[2023] KETAT 878 (KLR)

Kenya Cuttings Limited v Commissioner of Domestic Taxes (Tax Appeal 1028 of 2022) [2023] KETAT 878 (KLR) (8 December 2023) (Judgment)

Neutral citation: [2023] KETAT 878 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1028 of 2022

Grace Mukuha, Chair, E Komolo, Jephthah Njagi, T Vikiru & G Ogaga, Members

December 8, 2023

Between

Kenya Cuttings Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated in Kenya. The Appellant’s principal business activity is to produce ornamental plant cuttings for export to the Netherlands.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and 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 Appellant had accumulated excess input tax owing to making exported supplies taxable at the rate of zero per cent and lodged various VAT refund claims with the Respondent for the tax period of September 2014, July 2019, October 2019, April 2020 and July 2020 amounting to Kshs. 21,600,402. 00.

4. The Respondent rejected the Appellant’s refund application vide rejection notifications dated 4th July 2022 and 5th July 2022.

5. Dissatisfied with the Respondent’s rejection, the Appellant lodged this Appeal by filing its Notice of Appeal dated 19th September 2022.

The Appeal 6. The Appeal is premised on the Amended Memorandum of Appeal dated and filed on 28th April 2023 raising the following grounds: -a.That the Respondent erred in law and in fact by finding that the Appellant had incurred the input VAT, subject of the refund claims, as an agent of its non-resident customers;b.That the Respondent erred in law and in fact by rejecting the Appellant's VAT refund application on the assertion that it was reimbursed for costs including input VAT incurred in providing services to its non-resident customers;c.That the Respondent erred in law and fact by rejecting the Appellant's refund application on the assertion that the Appellant carries out research and development and that these services are chargeable to VAT at the standard rate of 16%;d.That the Appellant's VAT refunds claims which arose from excess input tax incurred in making exported supplies taxable at zero percent are merited in law and payable.

The Appellant’s Case 7. The Appellant’s case was premised on the here below stated documents:a.The Statement of Facts dated 16th September 2022 and filed on 19th September 2022 together with the Supplementary Statement of Facts dated 28th April 2023. b.The evidence of the Appellant’s witness, Joyce Kamau, as per her witness statement filed on 16th June 2023 and oral evidence given in the Tribunal on 6th September 2023c.The Written Submissions dated 26th September 2023 and filed on 27th September 2023.

8. The Appellant averred that it is a producer appointed by Syngenta Seeds B.V ('Syngenta B.V), a non-resident company incorporated in the Netherlands, as a non-exclusive producer of unrooted and rooted cuttings of flower varieties.

9. That the unrooted cuttings that the Appellant produces are flower plant materials of the various varieties from which rooted cuttings are grown.

10. That the production process involves the Appellant buying materials for production of the flower varieties from Syngenta B.V. and that the materials remain in the ownership of Syngenta B.V since they are the intellectual property of Syngenta B.V.

11. That the Appellant multiplies the materials received from Syngenta B.V to produce rooted plants from which it harvests unrooted cuttings for shipment to Syngenta B.V or re-roots them and exports them to Syngenta B.V as rooted cuttings.

12. That it is not in dispute that the Appellant exports the rooted and unrooted cuttings.

13. That the Appellant had accumulated excess input tax owing to making of exported supplies taxable at the rate of zero percent and in accordance with the provisions of Section 17 (5) of the VAT Act, 2013, lodged various VAT refund claims with KRA for the tax period September 2014,July 2019,October 2019,April 2020 and July 2020 amounting to Kshs. 21,600,402. 00

14. That at the time the Appellant lodged the refund application, Paragraph 1 of the Second Schedule to the VAT Act, 2013 provided that the "The exportation of goods or taxable services" was zero-rated.

15. That the Respondent rejected the Appellant's refund claims through notifications dated 4th July 2022 and 5th July 2022 on the basis that the input VAT in question was incurred by the Appellant in its capacity as an agent as opposed to a principal and therefore, the Appellant being an agent did not qualify for the VAT refund.

16. That the Respondent also rejected the claim on the basis that the services offered by the Appellant are those of propagation, research and development and which are performed in Kenya and attract VAT at 16%.

17. The Appellant refuted the above assertions of its relationship with Syngenta B.V and stated that its business model is one of an 'independent contractor' and that it was appointed by Syngenta B.V as a producer of unrooted and rooted cuttings of flower varieties through a Production and Sale Agreement (copy of the agreement is attached to the Statement of Facts.

18. That to ensure compliance with the agreement the Appellant is required to buy production material, i.e., the tissue material from Syngenta B.V and ensure the production of the cuttings is as according to the standards set by Syngenta B.V

19. That the Appellant produces the cuttings and undertakes to sell all cutting products produced exclusively to Syngenta B.V in accordance with the agreement and is also solely responsible for ensuring the quality of the cuttings products.

20. The Appellant submitted that under the ‘Production and Sale agreement’, the remuneration for production of rooted and unrooted cuttings is calculated as the sum of costs incurred in production. That contrary to the assertions by the Respondent, the expenses incurred by the Appellant are for the furtherance of its business and thus part of its ‘costs of sales’. That the expenses are incurred on the Appellant’s own behalf to ensure compliance with the tolling agreement. That this is in accordance with the provisions of Section 13 (1) of the VAT Act, 2013.

21. The Appellant averred that considering the provisions of Section 13 of the VAT Act, 2013 and that it is related to Syngenta B.V, the remuneration for its services is calculated on an arm's-length basis in compliance with Section 13(1)(b) VAT Act above as well as in compliance with the Income Tax Transfer Pricing Rules, 2006.

22. The Appellant submitted that under the provision of Section 13(5) all costs incurred in making a supply including incidental costs qualify to be included in the value of the supply for VAT purposes.

23. That the Respondent alleged that because of the remuneration method used by the Appellant (cost plus markup), the Appellant is thus an agent of Syngenta B V. That to the Respondent, the costs incurred by the Appellant are incurred on behalf of Syngenta BV as an agent and should be excluded from the value of the supply as provided in Section 13(5) of VAT Act, 2013.

24. The Appellant refuted the assertion that it incurred expenses on behalf of its non resident affiliates and submitted that a cost-plus model of remuneration is simply one of the Transfer Pricing methods used in determining the consideration between two related entities at arm’s length. That the existence of a cost-plus model of remuneration on its own is not indicative of a principal agency relationship, but a method of determining the open market value consideration to be paid to the Appellant.

25. The Appellant on the question of how to determine the existence of an Agency/Principal relationship relied on the cases of Kennedy v De Trafford [1897JA. A.C. 180 and Garnac Grain Co. Inc. -vs- H.M. Faure & Fair Dough Ltd and Bunge Corporation (1967]2 AII E.R. 353.

26. The Appellant submitted that the relationship between itself and Syngenta B.V. does not qualify as a principal-agent relationship in accordance with the foregoing authorities. That a key characteristic of the agency relationship is that the agent has power to bind the principal should it enter into contracts with third parties as an agent which is not the case herein. That the tolling agreement does not grant the Appellant any power to bind Syngenta in agreements with third parties.

27. That the Production and Sale agreement further buttressed that the relationship between the Appellant and Syngenta B.V is that of independent contractors. That the Appellant enters into contractual relationships with its suppliers on its own behalf and that there are no obligations and liabilities created between the third-party suppliers and Syngenta B.V.

28. The Appellant submitted that according to the Respondent since the Appellant is an agent of Syngenta B.V. all expenses incurred as inputs belong to Syngenta B.V., not the Appellant. That as per the Respondent's assertion, it is only the principal who may deduct input VAT incurred on supplies made to an agent on behalf of its principal. That to support the foregoing position, the Respondent relied on the decision made by the Tribunal on the Cofftea case.

29. The Appellant submitted that the Cofftea case does not apply in the present case for several reasons and the main one being that there is no agency relationship between the Appellant and Syngenta B.V.

30. The Appellant also submitted that under the proviso of Section 13 (5) of the VAT Act, 2013, the only expenses disallowable are disbursements incurred by an agent on behalf of a third party and not recharges. That the terms 'disbursements' and 'recharges' do not mean one and the same thing and the Respondent erred in equating recharges of costs to disbursements. That recharges for costs represent compensation for supply of services irrespective of whether they are itemised separately or form part of an inclusive overall fee.

31. The Appellant added that recharges consist of costs that the business incurs while supplying goods or services to customers. That the Appellant bought goods and services for its own use in furtherance of its business which is the production of rooted and unrooted cuttings to the requisite standards. That the costs incurred by the Appellant when supplying services to Syngenta B.V. are not therefore disbursements as described in Section 13(5) of the VAT Act, 2013.

32. The Appellant submitted that it was provided with goods and services in the course of furtherance of a business carried on by it and it paid consideration. That the fact that the Appellant recharges expenses or costs incurred does not preclude it from being entitled to a VAT refund under Section 17(1) as read with Section 17(5) of the VAT Act, 2013.

33. That from the invoices attached, the input VAT charged to the Appellant was not passed on to Syngenta B.V. in computing the cost-plus mark-up consideration as this was deductible input tax in accordance with the provisions of Section 17 of the VAT Act, 2013.

34. The Appellant averred that the Respondent also rejected the Appellant’s refund application on the basis that the company carries out research and development services in Kenya which are chargeable to VAT at 16%. That on the contrary the Appellant is in the business of producing and exporting cutting productions and that its activities are clearly set out in the Production and Sale agreement attached to the Statement of facts.

35. The Appellant invited the Tribunal to take judicial notice of the fact that Section 42 of the Finance Act, 2022 amended Section 47 of the TPA by repealing it and replacing it. That a new provision was introduced to Section 47 of the TPA as Section 47 (13) which reads as follows:-“(13)A person aggrieved by a decision of the Commissioner under this section may appeal to the Tribunal within thirty days after being notified of the decision."

36. That pursuant to Section 1 of the Finance Act, 2022, the new Section 47 came into force on 1st July 2022.

37. That the Respondent erroneously rejected the Appellant's VAT refund application vide rejection notifications dated 4th July 2022 and 5th July 2022. That by the time the Appellant received the rejections, Section 47(13) of the TPA had come into force and required the Appellant being aggrieved with the Respondent's rejections to appeal directly to the Tribunal within thirty (30) days.

38. That pursuant to Section 47(13), the Appellant herein filed the Notice of Appeal on 19th September 2022 and subsequently filed its Memorandum of Appeal and Statement of Facts.

39. That the Respondent in Paragraph 17 of its Statement of Facts dated 19th October 2022 alleged that:“Further, the Respondent states that at the objection stage the Appellant only provided the Toll Projection Agreement signed on 18th May 2009 and as per the contract with Syngenta Netherlands for production of unrooted cuttings of its flower varieties Kenya cuttings limited produce on behalf and in the name of Syngenta Netherlands and is reimbursed all costs plus some 5% mark up”.

40. That the claim in the Respondent's paragraph above that "...the said Agreement was provided by the Appellant during the objection..." is false and is an attempt by the Respondent to mislead the Tribunal.

41. That as there was a change in law requiring the Appellant to appeal to the Tribunal directly under Section 47(13) of the TPA, there was no objection stage that would ordinarily have offered the Appellant an opportunity to provide the documents before the Tribunal to the Respondent as part of its notice of objection. That the Respondent cannot claim or insinuate that the Appellant did not provide the applicable agreement for the review during the "objection".

42. That prior to rejecting the Appellant's claim the Respondent had every opportunity to request the Appellant to provide it with documents pursuant to Sections 47(4) and Section 59 of the TPA. That the Tribunal should note that the Respondent initiated an audit and requested for documents after it had rejected the refunds, and which the Appellant herein provided.

43. The Appellant submitted that nothing bars the Tribunal as a court of first instance from reviewing all the documents on record including the Production and Sale Agreement annexed to the Appellant's Statement of Facts and to support its submissions the Appellant relied on the cases of TAT Appeal 572 of 2021 Incentro Africa Limited v Commissioner of Domestic Taxes and TAT Appeal No. 304 of 2019- Pevans East Africa Ltd vs Commissioner of Domestic Taxes.

44. The Appellant added that there was no objection stage as alleged by the Respondent and the Appellant having appealed pursuant to Section 47(13) of the TPA, was obliged to present all material necessary before the Tribunal to prove that the Respondent had erred in fact and in law in rejecting its refunds. That all such material properly produced before the Tribunal should be considered.

45. That ‘without prejudice’ to the above, the Respondent acknowledged and agreed that the Appellant was entitled to a refund for the export of rooted and unrooted cuttings under the Toll Production Agreement and the Production and Sale Agreement.

46. That the Respondent in its letter of 15th February 2023 (annexed herein) approved a refund amount of Kshs. 109,932,449. 00 relating to the period January 2014 to March 2014 and further from January 2021 to September 2021. That during that period of January 2014 to March 2014 the Toll Production Agreement was in force (1st January 2008 to 31st December 2018) and during January 2021 to September 2021, the Production and Sale agreement was in force (effective from January 1st to date).

47. That the Respondent's letter of 15th February 2023 is not the first time that the Respondent had approved the Appellant's refund during the pendency of the Toll Production Agreement. That vide a letter dated 4th January 2016 the Respondent approved a VAT refund of Kshs. 6,634,423. 00 relating to the period October to December 2014 which was later paid out in November 2016. That the Respondent also paid a VAT refund amounting to Kshs. 7,463,099. 00 in 2017 (copy of previous refund approvals attached to the Appellant's Supplementary Statement of Facts dated 28th April 2023)

48. That as per the Respondent's letter dated 15th February 2023, the Respondent determined VAT refunds amounting to Kshs. 109,932,449. 00 for various periods between January 2021 to June 2022 were due and payable to the Appellant. That during this period the Production and Sale Agreement was in force (1st January 2019 to present).

49. The Appellant asserted that from the foregoing, the audit findings effectively contradicted the Respondent’s grounds for rejecting the VAT refund claims. That the Respondent is therefore unfairly prejudiced given that the Appellant lacks the ability to plan the businesses with some measure of regularity certainty and confidence in the administration of tax laws contrary to the principles of natural justice codified in the Constitution of Kenya and the Fair Administrative Action Act,2015.

50. The Appellant in buttressing its case has relied on many authorities including Local Production Kenya Ltd vs Commissioner of Domestic Taxes [2019] Eklr, Commissioner of Customs and Excise v Redrow Group Plc [1999] UKHL 4 and Commissioner of Domestic Taxes- v Microsoft East Africa Ltd (Income Tax Appeal E212 of 2021) amongst others.

Appellant’s prayers. 51. The Appellant prayed to the Tribunal to find that:a.The Appeal be allowed.b.The Respondent’s decision dated 4th July 2022 and 5th July 2022 be annulled and be set aside.c.The VAT refund claims amounting to Kshs. 21,600,402. 00 relating to the period September 2014, July 2019,October 2019,April 2020 and July 2020 are due and payable.d.Costs of the Appeal be awarded to the Appellant.

The Respondent’s Case 52. The Respondent premised its case on the following documents: -a.The Respondent’s Statement of Facts dated 17th October 2022 and filed on 19th October 2022. b.The Respondent’s Written Submissions dated 26th September 2023.

53. The Respondent averred that the Appellant lodged various VAT refund claims with the Respondent for the tax periods September 2014, July 2019, October 2020 and July 2020 amounting to Kshs. 21,600,402. 00.

54. That the claims were rejected by the Respondent upon review of the Toll Production Agreement. That as per the contract with Syngenta Netherlands for production of unrooted cuttings of its flower varieties, the Appellant produced on behalf and in the name of Syngenta Netherlands and is reimbursed for all the costs incurred plus a 5% mark up.

55. The Respondent averred that the Appellant supplies a service which is remunerated vide a commission from the principal. The principal controls all aspects of production including quality and safety of personnel.

56. That Syngenta BV provides propagating materials to Kenya cuttings free of charge and that this clearly indicates no arm's length transaction between the two as the propagating material has a value. That this supports the presence of an agency as the materials would not be offered for free.

57. That the services offered by Kenya Cuttings Limited are those of propagation, research and development and that both services are performed in Kenya and attract VAT at 16%.

58. The Respondent argued that the Appellant’s application for VAT refunds, was untenable because the Appellant was acting as an Agent for Syngenta Netherlands for the production of unrooted cuttings of its flowers variety whereas it is only the principal who can claim and deduct input VAT made to an agent on behalf of the Principal.

59. The Respondent also stated that at the Objection stage the Appellant only provided a Toll Projection Agreement signed on 18th May 2009.

60. The Respondent averred that the Appellant was informed vide the notice of invalidation issued on 21st June 2022 why its notice of objection was rejected as the Appellant's notice of objection was filed late without giving valid reasons why the same was late and it is therefore untrue for the Appellant to say that it did not receive any explanation why the Objection was rejected.

61. The Respondent further averred that the Appellant only provided the new Production and Sale Agreement between the Appellant and Syngenta made on 1st January 2019 which the Commissioner has not had a chance to look at/review and to give its findings.

62. The Respondent also argued that the Appellant has failed to demonstrate to this court how the Commissioner's decision was illegal, excessive and not based on any set laws despite the onus being on the Appellant to demonstrate that the Respondent's decision was erroneous.

63. That the allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts are unfounded in law and not supported by evidence.

64. The Respondent reiterated that the Appellant has failed to discharge its burden of proof to prove that the Respondent's tax decision is incorrect as per the provisions of Section 56(1) of the Tax Procedures Act and therefore the confirmed assessment issued is proper and the same should be upheld.

65. The Respondent in buttressing its case relied on the holdings in the matters of TAT No.70 of 2017 Afya Xray Centre vs Commissioner of Domestic Taxes, Mulherin vs Respondent of Taxation (2013)FCAFC 115 and Commissioner of Investigations & Enforcement vs Kidero (Income Tax Appeal E028 of 2020 [2022] KEHC 52(KLR).

Respondent’s prayers. 66. The Respondent prayed that the Tribunal do find;a.That the Respondent’s decision issued on 4th July 2022 disallowing the Appellant’s VAT refunds application be found to be proper in law and be upheld.b.The Appeal be dismissed with costs as the same lacks merit.

Issue for Determination 67. The Tribunal, having reviewed the pleadings, evidence and written submissions of both parties identified the following as the issue for its determination.Whether the Respondent erred in rejecting the Appellant’s application for VAT refunds

Analysis and Findings 68. The genesis of the dispute before the Tribunal is the refusal by the Respondent to grant the Appellant the VAT refunds for the periods of September 2014,July 2019,October 2019,April 2020 and July 2020 amounting to ksh.21,600,402. 00. The Respondent rejected the applications on 4th July 2022 and 5th July 2022 whereupon the Appellant initiated the Appeal process by filing its Notice of Appeal on 19th September 2022.

69. On 29th March 2023 the Appellant filed an application before the Tribunal seeking to amend its Memorandum of Appeal, file a Supplementary Statement of Facts and further documents to support its appeal. The application was allowed by the consent of the parties whereupon the Appellant proceeded to file the documents in issue.

70. The Supplementary Statement of Facts covered other developments, in relation to the Appeal, made by the parties in the period between 5th December 2022 and 15th February 2022.

71. The developments included a VAT refund audit process carried out by the Respondent which resulted in the allowance of the Appellant’s VAT refund claims covering varying periods in the years 2014,2021 and 2022. However, the Appellant’s claim period, the subject matter of the Appeal was not covered.

72. The communication of the allowed claims aforesaid was through a letter dated 15th February 2023 and the allowed amount was ksh.109,932,449. 00. The Appellant’s Supplementally Statement of Facts covers these developments and the Respondent has not rebutted this evidence.

73. The refund audit process was initiated by the Respondent vide an email to the Appellant dated 5th December 2022 and specifically requested the Appellant to provide particulars for the period January to March 2014, January to December 2021 and January 2022 to September 2022. Thus the appeal period was not covered in the audit process.

74. The Respondent argued that the reason why the refund amount was not allowed was because the document in support of the same had not been provided to the Commissioner as and at the time the refund application(s) were made and that therefore the decision to disallow the refund application did not take them into consideration. That the Commissioner made the ‘right decision’ based on the information presented then.

75. The Respondent further argued in its submissions that the production of the document as at the point of Appeal is irregular whereas the Appellant argued that the Tribunal being a court of first instance is not barred from reviewing all the documents on record. The Appellant also argued that the introduction of the provision of Section 47 (13) TPA did not provide for the objection process in these particular matters and the Appellant did not therefore have the chance to produce the documents.

76. The document in issue between the parties is the Production and Sale Agreement between the Appellant and Syngenta B.V dated 1st January 2019. The Respondent argued that it did not consider the same at the time of rejecting the refund application as the same had not been provided. The Appellant argued that it did not supply it to the Respondent because with the law amendment as per Section 47 (13) TPA there was no objection stage when it could have provided the document.

77. The Tribunal has noted that the Sale and Production agreement between the Appellant and Syngenta B.V. is important and the same should be considered for a proper decision to be made in the matter.

78. It is also not in dispute that the Agreement was not considered by the Commissioner when the decision to reject the application for refunds was made. The Respondent has also implied that the production of the document at the application for refunds stage was important.

79. The Tribunal taking into consideration all the foregoing determines that the ‘remaining dispute’ be referred back to the Commissioner to consider the Production and Sale Agreement in issue and make a decision accordingly.

80. The Tribunal has also noted that most of the refund claims made by the Appellant covering different periods have now been resolved upon the Respondent requesting for supporting documents from the Appellant during the pendency of the Appeal. The resolved matters covered the same subject matter and the same tax issues and revolved around the same documents as the appeal here.

81. The Respondent was in a position to include the “Appeal period” claim in the refund claim review process too but chose not to. This would have fully determined all the disputes involving the two parties once and for all. There are several matters related to the same subject matter(s) and with the same issues whose determination in the audit process would have saved a lot of judicial time in the circumstances. Consequently, the Tribunal can only conclude that the Respondent erred in rejecting the Appellant’s application for the refund claims.

Final Decision 82. From the analysis above, the Tribunal holds that this Appeal succeeds and consequently makes the following Orders:-a.The Appeal be and is hereby allowed.b.The orders of rejection issued on 4th July 2022 and 5th July 2022 are hereby set aside.c.The matter is sent back to the Commissioner to review the Production and Sale Agreement dated 1st January 2019 and make a decision on the refund claim for September 2014, July 2019, October 2019, April 2020 and July 2020 within the next 60 days.d.Each party to bear its own costs.

83. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF DECEMBER, 2023GRACE MUKUHA - CHAIRPERSONDR. ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBERTIMOTHY VIKIRU - MEMBERGLORIA OGAGA - MEMBER