[2024] KETAT 875 (KLR)

Candy Kenya Limited v Commissioner of Domestic Taxes (Appeal 1569 of 2022) [2024] KETAT 875 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 875 (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

June 28, 2024

Between

Candy Kenya Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

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 rate 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 of Kenya’s Laws. 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 and 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 a VAT refund claim 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 rendered a refund decision disallowing VAT refund claim of Ksh 45,426,006. 00 on 6th October 2022.

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

6. On 22nd March 2024, the Tribunal delivered a judgement on this matter on the premise that the Appellant had not been granted leave to file its Appeal out of time. Accordingly, the Appeal was struck out on that basis.

7. The Appellant applied for review of the judgement pursuant to Section 29(A) of the Tax Appeals Tribunal Act, CAP 469A of Kenya’s Laws (hereinafter “TATA”) and by orders issued by the Tribunal on 2nd April 2024, the judgment delivered on 22nd March 2024 was set aside and the matter referred back for determination on its merits which determination the Tribunal renders herein below.

THE APPEAL 8. 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, CAP 476 of Kenya’s Laws (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 9. The Appellant stated as follows in its Statement of Facts dated 19th December 2022 and filed on 22nd December 2022:

10. It sells its products in the local market as well as to various countries around the world attracting both zero-rate and standard rate sales that as a result, it is constantly in a perpetual credit position.

11. The Appellant 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.

12. 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 rate 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;“(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.”

13. 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 i.e. 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.

14. 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; or(b)Such excess arises from tax withheld by appointed tax withholding agents; and(c)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; ad(e)Such excess arises from input tax under subsection (8)”

15. 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 as follows:“…a subsidiary legislation cannot repeal or contradict express provisions of an Act from which they derive their authority.”

16. 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.”

17. 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.

18. The Appellant averred that the Respondent could only apply the provisions under 2017 VAT Regulations to periods prior to 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.

19. It was the Appellant’s assertion that the Respondent had contravened Section 7(2)(d) of the Fair Administrative Action Act, CAP 7L of Kenya’s Laws (hereinafter “FAAA”) 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 as follows:“It is axiomatic that statutory power can only be exercised validly if exercised reasonably and not arbitrarily or in bad faith.”

20. The Appellant stated that the Respondent violated Section 4 of the FAAA in exercising their 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 while conducting its affairs. In buffering this position, the Appellant cited the following authorities: Doody v Home Secretary of State 119931 1 All ER 151

Dry Associates Limited v Capital Markets Authority & Another Nairobi Petition no. 328 of 2011

21. It was the Appellant’s assertion that if the Respondent’s restriction were upheld, its actions would be an abuse of discretion and 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 22. The Appellant’s made the following prayers to the Tribunal:(a)That the Tribunal allows the instant Appeal.(b)That the Tribunal annuls the Respondent’s decision and allows the refund claim in full.(c)Awards the cost of the Appeal to the Appellant.

THE RESPONDENT’S CASE 23. The Respondent has responded to the Appellant’s Appeal through its Statement of Facts dated filed on 5th April 2023 where it stated as follows:

24. 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 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 18(2) of the VAT Act. The formula pursuant to Regulation 8(1) of the VAT Regulations 2017 which is to be applied in determining the amount refundable is as follows:“R=Z/T*e Where;R is the amount to be refundedZ is the total value of the zero-rated suppliesT is the total value of the taxable suppliesis the excess input tax for the month of the supply…”

25. 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 suppliesT is the total value of the taxable suppliesi is the deductible input tax for the months of supply…”

26. The Respondent averred that pursuant to Article 210 of the Constitution 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 27. The Respondent prayed that the Tribunal would: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 28. The Appellant’s written submissions dated 26th June 2023 were filed on even date. The Respondent did not file written submissions on time as directed by the Tribunal. The Tribunal adopted the Appellant’s written submissions and Respondent’s pleadings on 28th November,2023.

29. In its submissions, the Appellant submitted on five issues as stated hereunder:a.The objective of Section 17 of the VAT Act and the refund formula.

30. 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.

31. 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).

32. 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 CAP 2 of Kenya’s Laws (hereinafter “IGPA”) provides that no subsidiary legislation shall be inconsistent with provisions of an Act of Parliament. The Appellant further cited Section 8(1) and (2) of the 2017 Regulations which 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 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”..

33. 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.

34. 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 as follows:“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.”

35. 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 & 8Others [2014] eKLR.

36. 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.

37. 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. (a)Whether the Respondent applied the VAT credits refund formula under the 2017 Regulations, after the enactment of the 2019 Regulations.

38. 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. (b)Whether the Respondent acted fairly, reasonable and lawfully.

39. It was the Appellant’s assertion that despite the Respondent’s admission to at all relevant times being aware that the 2017 formula was defective and limited taxpayers’ rights to fully claim VAT refunds, it 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 willfully, the Respondent acted in bad faith by using the 2017 formula after August 2019 and curtailed the Appellant’s right to refund dully accrued. The Appellant cited the following cases to buttress its position; 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] eKLR.

Republic v Anti-Counterfeit Agency ex parte Caroline Mangala t/a Hair Works Saloon [2019] eKLR .(c)Whether the Respondent acted fairly, reasonably and lawfully.

40. The Appellant averred that the Respondent contravened Section 7(2)(d) of the FAAA 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 as follows:“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.”

41. The Appellant averred that Section 4 of the FAAA 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 their 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 42. The Tribunal having carefully considered the parties’ pleadings, documentation and Appellant’s written submissions notes that the issues that call for its determination are the following;a.Whether the Respondent factored in the 2019 VAT (Amendment) Regulations in its refund decision.b.Whether the Appellant was entitled to input VAT Refund.

ANALYSIS AND FINDINGSa.Whether the Respondent factored in the 2019 VAT (Amendment) Regulations in its refund decision.

23. The Tribunal notes that the dispute herein arose from a VAT refund claim lodged by the Appellant emanating from excess input VAT as a result of zero-rated supplies. The Appellant claimed that its perpetual credit position arose because of the significant input VAT as compared to the substantial zero-rated portion of output VAT exports.

24. The Respondent countered this by stating that a registered person who makes taxable supplies at both the standard rate and zero-rate shall only be entitled to a refund arising from the generation of zero-rated supplies pursuant to Regulation 8 which restrict excess input VAT claims relating to zero-rated supplies. The Respondent went ahead to state that it used different formulae in the tax computation for the period prior to July 2019 and after July 2019 when Amendments of the Regulations were effected (supra).

25. Whereas the Respondent insisted that it applied the VAT input refund formula for the period prior to July 2019 and after July 2019 when Amendments of the Regulations were effected, the Appellant was adamant that it was denied its rightful claim since the Respondent applied a uniform formula without factoring in the changes brought about by the VAT (Amendment) Regulations, 2019.

26. The Tribunal notes that the Appellant went ahead to demonstrate what ought to have been its rightful input VAT for the period prior and after the VAT Amendments of 2019 controverting the Respondent’s assertion disallowing the input VAT refund claim. The Tribunal notes that Section 30 of the Tax Appeals Tribunal Act, CAP 469A of Kenya’s Laws, Section 56 of the TPA and Section 109 of the Evidence Act, CAP 80 of Kenya’s Laws place the burden of proof upon the Appellant in tax matters. The Tribunal reiterates the Court’s position in the case of Tumaini Distributors Company (K) Limited v Commissioner of Domestic Taxes [2020] eKLR where the Court held as follows:“Under section 56(1) of the TPA, the Company bears the burden of demonstrating that the Commissioner's decision in reaching the assessments complained of was incorrect”.

23. Noteworthy for the Tribunal is that the Respondent did not controvert the Appellant’s assertion regarding what was the rightful input VAT claim as it had aptly demonstrated. The Respondent did not also file submissions to the Appeal. The Tribunal notes that the Respondent applied the formulae in Regulation 8 of the VAT Regulations 2017 in respect of periods after 2019. The formula applied was as follows:R=Z/T*i Where;R is the amount to be refundedZ is the total value of the zero-rated suppliesT is the total value of the taxable suppliesi is the deductible input tax for the months of supply

23. From the stated Section, it is a confirmation that indeed an amendment was effected on the section to correct an anomaly that had been identified. Thus, the Appellant’s assertion on application of the two distinct formulas to the different two tax periods was merited. The Tribunal relies on the case of Commissioner Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) (Commercial and Tax) (8 July 2022) (Judgment) where Justice Majanja stated that: -“I agree with the Tribunal’s holding that the burden of proof in tax matters is not stationary but is like a pendulum swinging between the taxpayer and taxman at different points but more times than not swings towards the taxpayer.”

23. The Tribunal finds and holds that the Appellant was not entitled to VAT refund claims for January 2018 to May 2018 and April 2020 and November 2020 as the refund application for these periods were made out of time contrary to Section 24(c) of the VAT Act.

24. Similarly, Tribunal finds and holds that the Respondent should apply the formula as couched under Regulations 8(1) and (2) of the 2017 VAT Regulations while calculating the refundable VAT for the August 2018 to June 2019 review period. On the other hand, the VAT refund formula as set out in the 2019 VAT(Amendment) Regulations should be applied in respect of the following review period;a.January 2021 to December 2021b.January 2022, April 2022, May 2022 and August 2022

23. Obtaining from the foregoing is that the Tribunal is persuaded that the Respondent failed to factor in the formula as outlined in the 2019 VAT (Amendment) Regulations in rendering its refund decision.(b)Whether the Appellant was entitled to input VAT Refund.

23. The Appellant stated that it made VAT refund claims arising from its trade in both standard and zero-rated supplies pursuant to Section 17 of the VAT Act; the Respondent on the other hand stated a different formula applied at the time period in relation to Appellant’s claims.

24. The Tribunal notes that the Respondent did not contradict the Appellant’s assertion that there should have been a differing formula application for the period prior and after the 2019 Amendments; as such, the Appellant’s averments and workings remain uncontroverted by the Respondent. The Tribunal notes that Section 8(1) and (2) of the VAT Act provides that;“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 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.”

23. The Tribunal observes that it is not in dispute that the Appellant made supplies pursuant to Section 17 of the VAT Act that were zero-rated. The Tribunal notes that the law under Section 47B of the TPA provides for refund of tax in cases where a taxpayer incurs zero-rated supplies, the cited Section provides that;“47B Refund of tax paid on exempted or zero-rated supply.The Commissioner may, upon approval by the Cabinet Secretary, refund tax paid in error in any case where the supply is exempt or zero-rated under the Act but such exemption or the zero rating was not processed within the specified period due to circumstances beyond the control of the taxpayer.”

23. The Tribunal observes that if the Appellant was entitled to refund claim and applied for the same within the stipulated legal timeframes, then the Respondent is legally bound to accept the same as couched in the relevant legal statute.

24. The Tribunal is convinced that the Respondent ought to have applied the VAT formula in a prorated manner as provided for by the 2019 Amendments. From the foregoing, the Tribunal is persuaded that the Respondent failed to apply the correct formula when disallowing the entire VAT refund claim of Kshs. 45,426,006. 00. The Tribunal is of the view that the Appellant was entitled to part of the input VAT refund.

FINAL DECISION 23. The upshot of the foregoing is that the Appeal is that the Appeal partially succeeds and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby partially allowed.b.The refund decision dated 6th October 2022 be is hereby varied as follows:(c)The Respondent to pro-rate the application of the formulas for the tax period before and after the 2019 VAT(Amendment) Regulations.(d)The Refund claims filed out of time by the Appellant be and are hereby expunged.(c)Each party to bear its own costs.

23. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 28TH DAY OF JUNE, 2024CHRISTINE A. MUGACHAIRPERSONBONIFACE K. TERER DELILAH K. NGALAMEMBER MEMBERGEORGE KASHINDI OLOLCHIKE S. SANKALEMEMBER MEMBERJudgment– 1569 of 2022 Candy Kenya Limited vs Commissioner of Domestic Taxes Page 10