[2023] KEHC 25087 (KLR)

Commissioner of Domestic Taxes v Machiri Limited (Income Tax Appeal E036 of 2022) [2023] KEHC 25087 (KLR) (Commercial and Tax) (10 November 2023) (Judgment)

Neutral citation: [2023] KEHC 25087 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Income Tax Appeal E036 of 2022

A Mabeya, J

November 10, 2023

Between

The Commissioner Of Domestic Taxes

Appellant

and

Machiri Limited

Respondent

Judgment

1. The respondent imported vehicles for the Government of Kenya under Kenya Aid funded project and the appellant assessed the tax at Kshs 4,705,154. The respondent made the said payments in four installments using form F147.

2. Later on, during the clearing process, it was noted by the appellant that it had used form F147 instead of form C404. The appellant advised the respondent to prepare C404 entries and seek a refund on the amount paid via form F147.

3. On 5/8/2019, the appellant refunded Kshs 2,675,833/- leaving a balance of Kshs 2,029,060/- as VAT. Vide a letter dated 16/8/2019, the respondent lodged a refund claim on the ITAX platform and the appellant rejected the claim by a letter dated 19/4/2021.

4. Aggrieved by that decision, the respondent appealed to the Tax Appeals Tribunal (“the Tribunal”). The Tribunal delivered its judgment on 25/3/2022 allowing the appeal.

5. The appellant was dissatisfied with the said decision and lodged this appeal vide a memorandum of appeal dated 20/4/2022. The grounds upon which the appeal was founded on were that, the Tribunal erred in not holding that the respondent’s claim for a refund was time barred, that the Tribunal failed to find that the VAT refund mechanisms were premised on strict timelines.

6. In opposition to the appeal, the respondent filed a replying affidavit (instead of statement of facts) dated 28/10/2022. The Court is prepared to consider the said affidavit as a form of statement of facts by the application of Article 159(2) (d) of the Constitution.

7. It was the respondent’s case that the first request for refund was made in 7/6/2019 within 5months of the last installment requesting to the full amount of the refund. That another request to the Commissioner Customs and Border Control refunds section was made vide a letter dated 7/8/2018.

8. That the appellant refunded Kshs 2,675,833/= and rejected the refund for Kshs 2,029,060/-. That neither of the parties would stand to benefit from the rejected amount since payments done by the F147s could not be transferred to any payment entry.

9. I have considered the record. The core issue for determination is whether the refund application for Kshs 2,029,060/- was time barred. Section 30 of the VatAct provides for refund of VAT payments made in error. Under that provision, the Commissioner is compelled to make a refund of the same on condition that the application is made within 12 months from the time the tax became due and payable.

10. It provides that: -“Where, in respect of any supply, tax has been paid in error, the Commissioner shall, except as otherwise provided by the regulations, refund such tax: Provided that no refund shall be made under this section unless a claim in respect thereof is lodged within twelve months from the date the tax became due and payable under section 19. ”

11. In the present case, it is not in dispute that the appellant made payments using form F147 instead of form C404. The parties have also not disputed that the appellant refunded Kshs 2,675,833/- leaving a balance of Kshs 2,029,060/-. The appellant faulted the Tribunal for holding that the claim for refund of Kshs 2,029,060/- was not time barred.

12. In its judgment, the Tribunal held that the appellant created legitimate expectation when it refunded the customs duty claim of Kshs 2,675,833/-.

13. With respect to legitimate expectation, in Communications Commission of Kenya & 5others v Royal Media Services &5 others SC Petition Nos. 14, 14A, 14B & 14C of 2014, the Supreme Court of Kenya stated that: -“Legitimate expectation would arise when a body, by representation or by past practice, has aroused an expectation that is within its power to fulfil. Therefore, for an expectation to be legitimate, it must be founded upon a promise or practice by public authority that is expected to fulfil the expectation."

14. Further, in Republic v Kenya Revenue Authority ex parte Shake Distributors Limited HCMISC Civil Application No 359 of 2012, it was held that:“In view of the above, the claim for legitimate expectation will be established where a public body has made a clear representation or proposition which has been relied on by the other party in fulfilment of a certain the respondent has relied on with respect to receiving or obtaining a certain right. The question before the court is whether the appellant by refunding part of the money created a legitimate expectation that the balance would be paid off.”

15. From the record, the first request for payment was made by the respondent vide a letter dated 7/6/2018 requesting for a full refund of the sum Kshs 4,705,154/-. Then in a letter dated 22/6/2018, the appellant informed the respondent to make a request for a refund using the normal refund process. The Commissioner Customs and Border control rejected the refund claims on the grounds that the respondent had made the request outside the 12 months prescribed by law and upon appeal Kshs 2,675,833/- was refunded. The second refund claim was made at the ITAX platform and the same was rejected on the same grounds that the claim was time barred.

16. The Court appreciates that section 30 of the VAT Act is couched in mandatory terms. The Commissioner is mandated to make the refund provided the claim for refund is made within 12 months.

17. In the present case, the tax was paid in instalments. The last of such instalment was made on 24/01/2018. That is an arrangement that was agreed upon by both the appellant and the respondent. Upon realizing that the tax was paid in error, the first claim for refund was made on 7/6/2018. The appellant admitted the erroneous payment vide his letter dated 22/6/2018. This was followed with another request for refund dated 7/8/2018 followed by a rejection dated 17/8/2018.

18. Then there followed protracted communication resting with the request for refund on ITax on 16/8/2019. While the customs tax was refunded, that of VAT was not.

19. With greatest respect, the time for payment ended with the last instalment of 24/1/2018. Therefore, the 12 month’s period began to run on that date. The respondent had until 23/1/2019 to lodge its claim for refund.

20. It is not in dispute that the first request for refund was made on 7/6/2018. In my view, although it may not have been made as required by the appellant, nevertheless that was enough notice by the respondent of a claim for refund.

21. The fact that the respondent did not make the claim through the ITax system, that did not defeat the request of 7/6/2018 as a claim. That request was made within 7 months of the last and final instalment. The respondent’s right cannot be defeated by a technicality on the form of request. That was curable under Article 159 of the Constitution.

22. The view the Court takes is that, the 12 months period is supposed to run with the government financial year. That after the 12 months period, the funds must have been utilized and is no longer available for refund. It is for proper budgeting purposes.

23. In my view, by entering into an arrangement to pay by instalments which concluded on 24/1/2018, the time started to run after that final instalment.

24. Accordingly, I do not find that the request for refund was made out of time and the appeal is dismissed with costs to the respondent.It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF NOVEMBER, 2023. A. MABEYA, FCI ArbJUDGE