[2024] KETAT 552 (KLR)

Candy Kenya Limited v Commissioner of Domestic Taxes (Appeal 1569 of 2022) [2024] KETAT 552 (KLR) (22 March 2024) (Judgment)

Neutral citation: [2024] KETAT 552 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1569 of 2022

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

March 22, 2024

Between

Candy Kenya Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya with tax obligations and whose principal business is production of chocolate products and sweets. The Appellant deals in both general rated Value Added Tax (VAT) sales which are sold locally and zero-rated sales which are exported.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. On various dates in the year 2022, the Appellant made VAT refund claims totaling Ksh 129,987,106. 00 for the January 2018 to August 2022 period.

4. Consequently, after conducting an audit on the Appellant’s refund claims, the Respondent issued a notice of assessment disallowing VAT refund claim of Ksh 45,426,006. 00 on 6th October 2022.

5. Aggrieved by the Respondent’s assessment, the Appellant filed its Notice of Appeal at the Tribunal on 22nd December 2022.

The Appeal 6. The Appeal was premised on the following grounds as laid-out in the Memorandum of Appeal dated 19th December 2022 and filed on 22nd December 2022 that;a.The Respondent erred in law and in fact by relying on Paragraph 8 of the Value Added Tax Regulations, 2017 which contradicted the provisions of Section 17 of the Value Added Tax Act, No. 35 of 2013 (hereinafter ‘VAT Act’)b.The Respondent erred in law and in fact by applying the formula as captured under Regulations 8(2) of the VAT Regulations even after the introduction of the VAT (Amendment) Regulations, 2019 which amended the said formula, to periods past the introduction of the Amendment.c.The Respondent erred in law by contravening the provisions of Article 47 of the Constitution of Kenya, 2010 (hereinafter ‘the Constitution’) by failing to exercise their powers fairly, reasonably and lawfully.

Appellant’s Case 7. The Appellant argued its case in its Statement of Facts dated 19th December 2022 and filed on 22nd December 2022.

8. The Appellant averred that it sells its products in the local market as well as to various Countries around the world attracting both zero-rated and standard rated sales that as a result, the Appellant is constantly in a perpetual credit position.

9. It disputed the Respondent’s decision to disallow a portion of its claim as not only incorrect but prejudicial towards the Appellant yet Section 17 of the VAT Act is clear that excess input arising from making zero-rated sales could be refunded back to the taxpayer.

10. The Appellant contested the Respondent’s reliance on the formula as provided for in Regulations 8(1) and (2) of the 2017 VAT Regulations since the formula was highly prejudicial towards taxpayers, especially those engaged in making zero-rated and general rated supplies as they are not able to recover all the input relating to zero rated sales. The said Regulations 8(1) and (2) of the 2017 VAT Regulations provides as follows;“8(1).A registered person who makes taxable supplies at both the general rate and zero rate, shall only be entitled to a refund arising from making zero rated supplies.2. In determining the amount due as a refund to a registered person who makes taxable supplies at both the general rate and zero rate, the Commissioner shall use the following formulaR=Z/T*eWhere: R is the amount to be refundedZ is the total value of zero-rated suppliesT is the total value of taxable suppliese is the excess input tax for the month of supply.”

11. It was the Appellant’s assertion that the term “e” in the formula represented excess input which had been taken to be the VAT credit figure being output VAT less input VAT instead of the actual input claimed thus reducing the amount refundable drastically since the focus shifted from input utilized to generate taxable supply to credit available in any one month.

12. Additionally, the Appellant claimed that, not only was interpretation and application of the formula incorrect, but contradicted Section 17 of the VAT Act which provides as follows;17(1).Subject to the provisions of this Act and regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person in a return for the period, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies...5. where the amount of input tax that may be deducted by a registered person under subsection (1) in respect of a tax period exceeds the amount of output tax due for the period, the amount of the excess shall be carried forward as input tax deductible in the next tax period:Provided that any such excess shall be paid to the registered person by the Commissioner where-a.Such excess from making zero rated supplies; orb.Such excess arises from tax withheld by appointed tax withholding agents; andc.Such excess arising out of tax withheld by appointed tax withholding agents may be applied against any tax payable under this Act or any other written law, or is due for refund pursuant to section 47(4) of the Tax Procedures Act, 2015;d.The registered person lodges the claim for the refund of the excess tax within twenty-four months from the date the tax becomes due and payable; ande.Such excess arises from input tax under subsection (8)”.

13. That whereas Section 17 cited entitled the Appellant to claim refund where excess input (not a credit) arose from making zero-rated supplies, Regulation 8 of the 2017 VAT Act Regulation was contradictory to the provisions of the VAT Act and being a subsidiary legislation, it could not purport to override provisions of the parent legislation and thus was null and void ab initio. The Appellant cited the case of Commissioner of Domestic Taxes v Total Touch Cargo Holland where the Court determined that;“…a subsidiary legislation cannot repeal or contradict express provisions of an Act from which they derive their authority.”

14. It was the Appellant’s assertion that the cure for this contradiction was the VAT (Amendment) Regulations, 2019 which amended Regulation 8(2) of the 2017 VAT Regulations by substituting the formula as follows;“R=Z/T*iWhere: R is the value of input tax relating to zero-rated suppliesZ is the total value of zero-rated suppliesT is the total value of taxable suppliesi is the deductible input tax for the month of supply.”

15. The Appellant was insistent that the application of the impugned formula by the Respondent would be considered tantamount to aiding and abetting an illegality contrary to the Respondent’s Constitutional duty to uphold the rule of law. That the Respondent abused its mandated duty by applying a formula that was no longer in force even after the same was amended in 2019.

16. The Appellant averred that the Respondent could only apply the provisions under 2017 VAT Regulations to periods prior to the amendment and was obliged to apply amended provisions only going forward. The Appellant claimed that the Respondent used the incorrect formula throughout the period for which refund claim had been made contrary to the Appellant’s workings which indicated the correct application of the formula for the same period.

17. It was the Appellant’s assertion that the Respondent had contravened Section 7(2)(d) of the Fair Administrative Action Act No. 4 of 2015 (hereinafter‘FAA’) by making a decision influenced by error of law and made in bad faith. The Appellant relied on the Court’s decision in the case of Republic v Permanent Secretary, Ministry of Medical Services Ex-Parte Pius Wanjala [2011]eKLR where the Court cited the case of Republic v Commissioner of Co-operatives, Kirinyaga Tea Growers Co-operative Savings & Credit Society Ltd.[1991] 1EA 245 where it was held that:“It is axiomatic that statutory power can only be exercised validly if exercised reasonably and not arbitrarily or in bad faith.”

18. The Appellant stated that the Respondent violated Section 4 of the FAA in exercising its power and discretion beyond the limits donated by statute, leading to a decision that was ultra vires. Moreover, the Appellant averred that the Respondent being a public body was bound by Article 47 of the Constitution of Kenya while conducting its affairs. In buffering this position, the Appellant cited the following authorities;a.Doody v Home Secretary of State 119931 1 All ER 151b.Dry Associates Limited v Capital Markets Authority & Another Nairobi Petition no. 328 of 2011

19. It was the Appellant’s assertion that if the Respondent’s restrictions were upheld, its actions would be an abuse of discretion of the powers and authority conferred upon it by the VAT Act and an abuse of the Appellant’s Constitutional rights that would also affect its business operations.

Appellant’s Prayers 20. The Appellant’s prayed that the Tribunal would:a.Allow the instant Appeal;b.Annul the Respondent’s decision and allows the refund claim in full; andc.Awards the cost of the Appeal to the Appellant.

The Respondent’s Case 21. The Respondent has addressed the Appellant’s grounds of Appeal through its Statement of Facts dated and filed on 5th April 2023.

22. That the Respondent conducted an audit of the input VAT claim after the Appellant made VAT refund claim after which it made the VAT assessment pursuant to Regulation 8(1) of the VAT Regulations 2017 for the period prior to July 2019 which provides that a registered person who makes taxable supplies at both the general rate and zero rate, shall only be entitled to a refund arising from making zero rated supplies whereas Section 8(2) provides the formula to be applied in determining the amount refundable as follows;“R=Z/T*e Where;R is the amount to be refundedZ is the total value of the zero-rated supplies T is the total value of the taxable suppliese is the excess input tax for the month of the supply…”

23. The Respondent averred that in similar fashion and pursuant to VAT (Amendment) Regulations 2019 which introduced amendments to Regulation 8 of the VAT Regulations 2017 for period after 2019 it applied the formula as follows;“R=Z/T*i Where;R is the amount to be refundedZ is the total value of the zero-rated supplies T is the total value of the taxable suppliesi is the deductible input tax for the months of supply…”

24. The Respondent averred that pursuant to Article 210 of the Constitution which provides that no tax may be imposed, waived or varied except as provided by legislation, the Respondent applied the prior formula before July 2019 and the one after brought forth by the Amendments under Regulation 8 of the VAT Regulations 2017 in determining the refundable amount to the Appellant. Therefore, the Respondent stated that it correctly and legally computed the refundable amount to the Appellant.

Respondent’s Prayers 25. The Respondent prayed that the Tribunal;a.Dismiss the Appeal with costs.b.Uphold the Respondent’s assessment disallowing the refund claim of Ksh. 45,426,006. 00.

Parties Written Submissions 26. The Appellant’s written submissions dated 26th June 2023 were filed on even date whereas the Respondent did not file written submissions as directed by the Tribunal. The Tribunal therefore adopted the Appellant’s written submissions.

27. In its submissions, the Appellant submitted on 5(five) issues as stated hereunder;

a. The objective of Section 17 of the VAT Act and the refund formula 28. It was the Appellant’s assertion that Section 17(1) and 5(a) of the VAT Act provides for refund of excess VAT arising from production of zero-rated supplies. Further, that it was important to isolate input VAT attributable to production of zero-rated supplies for one to determine the refundable amount in the case of a business or person making both zero-rated and standard rate supplies. Therefore, a person in business of producing zero-rated supplies is entitled to a refund of all their input VAT.

29. The Appellant averred that the objective of the VAT apportionment formula found relevance where a person was making both zero-rated and standard rate supplies because expenses, mostly overheads could not be attributable to only one production. The Appellant went ahead to demonstrate the applicability of the formula using two emblematic companies.

b. Whether Paragraph 8 of the VAT Regulations, 2017 (hereinafter “the 2017 formula”) contradicts Section 17 of the VAT Act, 2013(Ground 1) 30. The Appellant claimed that subsidiary legislation is void to the extent of its inconsistency to an Act of Parliament and that Section 31(b) of the Interpretation and General Provisions Act provides that no subsidiary legislation shall be inconsistent with provisions of an Act of Parliament. The Appellant further cited Section 8(1) & (2) of the 2017 Regulations which provides as follows;“(1)A registered person who makes taxable supplies at both the general rate and zero rate, shall only be entitled to a refund arising from making zero rated supplies,2. In determining the amount due as a refund to a registered person who makes taxable supplies at both the general rate and zero rate, the Commissioner shall use the following formula:R=Z/T*eWhere: R is the amount to be refundedZ is the total value of zero-rated suppliesT is the total value of taxable suppliese is the excess input tax for the month of supply”

31. The Appellant used two figurative companies to demonstrate how in the instant Appeal the 2017 formula contradicted Section 17(5) of the VAT Act, 2013. It was the Appellant’s assertion that it is trite that Acts of Parliament are superior to subsidiary legislation and that the 2017 VAT Regulations could not purport to override the provisions of the parent legislation since subsidiary regulations would be null and void ab initio.

31. The Appellant reiterated the Court of Appeal position in the case of Wavinya Ndeti v Independent Electoral & Boundaries Commission (IEBC) & 4 Others [2014] eKLR at paragraph 10 where it was held that;“It is established principle construction of statutes that no subsidiary legislation shall be inconsistent with the provisions of an Act (see Section 31(b) of the Interpretation and General Provisions Act-Cap 2 Laws of Kenya). A subsidiary legislation cannot repeal or contradict express provisions of an Act from which they derive their authority.”

33. The Appellant claimed that the Respondent expressly admitted to the 2017 formula defects when it provided the National Assembly with explanatory memorandum (in public record) during the Committee stage discussions of the 2019 Regulations. That it is on this basis that the National Treasury and Planning informed the National Assembly on Delegated Legislation that there was need to cure the VAT Regulations 2017. The Appellant invited the Tribunal to take judicial notice of the Respondent’s own admission to defective nature of the formula to the National Assembly as was held at paragraph 258 in the case of Judicial Service Commission v Speaker of the National Assembly & 8 Others [2014] eKLR.

34. The Appellant averred that the defective formula and the Respondent’s own admission to the same denied the Appellant the ability to recover all input VAT relating to zero-rated supplies. That the Respondent instead informed the Appellant that the disallowed credits would not be refundable but would be carried forward in the VAT ledger which did not improve the Appellant’s liquidity since VAT credits could not be used to settle financial obligations.

35. The Appellant again used two figurative companies to demonstrate how the 2019 rectified and cured the 2017 formula by providing for apportionment of input VAT as opposed to excess input VAT for persons supplying both zero-rated and standard rate supplies. The Appellant went ahead to reveal how the 2019 formula would have allowed it to fully claim all input VAT pertaining to supply of zero-rated supplies made for January 2018 to June 2019 that should have been Ksh 54,920,124. 55.

c. Whether the Respondent applied the VAT credits refund formula under the 2017 Regulations, after the enactment of the 2019 Regulations. 36. In similar fashion, the Appellant demonstrated how refundable amounts arrived at by the Respondent for tax periods October 2021, December 2021, January 2022 and August 2022 could only have been arrived at using the 2017 formula. The Appellant was thus adamant that the Respondent unlawfully used the 2017 formula after the enactment of the 2019 formula resulting in denial of a refundable amount of Ksh 2,131,058. 70.

d. Whether the Respondent acted fairly, reasonably and lawfully. 37. It was the Appellant’s assertion that despite the Respondent’s admission to the defective nature of 2017 formula which limited taxpayers’ rights to fully claim VAT refunds; the Respondent configured its iTax system to use the defective formula which limited the Appellant’s ability to claim the full amount of the refund due. That in doing so wilfully, the Respondent acted in bad faith by using the 2017 formula after August 2019 and curtailed the Appellant’s right to claim the full amount of refund due to it. The Appellant cited the following cases to buttress its position;i.Republic v K.S Bunyasi, The Principal- Hospital Hill High School & 3Others Ex-Parte AWO(Minor Suing through his father and next friend NO) & another [2019]eKLRii.Republic v Anti-Counterfeit Agency ex parte Caroline Mangala t/a Hair Works Saloon [2019]eKLR

e. Whether the Respondent acted fairly, reasonably and lawfully 38. The Appellant averred that the Respondent contravened Section 7(2)(d) of the FAA by making a decision grounded on an error of law. The Appellant cited the High Court case of Republic v Permanent Secretary, Ministry of Medical Services ex parte Pius Wanjal [2011]eKLR where the Court cited with authority the case of Republic v Commissioner of Co-operatives, Kirinyaga Tea Growers Co-operative Saving & Credit Society Ltd [1991] 1 EA 245 where it was held that;“It is axiomatic that statutory power can only be exercised validly if they are exercised reasonably. No statute ever allows anyone on whom it confers a power to exercise such power arbitrarily, capriciously or in bad faith.”

39. The Appellant averred that Section 4 of the FAA provides for reasonable aspects that ought to have been taken into account by the Authority when giving an administrative action that is expeditious, efficient, lawful, reasonable and fair. It was the Appellant’s assertion that the Respondent exercised its power and discretion beyond the limits donated by statute, leading to a decision that is ultra vires contrary to adherence to laws and procedures expected of them as administrators of the law.

Issues For Determination 40. The Tribunal having carefully considered the parties’ pleadings, documentation and Appellant’s written submissions notes that three issues call for its determination as outlined hereunder:a.Whether the Appeal is properly before the Tribunal.b.Whether the Respondent factored in the 2019 VAT (Amendment) Regulations in the notice of assessment disallowing VAT refund claim.c.Whether the Appellant was entitled to input VAT refund.

Analysis and Determination 41. Having identified the three issues for determination, the Tribunal proceeds to analyse them as follows:

(a) Whether the Appeal is properly before the Tribunal. 42. On one hand, the Appellant stated that on varied dates in the year 2022, It made VAT refund claims totaling Ksh 129,987,106. 00 for the January 2018 to August 2022 period; on the other hand, the Respondent averred that it conducted an audit on the refund claims and disallowed an amount of Ksh 45,426,006. 00 vide its notice of assessment dated 6th October 2022. That thereafter, the Appellant aggrieved by the Respondent’s assessment filed a Notice of Appeal at the Tribunal.

43. The Tribunal notes that Section 52 (1) of the TPA provides as follows:“(1).A person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the provisions of the Tax Appeals Tribunal Act, 2013”

44. The Tribunal borrows from Section 3(1) of the TPA on what constitutes an appealable decision, the said Section provides as follows:“…appealable decision means an objection decision and any other decision made under a tax law other thana.A tax decision; orb.A decision made in the course of making a tax decision.”

45. Further, the Tribunal observes that the procedure for appeal in tax matters is clearly couched in law and as such the Tribunal’s mandate is also predicated upon the law. The Tribunal notes that upon receipt of the refund assessment, the Appellant was duty bound in law to lodge an Appeal against the Respondent’s assessment.

45. The Tribunal has sighted the chronology of events as enumerated by the Appellant and the Respondent’s rebuttals and notes that the Appellant received its notice of assessment on 6th October 2022 and thus had up to 6th November 2022 to lodge an Appeal against the Respondent’s refund decision with the Tribunal but instead lodged the same on 22nd December 2022. The Tribunal notes that pursuant to Section 47(13) of the TPA a refund decision is an appealable decision. Section 47(13) of the TPA provides as follows;“A person aggrieved by a decision of the Commissioner under this section may appeal to the Tribunal within 30 days of being notified of the decision.”

47. The Tribunal finds that though the Appeal was properly before it, however it was lodged out of time without leave of the Tribunal as provided under Section 13 (3) and (4) which provides as follows;“(3).The Tribunal may upon application in writing or through electronic means extend the time for filing the notice of appeal and for submitting the documents referred to in subsection (2);(4).An extension under subsection (3) maybe granted owing to absence from Kenya, or sickness, or other reasonable cause that may have prevented the applicant from filing the notice of appeal or submitting the documents within the specified period.”

48. The Tribunal cites the High Court decision in Commissioner of Domestic Taxes vs. Lifecare International Brokers Limited [2020] eKLR, where Justice Majanja observed as follows:“Failure to file an appeal within time and without complying with statutory conditions is not a mere technicality that can be overlooked, it goes to the competence of the appeal. Counsel for the Appellant valiantly addressed the court on why the court should validate the appeal. The issues raised are factual issues that call for the court to exercise its discretion and can only be addressed in an appropriate application which is not before the court.”

49. The Appeal ought to have been filed on or before 6th November 2022 and the Tribunal thus finds that the Appeal is not properly before it. Accordingly, the Tribunal finds that the other issues it identified for determination have been rendered moot.

Final Decision 50. The upshot of the foregoing is that the Appeal is incompetent and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

51. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF MARCH, 2024CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERDELILAH K NGALA - MEMBERGEORGE KASHINDI - MEMBERSPENCER S. OLOLCHIKE -MEMBER