencies Limited v Kenya Revenue Authority
    [2019] eKLR
  • Chandler v Alberta Association of Architects
    1989 XanLII 41 (SCC), [1989] 2 SCR 848
  • Keroche Industries Limited v Kenya Revenue Authority & 5 others
    HCMA No 743 of 2006; [2007] eKLR
  • Commissioner of Customs (Import) v M/S Dilip Kumar and Company
    (2018) 9 SCC 1
  • Noor Malim Hussein & 4 others v Minister of State of Planning, National Development and Vision 2030 & 2 others
    [2012] eKLR
  • Republic v Commissioner of Co-operatives, Kirinyaga Tea Growers Co-operative & Savings & Credit Society Ltd
    [1999] 1 EA 245
  • Judicial Service Commission v Mbalu Mutava & another
    [2015] eKLR
  • Republic v Kenya Revenue Authority ex parte Cooper K- Brands Limited
    [2016] eKLR
  • Krish Commodities Limited v Kenya Revenue Authority
    [2018] eKLR
  • Communications Commission of Kenya & 5 others v. Royal Media Services Limited & 5 others
    SC Petitions No 14, 14A, 14B and 14C of 2014; [2014] eKLR
  • Martin Wanderi & 106 others v Engineers Registration Board & 10 others
    SC Petition No 19 of 2015; [2018] eKLR
  • Council of Civil Service Unions and others v Minister for the Civil Service
    [1983] UKHL6; [1984] 3 All ER 935
  • Jasbir Singh Rai & 3 others v Tarlochan Singh Rai & 4 others
    Sup Ct Petition No 4 of 2012; [2014] eKLR
  • Competition Markets Authority v Flynn Pharma Limited & 3 others
    C3/2019/1293; [2020] EWCA Civ 617
  • Mumo Matemu v Trusted Society of Human Rights Alliance & 5 others
    SC Civil Application No 29 of 2014; [2014] eKLR
On appeal from
Court of Appeal at Nairobi
Civil Appeal No 180 of 2019
Jurisdiction invoked
Article 163(4)(a) of the Constitution

Key timeline

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2008-2009
Export Trading Company imported rice and paid duty at 35% as calculated by KRA's Tradex Simba system.
2012
KRA conducted a post-clearance audit and demanded Kshs 378,016,680/- in short-levied duty, claiming the correct rate was 75%.
2015
High Court found KRA's demand violated fair administrative action and granted a permanent injunction.
2020-12-02
KRA filed its petition of appeal at the Supreme Court.
2023
Supreme Court dismissed KRA's appeal, affirming the lower courts, and ordered each party to bear its own costs.

Practical implications

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For lawyers

Challenge delayed KRA demands on fairness

When representing a client facing a delayed KRA tax demand, focus on the absence of a reasonable explanation for the delay, not just whether the statutory time limit has expired. Argue that the delay itself violates Article 47 of the Constitution. You can also raise a legitimate expectation defense if KRA's own system or conduct led the client to believe taxes were settled. The court has now clearly endorsed both arguments, even against a regulator.

For businesses

Keep records of KRA's system and inquiries

Document all interactions with KRA, especially when you rely on its systems (like iTax or Simba) to calculate what you owe. If you pay exactly what KRA's system says, and KRA does not respond to your questions about the correct rate, you may have a strong legal argument that you have a legitimate expectation the debt is settled. This can protect you against surprise demands years later, even if KRA later claims an error.

For individuals

You can challenge unfair KRA delays

If KRA demands extra taxes years after you paid what they initially asked, you can challenge that demand in court. You do not need to prove KRA acted in bad faith; you only need to show the delay was long and unexplained, making the demand unfair. The court has now confirmed that your constitutional right to fair administrative action protects you from such surprise demands. Keep proof of payments and any system calculations you relied on.

Frequently asked questions

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Can KRA demand extra taxes years after I paid in Kenya?+

Yes, but only if KRA acts fairly and gives a good reason for the delay. The law gives KRA up to five years to correct errors. However, as this Supreme Court case shows, just being within that time is not enough. A long delay without explanation can make the demand illegal under Article 47 of the Constitution.

What is a legitimate expectation in Kenyan tax law?+

It is a legal right created when KRA's own actions make you reasonably believe you have paid all you owe. For example, if KRA's system calculates a lower duty, you pay it, and KRA does not correct you, you can rely on that. The court in this case confirmed that KRA cannot later demand more unless it explains why it waited so long.

Can I sue KRA for compensation if they act unfairly in Kenya?+

The court in this case did not award compensation; it only stopped the demand and did not order KRA to pay costs. To claim compensation, you would need to show you suffered actual loss due to KRA's unreasonable conduct. This case focused on stopping the unfair demand, not on damages for the delay itself.

Does KRA have to pay my legal costs if I win a case against them in Kenya?+

Not automatically. This Supreme Court case ruled that when KRA acts in its regulatory role and without bad faith, each party generally bears its own costs, even if KRA loses. You would need to prove KRA acted unreasonably or in bad faith to get a costs order in your favour. So, winning does not guarantee KRA will pay your legal bills.

Later judgments citing this (25)

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Judgments in the corpus that rely on this one. Where the Court said how it treated the authority, that is shown.

Cite this brief

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Cite this brief

Caselaw, "Kenya Revenue Authority v Export Trading Company Ltd", Case Analysis (2022). Petition 20 of 2020. Source: https://new.kenyalaw.orghttps://new.kenyalaw.org/akn/ke/judgment/kesc/2022/31/eng@2022-06-17

Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.