[2024] KETAT 1044 (KLR)

Animix Limited v Commissioner of Customs and Border Control (Tax Appeal 143 of 2023) [2024] KETAT 1044 (KLR) (Civ) (12 July 2024) (Judgment)

Neutral citation: [2024] KETAT 1044 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal 143 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & T Vikiru, Members

July 12, 2024

Between

Animix Limited

Appellant

and

Commissioner of Customs and Border Control

Respondent

Judgment

1. The Appellant is a company duly incorporated in Kenya. Its principal business activity is the provision of solutions and services geared towards enhancement of animal health and nutrition.

2. The Respondent is a principal officer appointed pursuant to Section 13 of the Kenya Revenue Authority Act (KRA), Act No. 2 of 1995, and KRA is empowered to enforce and administer provisions of written laws as set out in Section 5 as read together with the First Schedule of the KRA Act.

3. The Appellant sought a VAT refund from the Respondent for the period August 2018 to July 2020, amounting to Kshs. 21,204,116. 00.

4. On 27th October 2022, the Respondent upon conducting an audit rejected the refund claim and reclassified the Appellant’s sales from zero-rated as described by the Appellant to general rate. The Respondent assessed the Appellant for VAT in the sum of Kshs.143,457,914. 65

5. On 8th November 2022, the Appellant objected to the assessment.

6. The Respondent issued its objection decision vide a letter dated 5th January 2023 confirming the audit findings, while imposing a penalty and interest, bringing the tax payable to Kshs. 143, 457,914. 65.

7. The Appellant, being dissatisfied with the Respondent’s objection decision, lodged a Notice of Appeal at the Tribunal on 3rd February 2023.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 15th February, 2023 and filed on 17th February 2023:-i.That the Respondent erred in fact and law by fully rejecting the objection application filed by the Applicant.ii.That the Respondent erred in fact and law by wrongly classifying of sales from zero rate status to general rated status for the periods in question.iii.That the Respondent erred in fact and law by finding that the sales in question are Vatable instead of zero rated.iv.That the Respondent erred in fact and law by basing their findings on the basis that the Appellant did not indicate the particular HS Codes in which the supplies in question fell under.v.That the Respondent erred in law and fact by finding that the Appellant did not adequately support its grounds of objection.vi.That the Respondent erred in fact and law by finding that the variance of Kshs. 44,163,201. 78 for the year 2019 relates to income tax.vii.That the Respondent erred in fact and law by confirming the Commissioner's assessment as drawn without taking into consideration the merits of the objections raised by the Appellant.viii.That the Respondent erred in fact and law by finding that the Appellant has an outstanding tax liability of Kshs. 100,018,756. 43 plus penalty and interest amounting to Kshs. 143,457,914. 65

Appellant’s Case 9. The Appellant’s case is premised on the following documents before the Tribunal: -a.Its Statement of Facts dated 15th February 2023 and filed on 17th February 2023. b.The Witness Statement of Dr. Ezekiel Onyango dated 15th February, 2023 and filed on 17th February 2023 that was adopted in evidence under oath on the 15th May 2024.

10. The Appellant averred that it supplied the Respondent with documents to evidence and prove that the purchases and sales are zero-rated and that vatable items were appropriately adjusted in the schedule and conceded to.

11. The Appellant submitted that the Respondent based its findings on the basis that the Appellant did not indicate the particular HS Codes under which the supplies in question fell.

12. The Appellant averred that the supporting documentary evidence was at all times clear on the specific codes under which the products were imported and classified.

13. The Appellant submitted that the Respondent confirmed the assessment without taking into consideration the merits of the objections raised by the Appellant.

Appellant’s Prayers 14. The Appellant prayed to the Tribunal that: -i.The objection decision dated 5th January 2023 be set aside in its entirety.ii.The Appellant has a basis for a claim of the VAT refund.iii.The Tribunal finds that the supplies in question are exempt and as such there is no basis for a claim for VAT by the Respondent.

Respondent’s Case 15. The Respondent’s case is premised on the hereunder filed documents:-a.The Respondent’s Statement of Facts dated and filed on 16th March 2023. b.The Respondent’s Written Submissions dated and filed on 16th May 2024.

16. The Respondent averred that the tax assessments were correctly issued and that they conformed to the provision of the Income Tax Act and the Tax Procedures Act which places the onus of proof in tax objections on the taxpayer as provided for under Section 56 (1) which provides that:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

17. The Respondent submitted that the Appellant failed to avail evidence that would support a contrary assessment or that would have guided the Respondent in arriving at a different objection decision.

18. The Respondent submitted that Section 5 of the VAT Act states that:“A tax, to be known as value added tax, shall be charged in accordance with the provisions of this Act on-a.a taxable supply made by a registered person in Kenya;b.the importation of taxable goods; andc.a supply of imported taxable service”

19. The Respondent averred that examination of the Appellant's records, audited accounts and income tax returns established that the Appellant failed to declare business income and all its incomes for the year of income 2015.

20. The Respondent submitted that Section 73 of the Income Tax Act provides that:“1)Save as otherwise provided, the Commissioner shall assess every person who has income chargeable to tax as expeditiously as possible after the expiry of the time allowed to such person under this Act for the delivery of a return of income.2)Where a person has delivered a return of income, the Commissioner may—b.(i)accept the return and deem the amount that person has declared as his self-assessment in which case no further notification need be given; or(ii)where the return is in respect of a year of income prior to 1992, accept that return and assess him on the basis thereof;c.if he has reasonable cause to believe that such return is not true and correct, determine, according to the best of his judgment, the amount of the income of that person and assess him accordingly.”

21. The Respondent averred that the Appellant had reached the required threshold to be assessed for VAT as provided for under Section 34 of the VAT Act, which states;“A person who in the course of a business—a.has made taxable supplies or expects to make taxable supplies, the value of which is five million shillings or more in any period of twelve months orb.is about to commence making taxable supplies the value of which is reasonably expected to exceed five million shillings in any period of twelve months,shall be liable for registration under this Act and shall, within thirty days of becoming so liable, apply to the Commissioner for registration in the prescribed form:Provided that this section shall not apply to persons supplying imported digital services over the internet or an electronic network or through a digital marketplace in respect to a turnover threshold of five million shillings.”

22. The Respondent averred that the Appellant has the responsibility to maintain records of all transactions as provided for under Section 54 (1) of the Income Tax Act, which states that:“A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”

23. The Respondent submitted that Section 55 (2) of the Income Tax Act provides that:“Every person carrying on a business shall preserve every book of account, and every document which is essential to the explanation of any entry in any book of account, relating to the business for a period of not less than ten years after the year of income to which that book of account or document relates:Provided that, subject to section 56, this section shall not require the preservation of a document or book of account—i.in respect of which the Commissioner has notified that person in writing that its preservation is not required; orii.in the case of a company which has gone into liquidation and has been finally dissolved or in the case of the cessation of a business other than one carried on by a company, for more than three months after the date on which the person having custody of the documents or books of account relating to the company or business as the case may be, informs the Commissioner that he proposes to destroy them.For the purposes of this section the “record” means records of all receipts and expenses, goods purchased and sold and accounts, books, deeds contract and vouchers.”

24. To buttress its averments on the burden of proof in tax disputes, the Respondent relied on the case of Metcash Trading Limited v Commissioner for the South Africa Revenue Services and another case CCT 3/2000, where Justice Krieger held that: -“But the burden of proving that the Commissioner was wrong rests on the vendor under Section 37. Because VAT is inherently a system of self-assessment based on a vendor's own record, it is obvious that the incidence of this onus can have a decisive effect on the outcome of an objection or an appeal. Unlike income tax, where assessments can either elicit genuine difference of opinion about accounting practice, legal interpretations, or the like, in the case of a VAT assessment there must be invariably have been an adverse credibility finding by the Commissioner; and by like token such a finding would usually have entailed a rejection of the truth of the vendor's record, returns and averments relating thereto. Consequently, the discharge of the onus is a most formidable hurdle facing a VAT vendor who is aggrieved by an assessment: unless the Commissioner's precipitating credibility findings can be shown to be wrong, consequential assessment must stand."

25. The Respondent averred that the assessments were correct, and that the Appellant failed to avail documentation to support the claim that the assessments were erroneous as it is the Appellant’s duty placed on it under Section 51(3)(c) of the TPA.

26. The Respondent further relied on the case of Primrosa Flowers Limited v Commissioner of Domestic Taxes [2019], where J Makau in reference to the Australian case of Mulheran v Commissioner of Taxation [2013], held that:“The Onus is on the taxpayer in proving that assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.”

27. The Respondent further relied on the case of Trust Bank Limited v Paramount Universal Bank Limited & 2 Others [2009] eKLR where the court observed that;“It is trite law that where a party fails to call evidence in support of its case, that party's pleadings remain mere statements of facts since in doing so the party fails to substantiate its pleadings."

28. The Respondent submitted that the Appellant did not file income tax returns for the accounting period 2018-2020 in contravention of the requirements of Sections 94 and 95 of the TPA and that the estimated assessment was correct.

29. The Respondent averred that Section 24 (1) and (2) of the TPA authorizes it to carry out assessment based on the information available, it provides that:-“1)A person required to submit a tax return under a tax law shall submit the in the approved form and in the manner prescribed by the Commissioner.2)The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

Respondent’s Prayers 30. The Respondent prayed that the Tribunal finds:-a.The Respondent's objection decision be upheld.b.The outstanding tax arrears of Kshs. 143,457,914. 65 are due and payable by the Appellant.c.That the Appeal herein be dismissed with cost to the Respondent.

Issues For Determination 31. The Tribunal having considered the pleadings of both parties, the testimony of the Appellant’s Witness and the Respondent’s submissions, is of the view that the issues that call for its determination are:a.Whether the Respondent erred in reclassifying the Appellant’s sales from zero-rated to general rated sales.b.Whether the Respondent erred in declining the Appellant’s VAT refund claim.

Analysis And Findings a. Whether the Respondent erred in reclassifying the Appellant’s sales from zero-rated to general rated sales. 32. The Respondent carried out a refund application audit on the Appellant as a result of which it reclassified the Appellant’s sales from zero-rated as described by the taxpayer to general rate. 33. On the basis of the reclassification, the Respondent rejected the Appellant’s refund application of Kshs. 21,204,116. 00 and assessed the Appellant for VAT of Kshs. 143,457,914. 65 inclusive of penalties and interest.

34. The Appellant contended that the Respondent erred in stating that the taxpayer had declared its sales as zero-rated while they should be vatable.

35. Section 7 of the Value Added Tax Act provides as follows regarding zero rating“7. Zero rating1. Where a registered person supplies goods or services and the supply is zero rated, no tax shall be charged on the supply, but it shall, in all other respects, be treated as a taxable supply.2. A supply or importation of goods or services shall be zero-rated under this section if the goods or services are of the description for the time being specified in the Second Schedule.”

36. The Appellant attached an extract of the 1st Schedule, Part 1, Paragraph 43 of the VAT Act 2013 which provides for exempt supplies, it states as follows:“Materials, waste, residues and by-products, whether or not in the form of pellets, and preparations of a kind used in animal feeding of tariff numbers 1213. 00. 00, 1214. 10. 00, 2308. 00. 00, 2309. 10. 00, 2309. 90. 10, 2309. 90. 90, 2302. 10. 00, 2302. 30. 00, 2303. 20. 00, 2303. 30. 00, 2304. 00. 00, 2306. 10. 00, 2306. 20. 00, 2306. 30. 00, 2306. 41. 00, 2306. 49. 00, 2306. 50. 00, 2306. 60. 00, 2306. 90. 00, 2835. 25. 00 and 2835. 26. 00. ”

37. Section 2 of the Value Added Tax Act defines exempt supplies as follows:“exempt supplies" means supplies specified in the First Schedule which are not subject to tax”

38. It was the Respondent’s contention that the Section of VAT Act that the Appellant had attached related to exempt supplies and not zero-rated supplies. The Respondent contended further that the Appellant had failed to specify under which HS Code its sales were classified as zero rated.

39. The Tribunal perused the documents presented and noted that the Appellant in its Statement of Facts, mentioned zero-rated goods instead of exempt goods, however it attached the excerpt of the First Schedule to the VAT Act which deals with exempt goods. The Tribunal is persuaded that this was an inadvertent error on the part of the Appellant.

40. The Tribunal is of the view that such an error should not be let to disenfranchise the Appellant since the effect of both the exemption and zero-rating is that there is no VAT payable. The Tribunal is guided by Article 159(1) (d) of the Constitution of Kenya 2010, which provides that:“…that justice shall be administered without undue regard to procedural technicality.”

41. The Appellant averred that the supporting documentation it provided to the Respondent included a sales ledger analysis table showing the general and zero-rated supplies and the corresponding import entries. The Tribunal noted that in the Respondent’s objection decision it acknowledged receipt of the sales ledger analysis provided by the Appellant.

42. The crux of the matter is the determination of the correct classification of the Appellant’s import, while the Respondent contended that the Appellant did not state which HS Code it had classified its product, equally the Respondent only stated that it reclassified the Appellant’s import from zero-rated to general rated and did not state to which specific HS Code it reclassified the product.

43. The Tribunal finds that omission of the HS Code in the Appellant’s documents does not warrant an arbitrary reclassification of the Appellant's imports. The Respondent ought to have sought further supporting documents from the Appellant or in the converse applied the rules for HS code interpretation to arrive the appropriate classification of the product.

44. During the hearing, the Appellant’s witness Dr. Ezekiel Onyango testified that the nature of the Appellant’s import is a premix used in the manufacture of animal feed. Whereas the Respondent contended the Appellant’s classification, it neither conducted a laboratory test to confirm the contents of the Appellant’s import nor proffered a specific HS Code in the alternative.

45. The Tribunal therefore applied the rules of interpretation of the Harmonized System to determine the correct classification of the imports. In the cascade of Rules provided in the GIRs, a product constituting of more than one material or substance, the appropriate rule to be considered by the Tribunal is Rule 3(a), which provides that:”…the Heading which provides the most specific description shall be preferred to headings providing a more general description.”

46. Given that a laboratory analysis was not done, neither did the Appellant attach a data sheet explaining the description of its imports, the Tribunal relied on the description of the goods as stated on the import entry documents. The description indicated on the import entry documents was that of animal feed additives and not complete feed or feed supplement.

47. According to the EAC/CET, 2017 HS classification, Heading 2309 is set out as follows;“2309: Preparations of a kind used in animal feeding.2309. 90. 00: Dog or cat food put up for retail sale.2309. 90. 10: Premixes used in the manufacture of animal and poultry Feeds.2309. 90. 90: Other.

48. Additionally, the Tribunal scrutinized part C of the Explanatory Notes to Heading 2309 whose title is “Preparations For Use In Making the Complete Feeds Or Supplementary Feeds.”“The notes explain that “These preparations, known in trade as " premixes ", are, generally speaking, compound compositions consisting of a number of substances (sometimes called additives) the nature and proportions of which vary according to the animal production required.”

49. The Tribunal was guided by its determination in the case of Lionpro Group K. Limited v Commissioner of Customs & Border Control (Tax Appeal 426 of 2022) eKLR. where it held that:“The Tribunal having taken judicial notice of the description of a premix as set out in the KEBS standard for animal feeds, is persuaded that the Appellant‘s product fits the description of a premix, and is not a final product to be fed to animals without a further process as contended by the Respondent.”

50. Guided by the description on the import entries, the Tribunal established that the Appellant’s imports were animal feed premixes for preparation of animal feed alternatively referred to as feed additives.

51. The Tribunal therefore determined that the appropriate classification under Chapter 2309 would be under HS code 2309. 90. 10. which is exempt from VAT as provided for in the 1st Schedule, Part 1, Paragraph 43 of the VAT Act 2013, which states as follows:“Materials, waste, residues and by-products, whether or not in the form of pellets, and preparations of a kind used in animal feeding of tariff numbers 1213. 00. 00, 1214. 10. 00, 2308. 00. 00, 2309. 10. 00, 2309. 90. 10, 2309. 90. 90, 2302. 10. 00, 2302. 30. 00, 2303. 20. 00, 2303. 30. 00, 2304. 00. 00, 2306. 10. 00, 2306. 20. 00, 2306. 30. 00, 2306. 41. 00, 2306. 49. 00, 2306. 50. 00, 2306. 60. 00, 2306. 90. 00, 2835. 25. 00 and 2835. 26. 00. ”

52. In view of the foregoing finding, the Tribunal holds that the Respondent erred and was thus not justified in reclassifying the Appellant’s imported products from VAT exempt to general rated.

b. Whether the Respondent erred in declining the Appellant’s VAT refund claim. 53. The Tribunal having found that the Respondent erred in reclassifying the Appellant’s imports from H.S Code 2309. 90. 10 which is exempt for VAT to a general rated classification it follows that the Respondent erred in declining the Appellant’s VAT refund claim.

Final Decision 54. The upshot of the foregoing analysis is that the Appeal is merited and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 5th January 2023 be and is hereby set aside.c.The Respondent to process the Appellant’s refund claim and issue a refund decision within 90 days of the date of delivery of this Judgment.d.Each party to bear its own costs.

55. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF JULY, 2024ERIC NYONGESA WAFULACHAIRMANCYNTHIA B. MAYAKA DR. RODNEY O. OLUOCHMEMBER MEMBERABRAHAM K. KIPROTICH DR. TIMOTHY B. VIKIRU MEMBER MEMBER