[2024] KETAT 48 (KLR)

Kenya Cuttings Limited v Commissioner of Domestic Taxes (Tax Appeal 1202 of 2022) [2024] KETAT 48 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 48 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1202 of 2022

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

January 26, 2024

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 October 2017, November 2017, December 2017 and January 2020, February 2020 and March 2020 amounting to Kshs. 27,040,852. 00.

4. The Respondent rejected the Appellant’s refund application vide rejection notifications dated 1st September 2022.

5. Dissatisfied with the Respondent’s rejection, the Appellant lodged this Appeal by filing its Notice of Appeal dated 30th September 2022.

The Appeal 6. The Appeal is premised on the Amended Memorandum of Appeal filed on 12th May 2023 raising the grounds as hereunder set out.a.That the Respondent erred in law and fact by rejecting the Appellant's refund application for the months of October 2017, November 2017, December 2017, January 2020, February 2020 and March 2020 on the assertion that the Appellant carries out research and development services in Kenya making these services chargeable to VAT at 16%;b.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:i.The Statement of Facts dated 14th October 2022 and the Supplementary Statement of Facts dated 11th May 2023 and filed on 12th May 2023. ii.The evidence of the Appellant’s witness, Joyce Kamau, as per her witness statement filed on 16th June 2023 and oral evidence given before the Tribunal on 6th September 2023iii.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 exclusively from Syngenta B.V. and 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.

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

12. 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 October to December 2017 and between January to March 2020 amounting to Kshs. 27,040,852. 00.

13. 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.

14. That the Respondent rejected the Appellant's refund claims on the basis that the “Services offered by Kenya Cuttings limited are those of propagation and research and development. Both services are performed in Kenya and attract VAT at 16%’.

15. The Appellant averred that its not engaged in any way in research and development activities. That on the contrary its business is in producing and exporting rooted and unrooted cuttings. That its activities are clearly set out in the Production and Sale agreement attached to the Statement of Facts.

16. That at the time the Appellant applied for the VAT refunds, Paragraph 1 of the Second Schedule to the VAT Act provided that the exportation of goods and services is a zero rated supply.

17. The Appellant also stated that the Respondent via an email dated 5th December 2022 notified the Appellant of its intention to conduct a VAT refund audit pursuant to Section 59 of the TPA. That it sought to audit the VAT refund claims made by the Appellant for the tax periods January 2014 to March 2014 and from January 2021 to September 2022.

18. That in the Respondent's email of 5th December 2022, the Respondent requested for various documents for examination and thereafter the parties held several meetings over the dispute in issue. That once the audit process was concluded, the Respondent issued its findings vide a letter dated 15th February 2023.

19. That in the letter of 15th February 2023. the Respondent found an amount of Kshs. 109,932,449. 00 claimed to be refundable and it only disallowed Kshs. 19,783. 00 on the basis that this amount related to VAT incurred on prohibited inputs.

20. The Appellant averred that by finding that Kshs. 109,932,449. 00 refundable pursuant to Section 17(5) VAT Act 2013 the Respondent must have concluded that the Appellant was engaged in the making of zero rated taxable supplies over the tax periods in question.

21. 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 with Section 47 (13) of the TPA which reads as follows:-“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."

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

23. That the Respondent erroneously rejected the Appellant's VAT refund application vide rejection notifications dated 1st September 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.

24. That pursuant to Section 47(13), the Appellant herein filed the Notice of Appeal on 30th September 2022 and subsequently filed its Memorandum of Appeal and Statement of Facts.

25. That the Respondent in Paragraph 19 of its Statement of Facts dated 11th November 2022 alleged that the Appellant’s Appeal is premature in view of the provisions of the Tax Procedures Act. That the rejection of the input VAT claims by the Respondent was a refund decision to which the Appellant ought to have filed an objection. Thus there is no objection decision before the Tribunal for hearing and determination.

26. That the claim in the Respondent's paragraph above that ".... The rejection of the input VAT claims by the Respondent was a refund decision to which the Appellant ought to have filed an objection ..." is patently false and is an attempt by the Respondent to mislead the Tribunal.

27. The Appellant argued 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 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 its review during the objection.

28. That prior to rejecting the Appellant's claim the Respondent had every opportunity to request the Appellant to provide it with documents pursuant to Section 47(4) of the TPA 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, which the Appellant provided.

29. That the Tribunal should take note of the unprocedural means by which the Respondent dealt with the Appellant's refund claim and the Respondent should not be allowed to deflect its responsibility to request for documents prior to making the rejections on the Appellant.

30. The Appellant also 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 dated 14 October 2022. That this was the Tribunal’s holding in the matters 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.

31. 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 this Tribunal should be considered.

32. The Appellant submitted that regardless of the agreement that was in force, the Respondent has determined in writing and by action that the Appellant is entitled to a VAT refund under Section 17(5) of the VAT Act, 2013.

33. 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 Actions Act,2015.

34. The Appellant in buttressing its case 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 35. The Appellant prayed to the Tribunal to find that:a.The Appeal be allowedb.The VAT refund claims amounting to ksh.27,040,852. 00 relating to the period October 2017, November 2017, December 2017 January 2020,February 2020 and March 2020 is due and payable by the Respondentc.Costs of the Appeal be awarded to the Appellant

The Respondent’s Case 36. The Respondent premised its case on the following documents: -a.The Respondent’s Statement of Facts dated and filed on 11th November 2022. b.The Respondent’s Written Submissions dated 26th September 2023 and filed on 27th September 2023.

37. The Respondent averred that vide a contract for production of unrooted cuttings between the Appellant and Syngenta Netherlands, the Appellant produces on behalf of Syngenta Seeds B.V, and is reimbursed all costs incurred plus a 5% mark up. 38. The Respondent also averred that the services offered by the Appellant are those of propagation, research and development. That the services are performed in Kenya and are agricultural and exempt from VAT.

39. That the Appellant attached to the Appeal a new contract dated 12th March 2019 which had not been availed to the Respondent. That this is the Production and Sale Agreement dated and signed on 12th March 2019.

40. That the terms of the new agreement are at variance with the Toll Agreement that had been provided to the Respondent at the time of applying for refunds. That the Respondent does not understand the reason why the same was not availed while the Appellant applied for refunds. That the failure to supply the document as at that time contravened the provisions of Section 43 of the VAT Act.

41. The Appellant also averred that its decision dated 15th February 2023 produced in the Amended Appeal was informed by the terms of the new agreement between the Appellant and Syngenta of 12th March 2019 which had not been availed earlier.

42. The Respondent argued that upon discovery of the new document, the Appellant ought to have availed it timeously to the Respondent and failure to do the same necessitated the Respondent’s finding against the Appellant.

43. The Respondent contended that the Appeal is premature in view of the provisions of the TPA. That the rejection of the input VAT claims by the Respondent was a refund decision to which the Appellant ought to have filed an objection. Thus there is no objection decision before the Tribunal for hearing and determination.

44. The Respondent in support of its case relied on the cases of Nairobi High Court Income Tax Appeal No.E101 of 2020 [Commissioner of Domestic Taxes v Dutch Flowers Group Kenya Ltd and Geoffrey Asanyo & 3 Others v A.G [2020]Eklr Respondent’s prayers.

45. The Respondent prayed that the Tribunal:-a.Dismisses the Appeal as the same is unmeritorious.b.Awards costs to the Respondent.

Issues For Determination 46. The Tribunal, having reviewed the pleadings, evidence and written submissions of both parties identified the following as the issues for determination.a.Whether the Appeal is prematurely before the Tribunalb.Whether the Respondent erred in rejecting the Appellant’s application for VAT refunds

Analysis And Findings a. Whether the Appeal is prematurely before the Tribunal 47. The Respondent argued that the Appeal before the Tribunal is premature in view of the provisions of the TPA. That the rejection of the input VAT claims by the Respondent was a refund decision to which the Appellant ought to have filed an objection. Thus there is no objection decision before the Tribunal for hearing and determination.

48. The Appellant argued that the claims of the Respondent that the Appellant ought to have filed an objection to the ‘refusal decision’ is false. That at the time the decision was made the new law encapsulated under Section 47 (13) of the TPA had come into force and the same required that a party aggrieved by the Commissioner’s decision was to appeal directly to the Tribunal.

49. Section 47 (13) of the TPA provides as follows:“A person aggrieved by the decision of the Commissioner under this section may appeal to the Tribunal within thirty days after being notified of the position”.

50. The Tribunal noted that the provisions of Section 47 (13) of the TPA came into operation on 1st July 2022 pursuant to Section 1 of the Finance Act, 2022.

51. The Respondent rendered his rejection decision on 1st September 2022 and by this date the applicable law was that a tax payer dissatisfied with the Commissioner’s decision was to appeal directly to the Tribunal within thirty days and which the Appellant did. There clearly was no provision for filing objection(s) to the Commissioner’s decision.

52. The Tribunal therefore finds the Appeal before it to be properly filed.

b.Whether the Respondent erred in rejecting the Appellant’s application for VAT refunds 53. The genesis of the dispute before the Tribunal is the refusal by the Respondent to grant the Appellant the VAT refunds for the period October 2017 to December 2017 and January 2020 to March 2020 amounting to Kshs. 27,040,852. 00. That the Respondent rejected the applications on 1st September 2022 whereupon the Appellant initiated the appeal process by filing its Notice of Appeal on 30th September 2022.

54. 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 whereupon the Appellant proceeded to file the documents in issue.

55. 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 2023.

56. The developments included a VAT refund audit process carried out by the Respondent which resulted in the allowance of the Appellant’s claims covering the period January 2014 to March 2014, January 2021 to December 2021 and January 2022 to September 2022. The period of claim in the Appeal was not covered.

57. That the review process took into consideration the documents requested for from the Appellant by the Respondent via its email of 5th December 2022. That the documents included the Toll Agreement and the Production and Sale agreement dated 1st January 2019 between the Appellant and Syngenta B.V.

58. The Respondent argued that the reason why the refund applications in issue were not allowed was because the documents 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.

59. The Respondent further argued in its submissions that the production of the document(s) 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 document.

60. The Tribunal noted that 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 parties are in agreement that the same ought to have been considered for a proper decision to be made in the matter.

61. The Tribunal further noted that it was not in dispute that the Agreement was not considered by the Commissioner when the decision to reject the application for refunds was made and that the same was considered in the audit process aforementioned that resulted in several refund claims being allowed.

62. The Tribunal has also noted that the Respondent in the audit process it carried out in the period between 5th December 2022 and 15th February 2023 the claim period, the subject matter of the Appeal, was not included. The Tribunal has also noted that most of the refund claims made by the Appellant between the year 2014 and September 2022 have now been resolved upon the Respondent requesting for supporting documents from the Appellant during the pendency of the Appeal.

63. It is also curious why the Respondent while being in a position to include the Appeal period claim in the refund claim review process chose not to. The circumstances of the refund applications and the documents in support of the same are more or less the same and were available at the time of the review. This would have determined the present matter and saved judicial time in the circumstances.

64. The Tribunal taking into consideration all the foregoing determines that in the best interest of justice the dispute be referred back to the Commissioner to consider the Production and Sale agreement in issue and make a decision accordingly.

65. Consequently, the Tribunal can only conclude that the Respondent erred in rejecting the Appellant’s application for the refund claims.

Final Decision 66. From the analysis above, the Tribunal holds that this Appeal is merited and consequently makes the following orders: -a.The Appeal be and is hereby allowed.b.The orders of rejection issued on 1st September 2022 are hereby set aside.c.The matter is sent back to the Respondent to review the Production and Sale agreement dated 1st January 2019 and make a decision on the refund claim for the periods of October to December 2017 and January to March 2020 within 60 days of the date of delivery of this Judgment.d.Each party to bear its own costs.

67. It is so ordered.

DATED AND DELIVEREDAT NAIROBI THIS 26TH DAY OF JANUARY, 2024GRACE MUKUHA - CHAIRPERSONDR. ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBERTIMOTHY VIKIRU - MEMBERGLORIA A. OGAGA - MEMBER