[2024] KETAT 1625 (KLR)

Dutch Flower Group Limited v Commissioner of Domestic Taxes (Tax Appeal E089 of 2023) [2024] KETAT 1625 (KLR) (Commercial and Tax) (11 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1625 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal E089 of 2023

E.N Wafula, Chair, Jephthah Njagi, E Ng'ang'a & G Ogaga, Members

October 11, 2024

Between

Dutch Flower Group Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and involved in the provision of logistical support services for the clients in Europe relating to their importation of flowers from Kenya.

2. The Respondent is a principal officer appointed pursuant to Section 13 of the Kenya Revenue Authority Act, (Cap. 469 of the Laws of Kenya) and is empowered to enforce and administer provisions of written laws set out in Section 5 as read together with the First Schedule to the KRA Act, among them, the Value Added Tax Act 2013, (VAT Act) the Income Tax Act (Cap 470 of the Laws of Kenya)

3. The Appellant has entered into contracts (“Service Agreements”) with Flower Retail Europe BV (“FRE”) and Flower Connect Holding (“FCH”), who are domiciled in the Netherlands.

4. On 12th July 2016, the Appellant applied for VAT refunds for the period January 2016 to May 2016 in respect of input VAT amounting to Kshs 2,603,527. 00.

5. Vide an email dated 15th December 2022, the Respondent informed the Appellant that its refund application for VAT “has been rejected”.

6. On the same day, the Respondent issued credit adjustment vouchers in respect of the Appellant’s VAT refund claim for the tax period January 2016 to May 2016.

7. The Appellant objected to the credit adjustment vouchers on 13th January 2023.

8. Vide a letter dated 14th February 2023, the Respondent issued its objection decision declining to allow the Appellant’s objection.

9. The Appellant wrote to the Respondent on 6th March 2023 notifying the Respondent that the objection decision relates to VAT refunds for the period of January 2016 to May 2016 which is pending determination in the Court of Appeal and asked that the Respondent retracts the objection decision and credit adjustment vouchers.

10. The Respondent replied on 13th March 2023 advising the Appellant to exercise its right to appeal under Section 52 of the Tax Procedures Act.

11. Aggrieved by the Respondent’s objection decision, the Appellant lodged a Notice of Appeal dated 16th March 2023 and filed on 18th March, 2023.

The Appeal 12. The Appellant filed its Memorandum of Appeal dated 30th March 2023 and filed on 31st March 2023 raising the following grounds of appeal:-a.That the Respondent erred in fact and in law in issuing credit adjustment vouchers and an objection decision in relation to the period January 2016 to May 2016 whereas the VAT refunds for the period in question are the subject of an Appeal filed by the Appellant at the Court of Appeal (Civil Appeal No. E673 of 2021- Dutch Flower Group Kenya vs The Commissioner of Domestic Taxes) which is pending full and final determination, in clear violation of the doctrine of lis pendens.b.That the Respondent erred in basing its objection decision on a decision of the Tribunal delivered on 2nd December 2022 as well as the Judgment of the High Court delivered on 10th September 2021 whereas the Appellant has filed appeals against both decisions and the same are pending hearing and determination at the High Court and the Court of Appeal, respectively.c.That the Respondent erred in fact and in law in finding that an agency relationship exists between the Appellant and Flower Retail Europe BV (‘FRE’) and Flower Connect Holding (‘FCH’) thereby misinterpreting the clear provisions of the Service Agreements and the conduct of the parties.d.That the Respondent erred in fact and in law in concluding that there was a degree of control exercised by FRE and FCH over the Appellant and that the element of control points to an agency relationship, thereby disregarding the basic elements of an agency relationship.e.That the Respondent erred in fact and in law in finding that the costs of the Appellant in providing the services under the Service Agreements are costs of FRE and FCH therefore disallowing the Appellant’s claim for input VAT alleging that it would be allowing the Appellant to claim costs belonging to FRE and FCH.f.That the Respondent erred in fact and in law in failing to refund the Appellant VAT input claimed amounting to Kshs. 2,603,527. 00, arising from excess input tax resulting from zero rated supplies for the period January 2016 to May 2016 contrary to Section 7 and Section 17(5) of the VAT Act (No 35 of 2013).

Appellant’s Case 13. The Appellant’s case was premised on the following documents:-a.The Appellant’s Statement of Facts dated 30th March 2023 and filed on 31st March 2023. b.The Appellant’s Written Submissions dated and filed on 26th March 2024.

14. The Appellant averred that it has entered into contracts (“Service Agreements”) with Flower Retail Europe BV (“FRE”) and Flower Connect Holding (“FCH”), who are domiciled in the Netherlands.

15. That FRE and FCH have entered into supply contracts with flower growers in Kenya for the delivery of flowers. That the flowers are required to meet certain specifications and quality standards. That the Appellant offers logistical services including assisting in sourcing for flowers, checking the quality of sourced flowers before they are shipped to consumers in Europe, checking and maintaining procedures and provisions important for the contracting party and the Kenyan flower growers and maintaining relations with the flower breeders in Kenya.

16. That on 12th July 2016, the Appellant applied for VAT refunds for the period January 2016 to May 2016 in respect of input VAT amounting to Kshs. 2,603,527. 00.

17. That subsequently, the Respondent conducted a VAT credit verification exercise on the Appellant’s operations for the period January 2016 to July 2017.

18. That vide a letter dated 4th October 2017, the Respondent informed the Appellant that it had disallowed the Appellant’s inputs. That the basis for its position was that the Appellant was an agent of its overseas clientele and as an agent, it could not claim its principal’s inputs.

19. The Appellant averred that it filed an objection dated 3rd November 2017, challenging the Respondent’s decision to disallow input VAT on the grounds that it did not have agency relationships with its overseas clientele and that its applications for refund of excess input tax were made pursuant to Section 7 as read together with Section 17(5) of the VAT Act (No. 35 of 2013).

20. That further, the Appellant distinguished the facts surrounding the Tribunal’s decision in Cofftea Agencies Ltd v Kenya Revenue Authority, which the Respondent had relied on in making its decision, from the Appellant’s position in relation to the overseas clientele, pointing out that whereas Cofftea Agencies Ltd was a commissioning agent, the Appellant was a service provider.

21. That by a letter dated 11th December 2017, the Respondent upheld its decision disallowing the Appellant’s claim for input VAT refunds, stating that input VAT was only claimable by the principal.

22. That aggrieved by the decision, the Appellant filed TAT Appeal No. 9 of 2018, which was subsequently consolidated with TAT Appeal No. 84 of 2018. That the two appeals related to the following:a.TAT Appeal No. 9 of 2018 arose from the Respondent’s findings disallowing input VAT claims for the period January 2016 to July 2017. b.TAT Appeal No. 84 of 2018 arose from credit adjustment vouchers issued on 21st March 2018 by the Respondent in relation to VAT refund applications for the periods July 2015 and June to December 2017. That it is noteworthy that the Respondent did not issue credit adjustment vouchers for the period January 2016 to May 2016 at that point.

23. That in a judgment delivered on 6th August 2020, the Tax Appeals Tribunal upheld the Appellant’s Appeal.

24. That the Respondent filed Income Tax Appeal No. E101 of 2020 at the High Court, to challenge the decision of the Tribunal and on 10th September 2021, the High Court allowed the Respondent’s Appeal.

25. That the Appellant disagreed with the High Court’s findings and has filed Civil Appeal No. 673 of 2021 at the Court of Appeal challenging the entire Judgment of the High Court, which Appeal is pending hearing and determination.

26. That despite the pendency of Civil Appeal No. 673 of 2021, the Respondent proceeded to issue credit adjustment vouchers on 15th December 2022 in respect of the Appellant’s VAT refund claim for the tax period January to May 2016.

27. That following the Respondent’s request for documents, the Appellant provided sample service agreements as well as sample invoices relating to the period in question.

28. That by a letter dated 14th February 2023, the Respondent issued its objection decision declining to allow the Appellant’s objection for the following reasons:-a.The relationship between the service provider and the principal under the service agreements was an agency relationship.b.What creates an agency relationship is the degree of control that the principal retains in the other party’s conduct or execution of some duty, regardless of whether the parties refer to their relationship as an agency relationship or not.c.From the ‘prices and payment’ clause in the service agreements, the overseas clientele exercise a considerable degree of control over the Appellant and as such, notwithstanding the working of the agreement, the net effect is that the Appellant is an agent of its overseas clientele. The control is evident from the right of the overseas clientele to inspect the Appellant’s books of account at first request.d.All the costs incurred by the Appellant are those of its overseas clientele as the agreements state that in the event that the invoices raised by the Appellant provisionally and paid exceed the actual costs incurred in any year of operation, the overseas clientele would be entitled to a credit from the Appellant.e.Notwithstanding the fact that the agreement does not expressly state that the Appellant is a commissioning agent, the net effect of the clauses is that the parties were in an agency relationship. The Appellant’s budget is controlled by its overseas clientele such that they agree on a budget, where the overseas clientele pay the costs to the Appellant plus 5% as its income.f.Allowing the Appellant to claim input VAT would be to claim costs belonging to the overseas clientele and not the Appellant.g.The Respondent relied on the Tribunal’s Judgment dated 2nd December 2022 on a separate appeal filed by the Appellant and the High Court’s Judgment in Commissioner of Domestic Services v Dutch Flower Group Kenya (Income Tax Appeal E101 of 2020) [2021] KEHC 23 (KLR).

29. That the Appellant wrote to the Respondent on 6th March 2023 notifying the Respondent that the objection decision relates to VAT refunds for the period of January 2016 to May 2016 which is pending determination in the Court of Appeal and asked that the Respondent retracts the objection decision and credit adjustment vouchers.

30. That the Respondent responded on 13th March 2023 advising the Appellant to exercise its right to appeal under Section 52 of the Tax Procedures Act.

31. The Appellant submitted that the following should be the issues for determination in this matter:-a.Whether the credit adjustment vouchers and the objection decision are/render the Appeal herein res judicata.b.Whether the Respondent erred in issuing a decision outside the statutory period under Section 47(3) of the Tax Procedures Act.c.Whether the Respondent erred in law in finding that the service agreements between the Appellant and Flower Retail Europe BV ("FRE") and Flower Connect Holding ("FCH") create agency relationships thereby rewriting the agreements between the parties.d.Whether the Respondent erred in law in misinterpreting the provisions of the VAT Act on what constitutes exported services.

32. The Appellant submitted that the Appeal herein is res judicata. That this is because the same issue of input VAT claims for the period January 2016 to May 2016 was dealt with by this Honourable Tribunal in TAT Appeal No. 9 of 2018 (consolidated with TAT Appeal No. 84 of 2018) and a Judgment delivered on 6th August 2020.

33. That the Respondent's letter dated 4th October 2017 noted that its VAT credit verification exercise covered the period January 2016 to July 2017 and that it had disallowed the input VAT claimed by the Appellant.

34. That the objection dated 3rd November 2017 related to the same period, January 2016 to July 2017. The Appellant's Appeal therefore related to the said period, which includes the period January 2016 to May 2016.

34. That in the case of Alfred Sagero Omweri v Kennedy Ornweri Sagero [2021] eKLR, the Court set out the factors to be considered in determining the issue of res judicata as follows:-“In order therefore to decide whether this case is res judicata, a court of law should always look at the decision claimed to have settled the issues in question and the entire pleadings of the previous case and the instant case to ascertain;i.what issues were really determined in the previous case;ii.whether they are the same in the subsequent case and were covered by the decision of the earlier case.iii.whether the parties are the same or are litigating under the same title and that the previous case was determined by a court of competent jurisdiction. "

35. That the Court in the above matter proceeded to find that a suit was res judicata as "the matter was not only heard and finally decided by the court, which matters therein were directly and substantially in issue as those in the present case and an Appeal was preferred and the same dismissed in the Court of Appeal... "

36. The Appellant submitted that the Respondent purported to issue credit adjustment vouchers on 15th December 2022, rejecting a VAT refund claim dated 12th September 2016. That Section 47(3) of the Tax Procedures Act provides that:“Where the Commissioner fails to ascertain and determine an application under subsection (I) within ninety days, the same shall be deemed ascertained and approved. "

37. That if indeed the Respondent insists, as it has done in its Statement of Facts, that the present Appeal concerns refund of input VAT covering an entirely different tax period from what has been litigated over in the Appeal pending at the Court of Appeal, then the Respondent, having failed to ascertain and determine the application for refund made on 12th September 2016 within ninety (90) days, was grossly in error, having issued a decision on 15th December 2022, 6 years, 3 months and 5 days after the application was made.

38. That in line with Section 47(3) of the Tax Procedures Act, the application was deemed ascertained and approved upon the lapse of 90 days. That this provision is couched in mandatory terms and makes it a requirement for a refund decision to be made within 90 days, failing which the refund is deemed to be allowed as claimed.

39. The Appellant relied on the case of Commissioner of Domestic Taxes v Sony Holdings Limited [2021] eKLR, where the Court emphasized the need for the Commissioner to make a decision within 90 days of application for a refund:“36. Section 47 of the TPA which underpins the taxpayers statutory right to apply to the Commissioner for a refund. It imposes on the Commissioner the duty to consider the application, audit the claim if necessary, and thereafter make a decision on it within 90 days of application as provided by section 47(3)..."

40. The Appellant submitted that the Respondent was misguided in issuing the Objection decision as the service agreements did not expressly state that the Appellant was an agent of Flower Retail Europe B.V. ("FRE") or Flower Connect Holding B.V. ("FCH").

41. The Appellant submitted that its role was limited to provision of logistical support to ensure that the flowers provided by Kenyan flower growers met the requisite quality requirements and standards. The Appellant was not authorized, either under the service agreements or otherwise, to enter into legal relations with them on behalf of FRE and FCH or alter the existing relations in any way.

42. That the Appellant's role under the service agreements was to source flowers in Kenya, ensure that the flowers met the quality requirements of FRE and FCH's customers in Europe, providing the correct packaging requirements especially flower food, sleeves and labels. and to maintain relations with the breeders in Africa.

43. That there was no agency relationship and the costs incurred were the Appellant's own costs, incurred on its own account in the course of providing logistical services. They were not the costs of FRE or FCH.

44. The Appellant submitted that all the services it provided under the service agreements were exported services. That Section 2 of the Value Added Tax Act, 2013 ("VAT Act") provides that a "service exported out of Kenya means a service provided for use or consumption outside Kenya."

45. That the determining factor is the place of use or consumption, such that if a service is consumed locally, it would be subjected to tax locally, but if it is consumed in a jurisdiction outside Kenya, it would be considered an exported service and be zero-rated in Kenya as it would be subjected to tax in that other jurisdiction.

46. That in the present case, the Appellant was providing services to FRE and FCH under the service agreements and was paid a service fee by the two companies. That these services constituted business-to-business supplies of internationally traded services. FRE and FCH are domiciled in the Netherlands and as such, since they consume and are the ultimate beneficiaries of the services, the place of use and consumption is in the Netherlands.

47. The Appellant submitted that the services it provided under the service agreements are consumed outside Kenya and as such, they fall within the definition of exported services, which were zero-rated during the period in question.

48. The Appellant submitted that the Tribunal should not reinvent the wheel on the issue of exported services as this has been expounded and determined in several cases that are similar in all respects to the present case, including the following:-a.Commissioner of Domestic Taxes v Coca Cola Central East and West Africa Ltd (Income Tax Appeal E038 of 2020) [2023] KEHC 1407 (KLR)-.The High Court upheld the Tribunal's finding that the Respondent was offering exported services and was therefore entitled to input VAT refunds.b.In Commissioner of Domestic Taxes v Total Touch Cargo Holland [2018] eKLR, the Respondent provided scanning, cooling and palletizing services to ensure that flowers provided by Kenyan farmers are in a merchantable quality for European consumers. which are similar to the services provided by the Appellant herein. The High Court applied the destination principle.c.In Panalpina Airflo Limited v Commissioner of Domestic Taxes [2019] eKLR, the High Court stated the following:-“22. Having found that our courts have had occasion to pronounce themselves on the interpretation of Section 2 of the VAT Act, I find that I have no reason to reinvent the wheel by deviating from the position that has been adopted by the court in similar matters."d.Commissioner of Domestic Taxes v W. E. C. Lines (K) Limited (Tax Appeal E084 of 2020) [2022] KEHC 57 (KLR)- In this case, the Respondent was providing services such as solicitation of business, customer service, booking, documentation, quotation of rates, collection, administration and forwarding of claims in Kenya under an agency agreement with a company incorporated in the Netherlands.

Appellant’s prayers 49. The Appellant prayed that:-a.The Respondent be compelled to withdraw the credit adjustment vouchers and the objection decision pending the hearing and determination of Civil Appeal No. E673 of 2021 at the Court of Appeal.b.A declaration be and is hereby made that the Appellant is entitled to VAT refunds arising from excess input tax resulting from the zero-rated supplies made to Flower Retail Europe BV and Flower Connect Holdings BV in the period January 2016 to May 2016 as claimed.c.A declaration be and is hereby made that the services offered by the Appellant to Flower Retail Europe BV and Flower Connect Holdings BV are export services which are zero-rated under the VAT Act (No. 35 of 2013).d.The Respondent be compelled to allow the Appellant’s VAT refund claims for the period January 2016 to May 2016. e.The costs of this Appeal be awarded to the Appellant.f.Any other remedies that the Tribunal deems just and reasonable.

Respondent’s Case 50. The Respondent’s case is premised on the following:-a.The Respondent’s Statement of Facts dated and filed on 13th April 2023. b.The Respondent’s Written Submissions dated 21st March 2024 and filed on 22nd March 2024.

51. In response to the Appeal, the Respondent requested the Tribunal to determine the following issues.a.The implication of the High Court judgment in Commissioner of Domestic Services v Dutch Flower Group Kenya (Income Tax Appeal E101 of 2020) [2021] KEHC 23 (KLR) (Commercial and Tax) (10th September 2021) and the pendency of determination of the Appeal in Civil Appeal No. E673 of 2021 - Dutch Flower Group versus Commissioner of Domestic Taxes to the instant case.b.Whether there existed an agency relationship between the Appellant on one hand, and FRE & FCH on the other hand.c.Whether the Respondent’s objection decision rejecting the VAT refund claim was within the confines of the law.

52. The Respondent averred that the Appellant misapprehended the common law doctrine of lis pendens. That Black's Law Dictionary 9th edition, defines lis pendens as the jurisdictional, power or control acquired by a court over property while a legal action is pending.

53. That in the case of Cieni Plainscompany Limited & 2 Others Versus Ecobank Kenya Limited [2017] eKLR, Onguto J, stated;“The doctrine of lis pendens often expressed in the maxim pendente lite nihilin novature (during litigation nothing should be changed). With regard to real property, section 52 of the now repealed Indian Transfer of Property Act 1882 provided that during the pendency in any court having authority in Kenya of any suit in which the right to immovable property was directly and specifically in question, the immovable property was not to be transferred or dealt with by any party to the suit or proceedings so as to affect the rights of any other party thereto under any decree or order that would be ultimately made , except with the authority of the court and on terms."

54. The Respondent averred that the Appellant has not demonstrated the following ingredients of the doctrine of lis pendens:-a.A litigation should be pending in a court of competent jurisdiction;b.The suit must be relating to a specific immovable property;c.The suit should not be collusive;d.The suit should relate to a right in this specific property;e.Property should not be transferred or otherwise dealt with;f.By any party to the suit;g.So as to affect the rights of any party thereto;h.Till the final disposal of the case.

55. The Respondent stated that from the foregoing. the doctrine of lis pendens as averred by the Appellant does not apply to the instant case. That this is on the basis that there is no immovable property being transferred during the pendency of the suit. That further, the Respondent has not made any attempts to circumvent the jurisdiction of the Court or remove the subject matter of litigation from the ambit of the court's power to decide a pending dispute or frustrate its decree.

56. The Respondent averred that in absence of a contrary finding by the Court of Appeal In Civil Appeal No. E673 Of 2021; Dutch Flower Group Versus Commissioner of Domestic Taxes, the decision made the High Court remains binding upon the Tribunal.

57. The Respondent reaffirmed its position that there existed an agency relationship between the Appellant as FRE and FCH. That as such, claiming a refund of input VAT would be claiming tax belonging to the principal.

58. That a cursory reading of the service agreements demonstrates how the parties have been described. Most importantly. the agreement describe FRE and FCH as the Principal whilst the Appellant is referred to as the “Service Provider.”

59. The Respondent averred that the agent-principal relationship was defined in the case of Lucy Nungari Ngigi & 4 Others Vs National Bank Of Kenya Limited And PCEA Ruiru Parish Development Foundation Civil Suit No 517 of 2014 which cited Bowstead and Reynolds on Agency Seventeen Edition, Sweets Maxwell Page 1-001, and defines such a relationship to be:-“... a relationship which exists between two persons one whom expressly or impliedly consents that the other should act on his behalf so as to affect his relations with third parties, and the other of whom similarly consents so to act or so acts."

60. The Respondent averred that what creates an agency relationship is the degree of control that the principal retains in what the agent does on its behalf. In this regard, where parties in a relationship envisage and agree that one will retain some control over another in the latter's conduct or execution of some duty, an agency relationship is created. It matters not what the parties call that relationship. It is the legal effect that arise from their relationship that will count.

61. The Respondent stated that despite the respective service agreement not expressly identifying the Appellant as a commission agent of FRE and FCH, the net effect of the clause on 'Prices and payment' dictates the existence of an agency relationship.

62. The Respondent posited that notwithstanding the wording of the service agreement, the net effect is that the Appellant is an agent of FRE and FCH. It is evident that FRE and FCH exercise a certain degree of control over the Appellant's mode of conducting business.

63. The Respondent referred the Tribunal to the case of Commissioner of Domestic Services V Dutch Flower Group Kenya {Income Tax Appeal E101 of 2020) [20211 Kehc 23 (KLR) (Commercial And Tax) which had similar facts and where the Court held that there existed an agency relationship between the Appellant and the principal. The Court further held that allowing the Respondent to claim input VAT would be to allow it to claim a cost belonging to FRE and not itself. The Respondent was therefore right in declining the claim.

64. The Respondent averred that this matter has therefore been conclusively determined by the High Court and the Judgment is therefore binding on the Tribunal.

65. That the High Court in the above case made a further finding that an Appellant cannot claim the input of the principal as was held in the case of Cofftea Agencies Ltd V KRA which case applies squarely in this matter.

Respondent’s prayers 66. The Respondent prayed that:-a.The Tribunal upholds the Respondent's objection decision dated 14th February 2023 that rejects the claim for VAT refunds as it is in conformity with the provisions of the VAT Act, 2013 and the Tax Procedures Act, 2015b.That this Appeal be dismissed with costs to the Respondent as the same is devoid of any merit.

Issues For Determination 67. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issues for determination to be as follows:-a.Whether the Appellant’s refund application was deemed allowed by operation of the law.b.Whether the Respondent’s Objection decision dated 14th February 2023 is proper in law.

Analysis And Findings 68. The Tribunal analysed the issues that call for its determination as hereunder, having reviewed all the pleadings, information and documents adduced by the Appellant and the Respondent.

Whether the Appellant’s refund application was deemed allowed by operation of the law. 69. The Appellant submitted that the Respondent purported to issue credit adjustment vouchers on 15th December 2022, rejecting a VAT refund claim dated 12th September 2016. That Section 47(3) of the Tax Procedures Act provides that:-“Where the Commissioner fails to ascertain and determine an application under subsection (I) within ninety days, the same shall be deemed ascertained and approved. "

70. The Appellant stated that if indeed the Respondent insists, as it has done in its Statement of Facts, that the present Appeal concerns refund of input VAT covering an entirely different tax period from what has been litigated over in the Appeal pending at the Court of Appeal, then the Respondent, having failed to ascertain and determine the application for refund made on 12th September 2016 within ninety (90) days, was grossly in error, having issued a decision on 15th December 2022, 6 years, 3 months and 5 days after the application was made.

71. The Appellant submitted that in line with Section 47(3) of the Tax Procedures Act, the application was deemed ascertained and approved upon the lapse of 90 days. That this provision is couched in mandatory terms and makes it a requirement for a refund decision to be made within 90 days, failing which the refund is deemed to be allowed as claimed.

72. The Appellant relied on the case of Commissioner of Domestic Taxes v Sony Holdings Limited [2021] eKLR, where the Court emphasized the need for the Commissioner to make a decision within 90 days of application for a refund as thus:-“36. Section 47 of the TPA which underpins the taxpayers statutory right to apply to the Commissioner for a refund. It imposes on the Commissioner the duty to consider the application, audit the claim if necessary, and thereafter make a decision on it within 90 days of application as provided by section 47(3)..."

72. The Tribunal reviewed the evidence adduced by the Appellant in support of its assertion that the Respondent issued its refund decisions beyond the 90 days provided for in law and makes the following observations:-a.The parties are in agreement that the Appellant on 12th July 2016 filed a VAT-refund claim for the period January 2016 to May 2016 totaling Kshs. 2,603. 527. 00. b.The parties are also in agreement that on 15th December 2022, the Respondent issued Credit Adjustment Vouchers and in the words of the Respondent in paragraph 9 of its Statement of Facts, “effectively rejecting the claim for VAT refund”.c.Aggrieved by the decision of the Respondent, the Appellant objected vide a letter dated 13th January 2023 and the Respondent made its objection decision on 14th February 2023.

72. The Tribunal analysed Section 47 of the Tax Procedures Act which provides for the timelines within which the Respondent is required to make a refund decision and clarifies that the Section 47(3) of the Tax Procedures Act as cited by the Appellant and reiterated below was introduced by Section 42 of the Finance Act 2022 and it came into operation on 1st July 2022: -“Where the Commissioner fails to ascertain and determine an application under subsection (1) within ninety days, the same shall be deemed ascertained and approved.”

73. The Tribunal observes that the Appellant duly applied for the refund in dispute in 2016 under the repealed Section 47 of the Tax Procedures Act which provided under the repealed Section 47(3) of the TPA that: -“The Commissioner shall notify in writing an applicant under subsection (1) of the decision in relation to the application within ninety days of receiving the application for a refund.”

74. The Tribunal finds that indeed, the Respondent notified the Appellant of its refund decisions rejecting the Appellant’s refund on 15th December 2022. On the face of the record, this was way beyond ninety days of receiving the application for refund.

75. The Tribunal is guided by the holding the case of Equity Group Holdings Limited v Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020) [2021] KEHC 25 (KLR) (Commercial and Tax) (23 August 2021) (Judgment) where Mativo J. held as follows as regards consequences of failure by a party to comply with a mandatory legal provision:-“7. Parliament in its wisdom deployed the word “shall” twice in section 51(11) of the Tax Procedures Act. The classification of statutes as mandatory and directory was useful in analyzing and solving the problem of the effect to be given to their directions. There was a distinction between a case where the directions of the Legislature were imperative and a case where they were directory. The real question in all such cases was whether, a thing, had been ordered by the Legislature to be done, and what the consequence was, if it was not done. The general rule was that an absolute enactment had to be obeyed, or, fulfilled substantially...

8. …

9. The word shall when used in a statutory provision imported a form of command or mandate. It was not permissive, it was mandatory. The word shall in its ordinary meaning was a word of command which was normally given a compulsory meaning as it was intended to denote obligation. Shall was used to express a command or exhortation or what was legally mandatory.

10. Section 51(11) of the Tax Procedures Act (TPA) was couched in mandatory terms. In a taxing statute one had to look merely at what was clearly said. There was no room for any intendment. There was no equity about a tax. There was no presumption as to a tax. Nothing was to be read in, nothing was to be implied. One could only look fairly at the language used. Where, however, the provisions were couched in language which was not free from ambiguity and admitted two interpretations, a view which was favourable to the subject should be adopted. The fact that such an interpretation was also in consonance with ordinary notions of equity and fairness would further fortify the court in adopting such a course.

11. …

12. The TAT rightly computed time and pronounced that the objection decision was rendered out of time. The objection decision was deemed to have been allowed. If the Commissioner did not render a decision within the stipulated period, the objection was deemed as allowed by operation of the law. The statute required that where the Commissioner had not made an objection decision within 60 days from the date the taxpayer lodged the notice of objection, the objection was to be allowed. That meant that the issues that the taxpayer had raised in the notice of objection would be accepted. In case of a tax assessment, it would be vacated.

13. Section 51 (11) of the TPA was couched in peremptory terms. The decision was made after the expiry of 60 days, the TAT had no legal basis to proceed as it did and to invoke article 159(2) (d). There was no decision at all. The decision had ceased to exist by operation of the law. The provisions of section 51 (11) (b) had kicked in. The objection had by dint of the said provision been deemed as allowed...”

76. Both the repealed Section 47(3) of the Tax Procedures Act and the amendment to Section 47(3) of the Tax Procedures Act are couched in mandatory terms. The refund decision that the Respondent issued out of time rendered that the refund decision had ceased to exist by operation of law.

77. Consequently, the Tribunal finds that because the Respondent rendered its refund decision out of time, in this case, the Appellant’s refund application was deemed ascertained and approved. The Appellant’s refund application was allowed by operation of the law.

78. Having found and determined that the Appellant’s VAT refund claim was allowed by operation of the law, the Tribunal did not delve into the other issue that fell for its determination as it was rendered moot.

Final Decision 79. The upshot of the foregoing analysis is that the Tribunal finds that the Appeal is merited and accordingly, the Tribunal proceeds to make the following Orders:-a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision dated 14th February 2023 be and is hereby set aside.c.The Respondent is hereby ordered to refund the Appellant Kshs. 2,603,527. 00 being the VAT-refund claim for the period January 2016 to May 2016 within sixty days from the date of delivery of this Judgment.d.Each party to bear its own costs.

80. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 11TH DAY OF OCTOBER, 2024ERIC NYONGESA WAFULA - CHAIRMANJEPHTHAH NJAGI - MEMBEREUNICE N. NGA’NG’A - MEMBERGLORIA A. OGAGA - MEMBER