[2023] KETAT 145 (KLR)

Excel Chemicals Limited v Commissioner of Domestic Taxes (Appeal 533 of 2022) [2023] KETAT 145 (KLR) (Civ) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 145 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 533 of 2022

Robert M. Mutuma, Chair, D.K Ngala, Rodney Odhiambo Oluoch, Edwin K. Cheluget & E.N Njeru, Members

March 17, 2023

Between

Excel Chemicals Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The appellant is a limited liability company incorporated in Kenya and is a registered taxpayer. The Appellant deals with production of food and beverages

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. 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 Actwith respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent reviewed the Appellant’s excise duty returns for the period December 2021, January 2022 and February 2022 and established that the Appellant had underpaid Excise Duty, and vide a letter dated March 21, 2022 titled excise tax arrears, demanded additional Excise Duty being the variance in the sum of Kshs 4,855,997. 94

4. The Appellant on the March 29, 2022 objected to the said demand saying that it had filed its returns and that there was a conservatory order issued by the High Court against the application of Legal Notice No 217 of 2021 which the Respondent had relied on to raise the additional Excise Duty.

5. The Respondent issued its objection decision on the 28th of April 2022 where it confirmed the additional assessments and also asserted that Legal Notice No 217 of 2022 did not prohibit it from raising the excise duty under Appeal.

6. The Appellant aggrieved by the objection decision a Notice of Appeal on the May 25, 2022.

The Appeal. 7. The Appellant filed a Memorandum of Appeal dated May 23, 2022 together with the Statement of Facts of even date. It further filed written submissions dated September 21, 2022, all were supported by attachments and annexures.

8. The said Memorandum of Appeal listed the following as the grounds of appeal;a.That the impugned tax decision is illegal as it purports to enforce a Legal Notice No 217 of 2021 whose constitutionality, both procedural and substantive is pending hearing and determination in petition No 024 of 2021 as consolidated with petitions E403 & E491 of 2021 before the High Court Constitutional and Human Rights Division at Nairobi.b.That the impugned tax decision is contemptuous to the status quo orders issued on November 19, 2021 staying the enforcement of the inflationary adjustment (which is the crux of the aforesaid dispute) and further extended as at May 18, 2021 in the above-mentioned case.c.That the impugned tax decision is malicious and deliberate excuse by the Respondent to frustrate the Appellant’s business by assessing the excise tax arrears at Kshs 4,855,997. 94 in total contravention of the status quo order.d.That the impugned tax decision violates the Applicant’s constitutional rights and the dictates of the rule of law, fair administrative action, and fair hearing contrary to article 10, 47, and 48 of the Constitution.

9. Reasons Wherefore the Appellant prays that the Tribunal;a.Allows this Appealb.Quashes and sets aside the impugned tax decision dated April 28, 2022 on the grounds that the same is contrary to and contemptuous of the status quo orders issued by the Court in Petition No 024 of 2021 as consolidated with Petitions E403 of 2021 before the High Court Constitutional and Human Rights Division at Nairobi.c.Award costs of this Appeal to the Appellant; andd.Make such further orders as benefits the ends of justice in this case.

The Appellant’s Statement of Facts 10. The Appellant in the Statement of Facts stated that the Respondent wrote to it confirming the filing of the tax returns for the tax period in question but failed to pay the full tax due. This variance resulted in a demand notice of a tax sum of Kshs 4,855,997. 94.

11. The Appellant responded to the said demand vide a letter dated the March 29, 2022. The main basis of its objection was that the Respondent had been served with courts orders staying the demand and collection of excise duty tax which fell within the realm of Legal Notice No 217 of 2021.

12. It contended that the Respondent had ignored this order on the premises that the order had directed parties to maintain status quo as of the 19th November, 2021. In its view this implied that the rate applicable was the one contained in Legal Notice No 194 of 2020.

13. That the Respondent’s decision was not only ignorant but contemptuous of the status quo orders that were subsequently extended to December 15, 2021 and later to May 18, 2022.

14. That the status obtaining as of November 19, 2021 was that the new Legal Notice was not applicable and therefore even with the effective date of December 20, 2021 the Respondent would not apply the new rates in Legal Notice 217 of 2021 without the court varying its orders to allow its application or implementation.

15. That the fact that the Respondent was aware of the effect and meaning of these orders was apparent from the fact that the it had filed an application dated January 10, 2022 in the High Court to vary the Order of November 19, 2021. This application was not granted.

16. Its prayer was that the Tribunal do allow the Appeal as prayed in the Memorandum of Appeal.

Appellant’s Submissions. 17. The Appellant has said that the cause of the dispute is as a result of the Respondent’s illegal and unconstitutional actions of demanding additional taxes in enforcing Legal Notice No 217 of 2021 contrary to the status quo orders issued by the Court in Petition No E024 of 2021 consolidated with others.

18. The Appellant reiterates all the other pleadings and identifies the following issues as falling for determination;a.Whether the adjustment of the Excise Duty based on Legal Notice No 217 of 2021 was contrary to the status quo orders issued on November 19, 2021. b.Whether the assessment of Excise Duty for the sum of Kshs 4,855,997. 94 is lawful.c.Whether the Respondent’s impugned tax decision dated April 28, 2022 should be quashed or set aside.

19. That the orders disobeyed by the Respondent barring the enforcement of the Legal Notice No 217 of 2021 are still in force as at the time of filing the submissions. That the Appellant has been remitting and continues to remit taxes using the previous Legal Notice 194 of 2020.

20. That stay of the Legal Notice No 217 of 2021 implied that the previous Legal Notice No194 of 2020 was still in place. Its decision to pay tax as is provided for under the latter Legal Notice was therefore lawful, proper and in order.

21. That it is incumbent upon every litigant to obey every court orders whether null or valid, regular or irregular as was held in Wildlife Lodges Limited v Narok county Council & another [2005] Vol 2 EALR.

22. In view of the above the Respondent has acted unlawfully and maliciously by refusing to issue the Appellant with tax stamps unless it pays arrears that fall under Legal Notice No 217 of 2021.

23. It asserted that paying this tax under dispute would render its appeal at the High Court nugatory and an exercise in futility because as observed in the case of National Hospital Insurance fund Exparte Patanisho Mertanity Home [2019] eKLR.

The Response 24. The Respondent opposed the Appeal by filing the Statement of Facts dated 23rd day of June, 2022 and the Submissions dated September 30, 2022 accompanied by attachments/annextures in each document.

Statement of Facts. 25. The Respondent’s chronology of events is similar to that of the Appellant. It contends that the additional taxes demanded were due and payable as the Appellant underpaid its taxes.

26. That it was proper for the Respondent to apply Legal Notice No 217 of 2021 as it came into effect on November 2, 2021 before the order of 1November 9, 2021 was issued.

27. That it properly adjusted the rates of products of the Appellant as per the Legal Notice pursuant to powers granted to it by Section 10 of the Excise Duty Act.

28. That in the enforcement of the Legal Notice 217 of 2021, several suits were filed in the High Court and were subsequently consolidated, the lead file being E024 of 2021, Pubs, Entertainment & Restaurant Association of Kenya & another vs Commissioner General Kenya Revenue Authority & 6 others.

29. That the order issued on November 19, 2021 read as follows;“that in view of the fact that the effective date shall be on 20th December, 2021, this court directs that the status quo be maintained as of today.’’

30. The matter came up again on the December 15, 2021 and parties asked the court to clarify what it meant by the above quoted order. The court said;“that under order 2 of the order of 19th November, 2021, the court clearly stated that in view of the fact that the effective date shall be on December 20, 2021, status quo be maintained as of November 19, 2021. ’’

31. The Respondent’s contention is that the effective date of the Legal Notice was as of December 20, 2021 and not any other date before then, and that it was therefore proper for the Respondent to apply the Legal Notice after the effective date as the court did not bar it from doing so.

32. That the court misdirected itself on the effective date as the Legal Notice came into effect on November 2, 2021 when it was gazetted before the court issued the order.

33. That the assessment complied with Section 35 of the Excise Duty Act and Article 210(1) of the Constitution because the Appellant was given the procedural opportunity to be heard. In its view, the suits filed by the Appellant are just an effort to frustrate the Respondent in carrying out its statutory mandate, and therefore the Appeal should be dismissed with costs.

Respondent’s Submissions. 34. The Respondent after reviewing the Appellant’s returns for the period of December 2021, January and February 2022 found out that as per the new rates in the Legal Notice 217 of 2021 the Appellant had arrears as per the objection decision.

35. The Respondent therefore has identified a single issue for determination which it states as follows;“whether the Respondent’s demand for additional Excise Tax for the period December 2021, January and February 2022 pursuant to Legal Notice No 217 of November 2, 2021 is correct.’’

36. It said that the Legal Notice adjusted the rates applicable as from the 2nd November, 2021. That various stakeholders filed several Petitions in the High Court and were consolidated as earlier stated. It confirmed that the orders alluded to by the Appellant were issued.

Issues For Determination. 37. Upon reading both the pleadings of the Appellant and the Respondent and their supporting submissions and authorities the Tribunal sets out the issues for determination as follows;a.Whether the orders issued by the High Court in the consolidated matters E024 of 2021 stayed/barred the application or implementation/enforcement of Legal Notice No 217 of 2021; andb.Whether the additional assessment of Excise Duty against the Appellant as per the objection decision of April 28, 2022 was proper and lawful.

Analysys And Findings.a.Whether the orders issued by the High Court in the consolidated matters E024 of 2021 stayed/barred the application or implementation/enforcement of Legal Notice No 217 of 2021

38. The Appellant and other stakeholders in the industry filed the suits seeking orders that the Respondent be restrained from implementing the rates of Legal Notice 217 of 2021 (LN 217) pending the hearing and determination of the now consolidated suits.

39. Both parties agree that the said orders applied to both of them, whether against or in favour of either of them. Further that the orders of November 19, 2021 were issued by a court with jurisdiction to issue the orders.

40. The dispute seems to be how the orders affect either party. The relevant part of the LN 217 of 2021 reads as follows;“ In exercise of the powers conferred by Section 10 of the Excise Duty Act, 2015,the Commissioner General adjusts for inflation the specific rates of duty set out in the schedule to the Act and takes into account the average inflation rate for the 2020/2021 financial year of four decimal nine seven per centum (4. 97%). Legal Notice 194 of 2020 is revoked.’’

41. The schedule includes products manufactured/supplied by the Appellant. The Appellant with other stakeholders opposed the implementation of the same.

42. As of November 2, 2021, and November 19, 2021 the applicable Legal Notice seemed to have been LN 194 of 2020. The reason for so saying is because of provisions of Sections 10 & 35 of the Excise Duty Act which are reproduced below;Section 10 of Excise Duty Act states that;"(1)Despite Section 8, the Commissioner may, with the approval of the Cabinet Secretary, by notice in the Gazette, adjust the specific rate of excise duty once every year to take into account inflation in accordance with the formula specified in Part 1 of the First Schedule.(2)The notice under subsection (1) shall be laid before the National Assembly within seven days from the date of publication.(3)The National Assembly shall, within twenty-eight sitting days of the receipt of the notice under subsection (2), consider the notice and make a resolution either to approve or reject the notice.(4)The notice shall cease to have effect, if a resolution disapproving the notice is passed by the National Assembly.’’

43. Section 35 Excise Duty Act reads;“A licensed manufacturer or a supplier of excisable services shall submit an excise duty return, in the approved form and in the prescribed manner, for each calendar month not later than the twentieth day of the succeeding month, whether or not any excise duty is payable for that month.’’

44. From the above LN 217 was gazette on November 2, 2021 and was to be presented to the National Assembly in the next 7 days. The National Assembly was to give its resolution rejecting or accepting the same within 28 sitting days.

45. It therefore follows that the date of the gazettement is not the effective date. It is clear to us that LN 217 of 2021 could not have been operational as at November 2, 2021. The assertions by the Respondent that the Order of November 19, 2021 was issued when LN 217 of 2021 was already in force as by November 2, 2021 is not true.

46. The Respondent filed an application dated January 10, 2022 before the High Court where it sought to set aside the orders in contention. The Supporting Affidavit, as signed by one Lilian Nyaringita stated that LN 217 of 2021 was forwarded to the National Assembly on November 8, 2021. She also deponed that the said LN became operational on November 2, 2021. It is thus not possible that LN 217 of 2021 could have become operational before it could be approved by the National Assembly.

47. At paragraph 11 of the application dated January 10, 2022 the said Ms. Nyangirita, stated that:“the Honourable court failed to consider that the order of status quo issued on November 19, 2021 was made subsequent to the enactment of Legal Notice 217 of 2021 which was on November 2, 2021. ’’

48. At paragraph 12 she also stated that:-“that as such in extending the status quo orders on December 17, 2021 the court failed to take judicial notice that the National Assembly had acceded to the Legal Notice vide a letter dated November 24, 2021. ’’

49. At paragraph 3 she stated that:-“that the Applicant is unable to comply with the orders herein and seeks for this court to consider the facts and the law before it and issue an appropriate order.’’

50. Finally, at Paragraph 8 she deponed that:-“that the court was misdirected that the December 20, 2021 to be the effective date of the Legal Notice when the Legal Notice came into effect on November 2, 2021. ’’

51. From the above it is clear that the Respondent was aware of the effect and consequence of the order issued by the High Court. It was also aware that it had breached the court orders by insisting on the implementation of the impugned LN. 217 of 2021.

52. Moreover, the documents availed to the Tribunal also shows that it was not possible for LN 217 of 2021 to come into effect on 2nd November, 2021 when it was forwarded to the National Assembly on the 8th of November 2021 and it was acceded/approved by the same National Assembly on the November 24, 2021.

53. The said LN. No 217 of 2021 does also not indicate that it was to be applied retrospectively to the 2nd of November, 2021 after it was approved on the 24th of November, 2021.

54. Based on the above, the Tribunal hereby arrives at the inescapable conclusion that the High Court had indeed suspended the implementation of LN No 217 of 2021, that introduced the Excise Duty that is the subject matter of the objection decision.

55. The Respondent’s attempt to implement Excise Duty that had been stayed by a Court Order was thus an illegality. The applicable rate pending the determination of the suit before the High Court is the one contained under LN. 194 of 2020. b.Whether the additional assessment of Excise Duty against the Appellant as per the Objection Decision of April 28, 2022 was proper and lawful.

56. Having concluded that the order issued in the consolidated suit vide E024 of 2021 disallowed the application of LN 217 of 2021, the assessment and any subsequent action undertaken by the Respondent in respect of Excise Duty levied against the Appellant cannot stand. The assessment and the objection decision of April 28, 2022 is therefore illegal and unjustified.

Final Decision 57. On the basis of the foregoing analysis the Tribunal makes the following Orders;a.The Appeal be and is hereby allowed.b.The objection decision dated April 28, 2022 confirming the Additional assessment of Excise Duty amounting to Kshs 4,855,997. 94 be and is hereby set aside.c.Each party to bear its own costs of the appeal.

58. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH, 2023……………………………….ROBERT M. MUTUMA, CHAIRPERSON……………………………….DELILAH K. NGALA, MEMBER……………………………….RODNEY OLUOCH, MEMBER……………………………….EDWIN CHELUGET, MEMBER……………………………….ELISHAH NJERU, MEMBER