[2022] KEHC 13971 (KLR)

Esteem Industries Inc v Commissioner of Domestic Taxes (Civil Appeal ITA E033 of 2021) [2022] KEHC 13971 (KLR) (Commercial and Tax) (7 October 2022) (Judgment)

Neutral citation: [2022] KEHC 13971 (KLR)

Republic of Kenya

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

Commercial and Tax

Civil Appeal ITA E033 of 2021

EC Mwita, J

October 7, 2022

Between

Esteem Industries Inc

Appellant

and

Commissioner of Domestic Taxes

Respondent

(Appeal from the Decision of the Tax Appeals Tribunal dated 16th April 2021 in TAT No. 55 of 2019. , Esteem Industries Inc. v Commissioner of Domestic Taxes)

Judgment

Introduction 1. This is an appeal by Esteem Industries Inc (Esteem Industries) against the decision of the Tax Appeals Tribunal (TAT) dated April 16, 2021 in Tax Appeals Tribunal Appeal No 55 of 2019. The TAT upheld the objection decision by Commissioner for Domestic Taxes (the Commissioner) dated January 11, 2019 declining input VAT claim by Esteem Industries for Kshs 249,024,127 for the period May 2015 to August 2017. The Commissioner opposed the appeal by way of a statement of facts dated July 5, 2021.

Background 2. Esteem Industries, a subsidiary of Esteem Industries Inc India, a limited liability company, was incorporated in Kenya on April 13, 2015. Its principal business is manufacturing and supplying laboratory, medical, surgical and scientific laboratory equipment. It was to deal solely with the government of Kenya in a program known as Medical Equipment Services (MES).

3. In 2015, Esteem Industries entered into a lease agreement with the Government through the Ministry of Health (MOH) to provide MES to several public hospitals in the country for a period of 7 years. Esteem Industries subcontracted Debra Limited (Debra) to deal with all MES related services, including installation, testing, fitting, user training, maintenance, replacement and decommissioning of the equipment.

4. Esteem Industries was not initially registered as a VAT tax payer but was later registered on October 9, 2017. Esteem Industries states that there was lack of clarity on whether the MES contract was subject to VAT. However, as soon as this was clarified, it immediately attempted to register but the system failed, thus failure to register as a VAT payer was not intentional.

5. The Commissioner states that Esteem Industries was forcefully registration pursuant to section 34(6) of the VAT Act, because Esteem Industries had failed to voluntarily register for VAT as required by section 34(1) of the VAT Act despite meeting the criteria for registration.

6. In November 2017, the Commissioner conducted an investigative tax audit on Esteem Industries. The Commissioner then issued letter dated May 4, 2018, pointing out several errors in computation of tax. By letter dated May 15, 2018, Esteem Industries offered explanations and paid all the tax not in dispute. The Commissioner however disallowed Esteem Industries’ input VAT claim of Kshs 249,024,127 on grounds that the claim was time barred.

7. The Commissioner issued a tax assessment notice dated October 19, 2018 demanding tax on VAT of Kshs 463,826,212 inclusive of penalties and interest. Esteem Industries objected to the assessment by letter of objection dated November 15, 2018 for the reason that no revenue had been lost since Debra paid output VAT on the input VAT claimed and that the delay in filing VAT returns was due to challenges experienced in updating its VAT obligation. The Commissioner issued an objection decision on January 11, 2019 rejecting the input VAT claim.

8. Esteem Industries was aggrieved and filed an appealed against the objection to the TAT. The TAT dismissed that appeal on April 16, 2021 and upheld the Commissioner’s decision that the VAT input claim was time barred; Esteem Industries was not registered for VAT at the time and did not present the claim until October 2017, thus the claim did not meet the criteria set under section 17(2) of the VAT Act which allows a late claim within six months.

Appeal 9. Esteem Industries was still dissatisfied with the decision by the TAT and lodged this appeal through a memorandum of appeal dated May 5, 2021, raising fourteen ground as follows:a.That the tribunal erred in law and in fact in misinterpreting the provisions of sections 17 of Value Added Tax Act as well as section 29(1) of the Tax Procedures Act.b.That the tribunal erred in law and in fact in failing to appreciate that the services rendered by Debra Limited to the appellant herein were taxable supplies within the meaning of section 2 of VAT Act which were intended for use in making taxable supplies (ie, the services rendered to the Ministry of Health by the appellant.c.That the tribunal erred in law and in fact in failing to appreciate that under section 18(1)(b) of VAT Act, the appellant had a legally entrenched right to claim relief from any tax shown to have been incurred on in connection with taxable supplies made to the appellant by Debra Limited within Twenty-four (24) Months prior to the date of registration as long as the claims were made within three (3) months from the date of being registered.d.That the tribunal erred in law and in fact in failing to appreciate that the delay in procuring the registration of the Appellant was caused by and/or substantially contributed to by the respondent and consequently it was unjust and unfair to punish the appellant for the respondent's acts and/or omissions.e.That the tribunal erred in law and in fact in misinterpreting the decision in Skyline Towers Investments v Commissioner of Domestic Taxes by unduly restricting its ratio decidendi.f.That the tribunal erred in law by wrongly misconstruing the principle that "tax legislations ought to be construed strictly" and in wrongly using that principle to oust the provisions of article 159 of theConstitution to the appeal before it.g.That the Tribunal erred in law in failing correctly appreciate the relevance of article 159 of the Constitution to the circumstances of the appeal before it and in failing to appreciate and/or redress the injustice involved in permitting the respondent to appropriate output tax paid by Debra Limited while denying the appellant the right to claim the input tax deriving from precisely the same transactions.h.That the tribunal erred in law in failing to find that it was illegal and unconstitutional for the Respondent to purport to register the appellant retrospectively, while at the same time applying section 17 of VAT Act prospectively to the appellant's VAT claims.i.That the tribunal erred in law in failing to find that the respondent acted ultra vires its powers under the Kenya Revenue Authority Act in purporting to register the appellant retrospectively upon terms that effectively denied the appellant its accrued rights pursuant to the provisions of VAT Act.j.That the tribunal erred in law in failing to appreciate that the decision by the respondent to register the appellant retrospectively with adverse consequences upon the appellant was null and void by reason of being in breach of the provisions of the Fair Administrative Action Act, as well as article 47 of theConstitution.k.That the tribunal erred in law in failing to appreciate that the respondent violated the appellant's right to legitimate expectation by purporting to retrospectively register them as VAT agent when he knew or ought to have known that such retrospective registration could impact negatively on the right to claim input VAT.l.That the tribunal erred in law in failing to appreciate that by delaying the appellant's registration, and thereafter registering them retrospectively, and using that retrospective registration to deny the appellant the right to claim input VAT, the respondent acted unreasonably, in bad faith and abused their power.m.That the tribunal erred in law in failing to appreciate that, as was held by the Supreme Court in the case of Samuel Kamau Macharia v Kenya Commercial Bank Ltd [2012] еKLR"All statutes are prima facie prospective and no retrospective effect can be given to a statute unless by express words".n.That the tribunal erred in law in failing to appreciate that section 36(4) of VAT Act does not expressly donate power to the respondent to retrospectively register a tax payer as the respondent purported to do herein.

10. Esteem Industries prayed that the appeal be allowed with costs, the decision of the TAT dated April 16, 2021 and the objection decision also be set aside.

Submissions 11. This appeal was disposed of by way of written submissions with oral highlights. Esteem Industries filed written submissions dated August 4, 2021 while the Commissioner’s written submissions are dated September 20, 2021.

Submissions by Esteem Industries 12. Esteem Industries argued that the TAT was wrong in upholding the Commissioner’s objection decision declining the input VAT claim of Kshs 249,024,127 which had been lawfully incurred between May 2015 and January 2017, on the premise that it was time barred. In the view of Esteem Industries, the TAT misapplied section 17 the VAT Act which required that late claim for input VAT be filed within six months from the end of the tax period. Esteem Industries asserted that the tax period was not applicable to this case because it had not been registered for VAT between May 2015 and August 2017 and, therefore, an unregistered person could not be expected to pay VAT.

13. Esteem Industries argued that the TAT should have applied section 18 of the VAT Act which allows input claims within 24 months after registration where input VAT had been incurred. It was submitted that having been registered as a VAT tax payer on October 9, 2017, and having incurred input tax, section 18 allowed input VAT claim incurred within 24 months preceding registration. Esteem Industries also faulted the Commissioner for backdating the effective date of registration as a VAT tax payer to May 31, 2015.

14. Esteem Industries contended that the Commissioner’s notice of assessment sought to recover input tax that had already been remitted by Debra as output tax. Esteem Industries relied on Republic v Kenya Revenue Authority ex parte Bata Shoe Company [2014] eKLR for the argument that a taxpayer is not obliged to pay a single coin more than is due to the taxman.

15. Esteem Industries maintained that in issuing the assessments redistributing the output backwards, the Commissioner ought to have taken into account the input tax incurred during that period since the information was within the Commissioner’s knowledge. In this respect, Esteem Industries relied on section 29 of the Tax Procedures Act and Samwel Kamau Macharia v Kenya Commercial Bank & 2 others [2012] eKLR.

16. Esteem Industries also asserted that the Commissioner acted ultra vires its powers and violated the right to fair administrative action by failing to consider all the information as required by section 29 of the Tax Procedures Act.

Submissions By The Commissioner 17. The Commissioner supported the decision by the TAT, arguing that the TAT correctly applied section 17 of the VAT Act because Esteem Industries was required to claim input VAT within 6 months from the end of the tax period in question. The Commissioner maintained that Esteem Industries was forcefully registered as a VAT tax payer on October 9, 2017 under section 34 (6) (7) of the VAT Act because it was found to be engaged in taxable supplies exceeding Kshs 5,000,000. The Commissioner asserted that upon registration, Esteem Industries was obliged to comply with VAT obligations from May 31, 2015 when section 34 of the VAT Act became applicable and that was why the PIN certificate reflected that date.

18. The Commissioner faulted Esteem Industries for claiming input VAT from March 2015. The Commissioner also argued that the issue regarding the claim for input VAT under section 18 of the VAT Act was not canvassed before the TAT, and that Esteem Industries did not make the claim on or before January 9, 2018 or within 3 months after the date of registration as VAT tax payer. The Commissioner relied on Keroche Industries Ltd v Kenya Revenue Authority & 5 others (Misc Civil Application No 743 of 2006); [2007] eKLR, for the proposition that even if the amount of tax is huge, if its assessment and recovery is lawful, the court must uphold the right of recovery regardless of its consequence to the tax payer.

19. The Commissioner again relied on Republic v Kenya Revenue Authority ex parte Bata Shoe Company (supra) to argue that it is entitled to collect up to the last coin that is due from a taxpayer. The Commissioner urged that this appeal be dismissed with costs.

Reply by Esteem Industries 20. In a brief rejoinder, Esteem Industries conceded that under section 18 of the VAT Act, the claim for input VAT would go to September 9, 2015 and not May 30, 2015. Esteem Industries disputed the contention that a claim for input VAT was not made within three months and argued that the issue was raised before the TAT, a fact that was reflected in their submissions before the TAT.

Determination 21. I have considered the appeal, submissions and decisions relied on by parties. This appeal raises two issues for determination, namely; whether the input VAT claim was time barred and whether retrospective registration and application of section 17 was unconstitutional and unlawful.

Whether The Input VAT Claim Was Time Barred 22. Esteem Industries argued that the TAT was wrong in upholding the Commissioner’s objection decision declining the input VAT claim of Kshs 249,024,127 lawfully incurred between May 2015 and January 2017 as time barred. Esteem Industries took the view, that the TAT misapplied section 17 of the VAT Act which required that late claims for input VAT be filed within six months from the end of the tax period. Esteem Industries argued that the tax period was not applicable in this case because it had not been registered for VAT between May 2015 and August 2017 and an unregistered person could not be expected to pay VAT.

23. Esteem Industries maintained that the TAT should have applied section 18 of the Act which allows input claims within 24 months after registration where input VAT had been incurred. Esteem Industries asserted, therefore, that since it was registered as a VAT tax payer on October 9, 2017, and having incurred input tax, section 18 allowed the input VAT claim within 24 months preceding registration.

24. The Commissioner argued that the TAT correctly applied section 17 of the Act in that Esteem Industries was required to claim input VAT within 6 months from the end of the tax period in question. According to the Commissioner, Esteem Industries was forcefully registered as a VAT tax payer under section 34(6)(7) of the Act on October 9, 2017 because it was found to have been engaging in taxable supplies exceeding Kshs 5,000,000. The Commissioner maintained that Esteem Industries could not claim input VAT from May 2015 since the claim was time barred.

25. Regarding Esteem Industries claim that the input VAT claim should have been determined under section 18 of the Act, the Commissioner argued that the issue was not canvassed before the TAT.

26. I have considered respective arguments by parties on this issue and read the record of the TAT. The question here is whether the claim for input tax for May 2015 to January 2017 was time barred. Esteem Industries maintained that under section 17 of the VAT Act, a tax payer is entitled to claim all input tax incurred in making the taxable supplies.

27. Esteem Industries did not deny that the input VAT claim was filed outside the six months required by section 17. Before the TAT, Esteem Industries’ case was that failure to file returns and claim input VAT within the set timelines was inadvertent and a mere procedural technicality that could not override equity and the right to claim the input tax that had been genuinely incurred. The same argument was advanced before this court. The Commissioner’s case before the TAT was that Esteem Industries failed to register for VAT as required by section 34(1) of the Act despite meeting the criteria for registration and had to be forcefully registered in accordance with section 34(6) of the Act. The registration was backdated to May 2015 when Esteem Industries was known to have made taxable supplies that fell within statutory threshold.

28. The Commissioner asserted, therefore, that input tax claim incurred between May 2015 and January 2017 (Kshs 249, 024,127) was declined because under section 17 of the Act, the claim should have been made within six months.

29. The TAT considered the issue and observed that section 17 gives leeway for deduction of input tax to be delayed where documents are not readily available to such time when the documents become available which must however be done within six months after the tax period. The TAT observed that the input tax was claimed in October 2017 for the period May 2015 and January 2017 outside the six months allowed by section 17 of the Act, thus was time barred.

30. The facts of this appeal are not in dispute. Esteem Industries had not registered as a VAT payer in May 2015. Registration was forcefully done by the Commissioner on October 9, 2017 but was backdated to May 31, 2015 when, according to the Commissiioner, Esteem Industries was known to have made taxable supplies that brought it within the legal threshold for registration as a VAT payer. That fact is not denied and the PIN certificate bears this information too.

31. Section 17 of the Act stated where relevant as follows:"(1)Subject to the provisions of this Act and the 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."

32. Subsection (2) provided that if, at the time when a deduction for input tax would otherwise be allowable under subsection (1)—(a) the person did not hold the documentation referred to in subsection (3), or (b)the registered supplier had not declared the sales invoice in a return, the deduction for input tax would not be allowed until the first tax period in which the person held such documentation, provided that the input tax would be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.

33. The documentation mentioned in subsection (2) included: original tax invoice for supply or certified copy, a customs entry duly certified by the proper officer, customs receipt, a credit note in the case of input tax deducted under section 16(2) and a debit note in the case of input tax deducted under section 16(5) among others. These documents were not applicable to the case by Esteem Industries.

34. Section 17 was clear that only a registered person was entitled to deduct taxable supplies or importations for the tax period and the deduction was to be done at the end of the tax period. Esteem Industries was not a registered person between May 2015 and January 2017 when the taxable supplies were allegedly made. The law did not allow an unregistered person claim input VAT and on that ground alone, Esteem Industries’ claim could not succeed.

35. The only other way Esteem Industries could succeed was if section 17(2) came into play. The section allowed a late input VAT claim If at the end of the tax period, the registered tax payer person did not have the documentation listed in subsection (3). Even then, the “delayed” claim could only be made within six months after the tax period concerned. Esteem Industries did not invoke this subsection and, as correctly pointed out by the TAT, the matter did not fall within that subsection. In the premise, I am unable to fault the TAT in its decision.

Retrospective Registration 36. Esteem Industries argued that the retrospective registration violated the law. According to Esteem Industries, all statutes are prima facie prospective and no retrospective effect can be attributed to a statute unless by express words. Esteem Industries maintained that the TAT failed to appreciate that section 36(4) of the Act does not expressly donate power to the Commissioner to retrospectively register a tax payer as the Commissioner purportedly did in this case.

37. According to Esteem Industries, the TAT further failed to appreciate that section 18(1)(b) of the Act, gave it a legally entrenched right to claim relief from any tax incurred in connection with taxable supplies that had been made to it by Debra Limited within twenty-four (24) months prior to the date of registration as long as the claims were made within three (3) months from the date of registration.

38. Esteem Industries again blamed the TAT for failing to appreciate that the Commissioner had delayed registration and thereafter retrospectively registered it and used the retrospective registration to decline the right to claim input VAT. Esteem Industries deemed this as an act of bad faith and abuse of power. Esteem Industries maintained that the TAT should gave applied section 18 of the Act in which event it should have found that the input VAT claim could have been filed six months after registration.

39. The Commissioner on its part asserted that the issue of section 18 was not raised before the TAT and could not be raised in this appeal at this stage. The Commissioner maintained that Esteem Industries was forcefully registered on October 9, 2017 with the registration taking effect from May 31, 2015 because that was the time when Esteem Industries made taxable supplies that fell within the legal threshold for one to be register as a VAT payer.

40. I have considered the arguments by parties on this issue and gone through the record of appeal and, in particular, the grounds of appeal and submissions made before the TAT. The record reveals, as correctly argued by the Commissioner, that Esteem Industries did not raise the issue of application of section 18 before the TAT. The TAT was not, therefore, called upon to decide whether the applicable section was 17 or 18 of the Act. That being the fact of the matter, the issue of whether the TAT failed to appreciate section 18 and wrongly applied section 17 instead of section 18 could not be raised before this court at appeal stage.

41. Esteem Industries was forcefully registered on October 9, 2017 which registration took effect from May 31, 2015. The reason given for backdating the effective date was because that was the time when Esteem Industries made taxable supplies that brought it within the legal threshold to register as a VAT payer. It was after the forceful registration that Esteem Industries sought to claim input VAT for the period May 2015 and January 2017 which claim was made in the same month of October 2017.

42. It is notable that Esteem Industries did not question the backdated registration before any other forum after realising that the registration had been backdated. Esteem industries did not also raise the issue before the TAT during the hearing of the appeal. In the appeal before the TAT, the argument put forward by Esteem Industries, as can be discerned from the record, was that failure to file returns and claim for input VAT within the set timelines was inadvertent. The issue of retrospective registration or application of section 18 of the Act were not issues then. Esteem Industries sought to persuade the TAT that failure to file the claim was a mere procedural technicality which could be cured under article 159 of theConstitution, and such a technicality could not override equity and the right to claim input tax which had been genuinely incurred.

43. Esteem Industries had an opportunity to challenge the backdated registration before filing its input VAT claim or raise the issue of which section between section 17 and 18 was applicable when it argued the appeal before the TAT. I must however state that failure to comply with statutory provisions on timelines is not a procedural technicality. It is a requirement of law and article 159 cannot be invoked to cure such anomaly. Moreover, article 159 is not a cure for all ills and cannot be read and understood to be supporting equity to override a legal provision: For equity follows the law.

44. Esteem Industries having not raised the issue of retrospective registration or application of section 18 of the Act before the TAT, that issue could not be lawfully be raised before this court. I do not agree with Esteem Industries that the TAT fell into error by failing to appreciate the import of section 18, or for applying section 17, thus determining that the input VAT claim was time barred. Similarly, this court cannot venture to decide issues that were not before the TAT, given that it was called upon to look for errors, if any, committed by the TAT.

45. In the end, having carefully considered the appeal, the arguments by parties and decisions relied on, and having read the record of the TAT and the law, I find no merit in this appeal. It is declined and dismissed. Each party do bear own costs.

DATED, SIGNED AND DELIVERED AT NAIROBI THIS 7TH DAY OF OCTOBER, 2022. EC MWITAJUDGE