[2023] KETAT 260 (KLR)

Jubet Investment Limited v Commissioner of Domestic Taxes (Appeal 244 of 2021) [2023] KETAT 260 (KLR) (26 May 2023) (Judgment)

Neutral citation: [2023] KETAT 260 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 244 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, AK Kiprotich & Jephthah Njagi, Members

May 26, 2023

Between

Jubet Investment Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company registered in Kenya. Its primary business is offering services of weeding, cutting and bundling sisal for its clients.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya and the Kenya Revenue Authourity is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent noted a variance between the Appellant’s income tax and VAT returns as filed in the itax portal of the Appellant for the years 2018-2019.

4. The Respondent, consequently, issued VAT additional assessment order number KRA2021111781504 on 14th June 2021 demanding tax payment of principal tax of ksh.5,412,946. 00, penalties and interest of Kshs.1,299,107. 00 and with the aggregate amount payable being Kshs 6,712,054. 00

5. The Appellant objected to the additional assessments on 10th July 2021 and the Respondent acknowledged the notice of objection on the same date.

6. The Respondent responded by requesting for further documents in support of the objection vide an email dated 23rd August 2021 but the Appellant failed to provide the documents.

7. The Respondent consequently made an objection decision dated 13th September, 2021 and the Appellant being thereby dissatisfied lodged a Notice of Appeal dated 24th September, 2021 that was filed before the Tribunal on the 11th February, 2022

The Appeal 8. On the basis of its Memorandum of Appeal dated 7th October, 2021 and filed on 12th October 2021 the Appellant’s Appeal is premised on the following grounds:-a.That the Respondent erred in law and fact and issued an invalid decision contrary to the Tax Procedure Act Section 15 which states that “The Commissioner in writing shall notify the tax payer of the objection decision and shall take all necessary steps to give effect to the decision, including, in the case of an objection to an assessment, making an amended assessment.b.That Section 10 further requires the Respondent to in case of an objection decision include a statement of findings on the material facts and the reason for the decision.c.The Respondent erred by demanding tax that is unreasonable and unfair as per Articles 210 and 201 (b)(i) of the Constitutiond.That the Respondent erred in law and fact by eliminating certainty as an integral ingredient of the rule of law as stated to be the lifeline of business and business planse.That the Respondent’s actions are contrary to legitimate expectations on the operations of the tax payer, as per VAT Act, and of the Kenya Constitution.

The Appellant’s Case 9. The Appellant’s case is set in the Statement of Facts filed on 11th October 2021 and the written submissions dated 20th July 2022 and filed on 21st July 2022.

10. The raises three issues for consideration as hereunder:-

Whether the Respondent is legally correct to combine incomes of 2 tax years and put to charge VAT in one tax year. 11. The Appellant argues that Section 2 of the VAT Act defines a tax period as “one calendar month or such other period as maybe prescribed in the regulation”

12. The Appellant also submits that, VAT is a monthly consumption tax incurred by a business entity registered for VAT and thus the Respondent’s action of lumping turnovers for the two years of income to one month is erroneous.

13. The Appellant adds that the VAT Act 2013 goes on to define VAT as tax chargeable on a tax payer on procurement of goods for the purposes of sale to their clients and hence considered as an expense on their part. Output tax is therefore realised when the goods /services is passed on sale as taxable supplies.

14. That on a simple transaction on taxable goods where the taxpayer does business with a VAT registered entity, at any level of the transaction in times of the declaration of taxes, the taxpayer and the other trading entity is expected to deduct input tax from the output tax they have charged and remit the balance to the Respondent.

15. That ideally the two turnovers ought to have been separated for purposes of VAT assessments and assessed in separate periods and not in one month.

16. The Appellant submits that it has discharged itself from the tax burden placed on it under Section 56 of the TPA.

17. The Appellant submits that the procedure culminating to the notice of assessment dated 14th June 2021 was not well placed and compliant with the provisions of the TPA and the VAT Act and the strict rules attendant to the taxation of a tax payer.

Whether the Respondent is legally correct to charge VAT at the rate of 16% on agricultural services 18. The Appellant cites the provisions of Part 11 of the 1st Schedule of the VAT and submits that the procedures culminating with the notice of assessment dated 14th June 2021 was not compliant with the provisions of the TPA and the VAT Act Rules attendant to taxation of a taxpayer.

Whether the Respondent is legally correct not to consider all the documents submitted by the Appellant during the objection process 19. The Appellant avers that it submitted all the supporting documents for purpose of processing the review under the TPA, informed the Respondent on the issue of document submission and the Respondent never reviewed them.

20. The Appellant also states that the Respondent never invited it for an interview or discussion on the tax matters.

21. The Appellant submits that the Respondent’s request for documents was based on the assumption that they were trading in taxable supplies contrary to the provisions of the VAT Act.

22. The Appellant prays for the Tribunal to find that:a.The Appellant’s Appeal is valid and accepts it for being filed contrary to Section 51 of the TPA.b.The Respondent’s assessment dated 14th June 2021 is invalid and not in accordance to fair administration of justicec.The Tribunal strikes out the Respondent’s decision to charge additional VAT amounting to ksh.5,414,946. 00 inclusive of the interest under Section 38 of the TPA.

The Respondent’s Case 23. The Respondent’s case is set in the Respondent’s Statement of Facts dated 8th March, 2022 and filed on the 9th March, 2022 and the written submissions dated 3rd August 2022 and filed on the same date.

24. The Respondent raised two issues it considered to be falling for determination in this Appeal.

Whether the Respondent erred in law and fact by charging VAT on products which are exempt from VAT 25. The Respondent avers that VAT is levied under the VAT Act 2013 and VAT Regulations 2017. It is charged on the supply of taxable goods or services made or provided in Kenya and on importation of taxable goods/services into Kenya.

26. That the 5 types of supplies that attract VAT at different rates are;16% for local taxable supplies,8% on local supply of fuel,0% for zero rated supplies and exports, exempt supplies and supplies that are out of the VAT scope. Additionally, that VAT is required for persons making/expecting to make taxable supplies of over ksh.5 million in a 12-month period.

27. That according to Section 2 of the VAT Act,2013 exempt supplies are defined to mean supplies specified in the First Schedule which are not subject to tax. That this means that if exempt supplies incur input tax in obtaining raw materials for the manufacture of exempt supplies, this input tax is passed on to purchasers of exempt supplies.

28. That the First Schedule of the VAT Act and Part II in particular exempts agricultural, animal husbandry and horticultural services from VAT. That however, the definition of agricultural services which is the use of the land, structures or buildings for purposes of buying and selling commodities and services that are necessary to support agricultural operations does not include the services offered by the Appellant to its client and as such the same is a VAT supply.

29. The Respondent further states that Section 62 of the VAT Act, places the burden of proving that any tax has been paid, or that any goods or services are exempt from payment of tax, lies on the person liable to pay the tax, or claiming that the tax has been paid or that the goods or services are exempt from payment of tax. On this submission the Respondent relies on the holding in the case of R VS KRA Ex-Parte Cooper K.Brands Ltd[2016].

30. The Respondent submits that the Appellant is involved in the process of weeding, cutting and bundling sisal for processing to its client. That however, the said services as offered by the Appellant do not come into the parameters of providing an agricultural service for the same to be exempt under the First Schedule of the Act.

31. The Respondent maintains that the exempt supply ought to be made within the definition of an exempt supply which is the agricultural services and the Appellant does not fall under that category.

Whether the Respondent’s objection decision was invalid, incorrect, unfair and failed to meet the legitimate expectations of the tax payer 32. Section 59 of the TPA empowers the Respondent to require the production of documents for the purposes of ascertaining the tax status of a taxpayer.

33. Section 29 of the said Act empowers the Respondent to make an assessment based on the information available to him in circumstances where the taxpayer fails to produce documentation.

34. The Respondent also submits that Section 56 (1) of the TPA places the burden on the taxpayer to prove that a tax decision is incorrect and on this the Respondent relies on the case of KRA Vs Man Diesel & Turbo Se,Kenya [2020]Eklr.

35. Additionally, the Respondent submits that in conducting an examination of the Applicant Company’s input VAT refund claims and other business operations, the Respondent was guided by Section 43 which requires any person making taxable supplies under the VAT Act to keep certain records and in particular Section 43 (3) which provides as follows:“Every person required under subsection (1) to keep records shall, at all reasonable times, avail the records to an authorised officer for inspection and shall give the office every facility necessary to inspect the records”

36. That Section 23 (1) of the TPA also provides for record keeping and Section 54 A (1) of the Income Tax Act requires the taxpayer to keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds and vouchers which in the opinion of the Commissioner are adequate for the purposes of computing tax. In regard to this issue the Respondent relies on the case of Commissioner Of Investigations And Enforcement Vs Evans Odhiambo Kidero (Income Tax Appeal No. E028/2020).

37. The Respondent submits that contrary to the allegations in the Appeal, the Appellant did not provide sufficient relevant documentary evidence as requested in support of its grounds of objection.

38. The Respondent prays for the VAT assessments to be upheld and the Appeal to be dismissed with costs.

Issues For Determination 39. The Tribunal upon considering the facts of the matter and the submissions filed by the parties is of the view that there are two issues falling for determination, namely:a.Whether Agricultural Services are VAT Exemptb.Whether the VAT Assessments by the Respondent Are Proper and Correct

40. It is to these issues that the Tribunal will now turn to analyse.

Whether Agricultural services are VAT exempt 41. The parties are in agreement that the services being offered by the Appellant are principally weeding, cutting and bundling of sisal.

42. The Appellant argues that agricultural services are not vatable while the Respondent argues to the contrary and this is the gist of the matter.

43. The VAT Act and Part 11 thereof in particular exempts agricultural services from VAT and Section 6 thereof which covers part of the exempted services states very clearly that the exemption relates to “Agricultural, animal husbandry and horticultural services”.

44. The Respondent in Paragraph 11 of its submissions defines agricultural services as “the use of the land, structures or buildings for purposes of buying and selling commodities and services that are necessary to support agricultural operations”. It adds that the services offered by the Appellant to its clients are not covered here and are therefore a vatable supply. However, the source of the definition is not cited by the Respondent.

45. The VAT Act has no definition for agricultural services. In the circumstances the ordinary meaning of the terms has to come into play. This position is reflected in the case of Inland Revenue Commissioners vs Wolfson {1949]1 ALL ER 864 at 868 as cited in paragraph 72 in R vs KRA Exparte Cooper k -Brands Ltd where it was held that:“It was held that the construction that I favour leaves an easy loophole through which the evasive tax payer may find escape. That maybe so, but I will repeat what has been said before .It is not the function of a court of law to give words a strained and unnatural meaning because only thus will a taxing section apply to a transaction which had the legislature thought of it ,would have been covered by appropriate words . It is the duty of the court to give to the words of this section their reasonable meaning ,and I must decline on any ground of policy to give them a meaning which with all respect to dissentient Lord Justice I regard as little short of extravagance”.

46. The Tribunal has also taken into consideration the holding in the case of Cape Brandy Syndicate vs Inland Revenue Commissioner [1921] 1 KB 64 where it was held:“In a taxing Act one has to look merely at what is clearly stated. There is no room for intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”

47. The Tribunal has noted that the services offered by the Appellant are clearly agricultural in nature and consequently exempt from VAT.

48. Having established that the Appellant’s services are tax exempt, the Tribunal will therefore not delve further to analyse the second issue which has thereby been rendered moot.

Final Decision 49. The upshot of the above findings is that the Appeal is merited and the Tribunal accordingly proceeds to make the following orders:i.The Appeal be and is hereby allowed;ii.The objection decision dated 13th September 2021 be and is hereby set aside; andiii. Each party to bear its own costs.

DATED AND DELIVERED AT NAIROBI ON THIS 26TH DAY OF MAY,ERIC N. WAFULACHAIRMANCYNTHIA MAYAKA GRACE MUKUHAMEMBER MEMBERABRAHAM KIPROTICH JEPHTHAH NJAGIMEMBER MEMBER