[2023] KETAT 349 (KLR)

Kenya Nut Company Limited v Commissioner of Domestic Taxes (Appeal 322 of 2022) [2023] KETAT 349 (KLR) (9 June 2023) (Judgment)

Neutral citation: [2023] KETAT 349 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 322 of 2022

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

June 9, 2023

Between

Kenya Nut Company Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a private limited liability company incorporated under the provisions of the Companies Act, CAP 486 of the laws of Kenya and engages in the business of growing, processing and selling macadamia and cashew nuts in the Kenyan and international markets.

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. In July 2003 and 2006, the Appellant sought the Respondent's guidance on the incidence of VAT on macadamia and cashew nuts.

4. Vide letters dated 5th August, 2003 and 1st August, 2006, respectively, the Respondent replied to the Appellant’s request.

5. After the introduction of the new VAT Act in 2013, the Appellant vide a letter dated 30th October, 2013 again sought guidance on the VAT status of its products.

6. In a private ruling dated 6th December, 2013, the Respondent ruled on the VAT status of dry roasted and salted macadamia nuts, dry and salted cashew nuts, honey­ coated macadamia, honey coated cashew nuts and chocolate covered macadamia nuts to be exempt. This ruling was in further reference to the Respondent's letters dated 5th August, 2003 and 1st August, 2006, all classifying the above products produced by the Appellant as VAT exempt.

7. The Appellant applied for refund of input VAT amounting to Kshs. 20,330,851. 00 as a result of making zero rated supplies.

8. On 23rd December, 2021, the Respondent issued a VAT refund claim approval order 20148197404 partially approving the claim to the tune of Kshs. 2,817,742. 00 for the month of September, 2018 following adjustments while entirely rejecting the rest of the claim.

9. The details of the approved claim are as follows:-PERIOD VAT REFUND CLAIM PERRETURN AMOUNT REFUNDABLE (AUDITED) APPROVED AMOUNT DISALLOWED VAT REFUND CLAIM

KSHS. KSHS. KSHS. KSHS.

July , 2018 5,452,599. 00 5,177,730. 00 5,452,599. 00

August, 2018 10,910,278. 00 10,468,812. 00 10,910,278. 00

September, 2018 3,967,974. 00 3,757,620. 00 2,817,742. 00

TOTAL 20,330,851. 00 19,404,161. 00 2,817,742. 00 16,362,877. 00 10. On 4th May, 2021, the Respondent wrote to the Appellant, purporting to revoke its ruling of 6th December, 2013 and classifying the Appellant's products as taxable.

11. The Respondent used the said letter of revocation to process the pending claims by the Appellant, and on 23rd December, 2021 the Respondent issued a VAT refund claim approval amounting to only Kshs. 2,817,742. 00 and rejecting the other amounts totaling to Kshs. 16,362,877. 00.

12. On 20th January, 2022, the Appellant objected to the Respondent's decision of 4th May, 2021 pursuant to the provisions of Section 51 of the Tax Procedures Act.

13. The Respondent issued an objection decision dated 25th February, 2022, and rejected the Appellant's letter of objection and affirmed its decision to retrospectively revoke the private ruling of 6th December, 2013 and classify the Appellant’s products which were hitherto exempt, as taxable.

14. Dissatisfied with the objection decision, the Appellant filed this Appeal on 29th March 2022.

The Appeal 15. The Appeal is premised on the following grounds sd stated in the Memorandum of Appeal dated 23rd March 2022 and filed on 29th March 2022. That:-a.The Appellant is dissatisfied with the Respondent's objection decision and the additional assessment notice dated 25th February, 2022 issued by the Respondent under the provisions of the Tax Procedures Act, 2015 in response to the Appellant's notice of objection dated 23rd January, 2022 in response to the VAT refund approval order dated 23rd December 2021. b.The Respondent, having attempted to recant its previous position, is estopped, by the provisions of Section 120 of the Evidence Act, from resiling from its rulings dated 5th August, 2003, 1st August, 2006 and 6th December, 2013 upon which the Appellant has placed reliance for numerous years.c.By retrospectively revoking the private ruling dated 6th December, 2013, the Respondent was in violation of the provisions of Article 47 of the Constitution of Kenya, 2010 as the administrative action taken was leisurely, inefficient, unlawful, unreasonable and procedurally unfair.d.The retrospective revocation of the private ruling by the Respondent is an outright violation of Section, 4 (1) of the Fair Administrative Action Act in that the substance of the impugned decision is neither expeditious, efficient, lawful, reasonable nor procedurally fair.e.The Respondent's basis for disallowing the amounts claimed as refunds following reclassification of the VAT status of the company's sales is inequitable as the said decision was drawn from a retrospective administrative action of revoking an earlier issued private ruling upon which reliance was placed by the Appellant in good faith.f.The Respondent's objection decision is immature as the dispute regarding the retrospective revocation of the private ruling issued on 6th December, 2013 is currently still under consideration by this Honourable Tribunal in TAT 547/2021 -Kenya Nut Company Limited vs. Commissioner of Domestic Taxes and the same is yet to be determined.g.A private ruling is binding on the Commissioner where the taxpayer has made complete and accurate disclosure of the transaction by virtue of the provisions of Section 58 of the Value Added Tax Act, 2013 (now repealed) and Section 65 of the Tax Procedures Act (TPA)h.The withdrawal of the private ruling by the Respondent and the decision to apply it retrospectively was arbitrary as the transaction had already occurred and VAT was not remitted to the KRA at that time.i.The Respondent's administrative action of partially approving the Appellant's refund claim while applying the rest of the claim to settle VAT now claimed as being due from products which were previously exempted, based on prior guidance from the Kenya Revenue Authority, is not only in contravention of the canons of taxation but also a grave misinterpretation of the tax laws.j.As a registered person, the Appellant is an agent of the Kenya Revenue Authority and the incidence of tax should not fall on it as a registered person. Therefore, where it legitimately did not collect VAT, it cannot be penalized years later.k.The export of exempted goods entitled the Appellant to, claim VAT refunds, from the Kenya Revenue Authority, on the input tax incurred towards export sales and it is unreasonable for the Appellant's VAT refund claims to now be reduced, so significantly, to its detriment and contrary to its legitimate expectation.l.The Respondent's objection decision dated 25th February, 2022 is unlawful to the extent that Section 68 (4) (a) of the Tax Procedures Act, 2015 expressly precludes the review of a ruling from operating retrospectively.m.It is an abuse of the Respondent's powers in executing its statutory duty to want to arbitrarily alter its position, bring to charge VAT retrospectively on the Appellant's products and deprive the Appellant of its validly lodged VAT refund claims.n.The Respondent's alleged mistake in issuing the ruling dated 6th December, 2013 is not a mutual mistake and is thus not binding on the Appellant.o.The Respondent's objection decision dated 25th February, 2022 is:i.Irrational, unreasonable, capricious and unlawful;ii.Substantially unfair and amounts to an abuse in excess of the powers and discretion conferred by statute;iii.An unlawful breach of the Appellant's legitimate expectation;iv.Not intended to secure any legitimate overriding public interest or statutory objective and is thus for an improper motive and purpose; andv.A frustration of the legislative purpose codified in Section 68 (4) (a) of the Tax Procedures Act, 2015 which expressly precludes the review of a ruling from operating retrospectively.

Appellant’s Case 16. The Appellant’s case is also premised on the following:-a.The Appellant’s Statement of Facts dated 23rd March, 2022 and filed on 29th March, 2022 together with the documents attached thereto.b.The Appellant’s written submissions dated 2nd November 2022 and filed on 3rd November 2022 together with the legal authorities attached thereto.

17. The Appellant averred that it was dissatisfied with the Respondent's objection decision and the additional assessment notice dated 25th February 2022 issued by the Respondent under the provisions of the Tax Appeals Tribunal Act, 2015 in response to the Appellant’s notice of objection dated 23rd January, 2022 in response to the VAT refund approval order dated 23rd December, 2021.

18. That the Respondent, having attempted to recant is previous position, is estopped, by the provisions of Section 120 of the Evidence Act, from resiling from its rulings dated 5th August, 2003, 1st August, 2006 and 6th December, 2013 upon which the Appellant has placed reliance for numerous years.

19. That the Respondent's basis for disallowing the amounts claimed as refunds following reclassification of the VAT status of the company's sales is inequitable as the said decision was drawn from a retrospective administrative action of revoking a private ruling upon which reliance was placed by the Appellant in good faith.

20. That the Respondent's objection decision is immature as the dispute regarding the revocation of the private ruling issued on 6th December, 2013 is still under consideration by the Tribunal in TAT 547 of 2021 which involved the same parties and facts.

21. That a private ruling is binding on the Commissioner where the taxpayer has made complete and accurate disclosure of the transaction by virtue of the provisions of Section 58 of the Value Added Tax Act, 2013 (now repealed) and Section 65 of the TPA.

22. That the withdrawal of the private ruling by the Respondent and the decision to apply it retrospectively was arbitrary as the transaction had already occurred and VAT was not collected and remitted to the Respondent at that time.

23. That the Respondent's administrative action of partially approving the Appellant's refund claim while applying the rest of the claim to settle VAT now claimed as being due from products which were previously exempted, based on prior guidance from the Respondent, is not only in contravention of the canons of taxation but also a grave misinterpretation of the tax laws.

24. That as a registered person, the Appellant is an agent of the Kenya Revenue Authority and the incidence of tax should not fall on it as a registered person. Therefore, where it legitimately did not collect VAT, it cannot be penalized years later.

25. That the export of exempted goods entitled the Appellant to claim VAT refunds, from the Respondent, on the input tax incurred towards export sales and it is unreasonable for the Appellant's VAT refund claims to now be reduced, so significantly, to its detriment and contrary to its legitimate expectation.

26. That the Respondent's objection decision dated 25th February 2022 is unlawful to the extent that Section 68(4) (a) of the Tax Procedures Act, 2015 expressly precludes the review of a ruling from operating retrospectively.

27. That it is an abuse of the Respondent's powers in executing its statutory duty to want to arbitrarily alter its position, bring to charge VAT retrospectively on the Appellant's products and deprive the Appellant of its validly lodged VAT refund claims.

28. That the Respondent's alleged mistake in issuing the ruling dated 6th December, 2013 is not a mutual mistake and is thus not binding on the Appellant.

29. The Appellant submitted that the Respondent, having attempted to recant its previous position, is estopped, by the provisions of Section 120 of the Evidence Act, from resiling from its rulings dated 5th August, 2003, 1st August, 2006 and 6th December, 2013 upon which the Appellant has placed reliance for numerous years. The said Section provides as follows;“When one person has, by his declaration, act or omission, intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his representative shall be allowed, in any suit or proceeding between himself and such person or his representative, to deny the truth of that thing."

30. That in the case of Jack Ogola Ogolla vs George Onyango Nyamor [2021] eKLR the Tribunal relying on Lord Denman CJ in the English case, Pickard v Sears 112 E.R. 179 stated as follows:-“The rule of law is clear that where one, by his words or conduct, willfully causes another to believe in the existence of a certain state of things, and induces him to act on that belief, so as to alter his own previous position, the former is precluded from averring against the latter a different state of things as existing at the time.."

31. That also, in the case of Serah Njeri Mwobi v John Kimani Njoroge [2013] eKLR the Court of Appeal held as follows:-“The doctrine of estoppel operates as a principle of law which precludes a person from asserting something contrary to what is implied by a previous action or statement of that person”.

32. That the Appellant having acted on the declaration stated in the ruling of 6th December, 2013 for all those years, the Respondent is now estopped from denying and or revoking the contents of the said ruling.

33. That the retrospective revocation of the private ruling by the Respondent is also an outright violation of Section 4 (1) of the Fair Administrative Actions Act which gives every person the right to administrative action which is expeditious, efficient, lawful, reasonable and procedurally fair.

34. That the Court of Appeal in the case of Commissioner of Income Tax v Pan African Paper Mills (E.A) Limited [2018] eKLR laid guidance on applying the law retrospectively, by stating as follows;-“We are guided by the case of Yew Bon Tew v Kenderaan Bas Mara [1982] 3 All ER 833 where the Privy Council held as follows:-‘Apart from the provisions of the interpretation statutes, there is at common law a prima facie rule of construction that a statute should not be interpreted retrospectively so as to impair an existing right or obligation unless that result is unavoidable on the language used. A statute is retrospective if it takes away or impairs a vested right acquired under existing laws, or creates a new obligation, or imposes a new duty or attaches a new disability, in regard to events already past.......23. From the foregoing, we are satisfied that Section 48 of the Finance Act was a tax incentive to attract new investments in future and was to operate prospectively and did not have a retrospective effect. Accordingly, the respondent did not qualify for refund of import duty’."

35. The Appellant submitted that the law should work prospectively, and should only be applied to the future events or transactions. In the instant case, the letter of revocation of 4th May, 2021 ought not to have affected previous transactions or actions by the Appellant, and the same (if legal), should only have affected future transactions of the Appellant in line with Section 68(4) of the Tax Procedures Act.

36. That in the case of Mary Kasiwa v Scorpio Enterprises Limited [2013]eKLR the court held that;“Retrospective laws are no doubt prima facie of questionable policy, and contrary to the general principle that legislation bit which the conduct of mankind is to be regulated ought, when introduced for the first time, to deal with future acts and ought not to change the character of past transactions carried on upon the faith of the then existing law: Accordingly the Court will not ascribe retrospective force to new laws affecting rights unless by express words or necessary implication it appears that such was the intention of the legislature ....it is a general presumption at common law and rule of statutory interpretation that statutes should not be interpreted to operate retrospectively unless there is express intention by the legislature. I take umbrage for this position in the per curiam holding in the Yew Tew Bon case (supra)."

37. The Appellant submitted that the Respondent's basis for disallowing the amounts claimed as refunds following reclassification of the VAT status of the company's sales is inequitable as the said decision was drawn from a retrospective administrative action of revoking an earlier issued private ruling upon which reliance was placed by the Appellant in good faith.

38. The Respondent submitted that there was legitimate expectation on the part of the Appellant since the private ruling of 6th December, 2013 clearly explained the anticipated VAT status of the various supplies and the understanding of the products that were declared VAT exempt.

39. That in the case of Kenya Revenue Authority vs. Export Trading Company Limited (Petition 20 of 2020) [2022] KESC 31 (KLR) (Civ) (17 June 2022) the Supreme Court upheld the emerging principle on legitimate expectation to be that;“there must be an express, clear and unambiguous promise given by a public authority; the expectation itself must be reasonable and the representation must be one which it was competent and lawful for the decision-maker to make;"

40. That there is no dispute that the Respondent had authority to issue the ruling as mandated by Section 68 (1) of the Tax Procedures Act, and by doing so, the Appellant relied on it in all its transactions from when it was issued on 6th December, 2013 to 4th May, 2021 when the Respondent sought to revoke the same. That for more than 7 years, the Appellant carried on its business fully bound and relying on the said ruling and hence the revocation of the same cannot be construed to be an error or a mistake on the part of the Respondent.

41. That it is impractical to have an error or a mis-declaration that has been implemented for more than 7 years without any question, and it is incomprehensible how the Appellant should be made to suffer the consequences of the actions of the Respondent of failing to issue a decision that conforms with the law. That through the ruling of 6th December, 2013 the Respondent gave an indication that the listed products indeed were VAT exempt. That the same Act which allows the Commissioner to withdraw its private ruling provides under Section 64 (4) that;“private ruling that has been withdrawn; shall continue to apply to a transaction by the applicant that commenced before the ruling was withdrawn;”

42. The Appellant submitted that the revoked ruling of 6th December, 2013 should apply to all the transactions of VAT refund claims that commenced before the letter of revocation of 4th May, 2021.

43. The Appellant submitted that legitimate expectation arose when the Respondent processed previous VAT claim refunds, applying the said ruling of 6th December, 2013 when the Appellant applied for VAT refund claim for the year 2019 to February, 2021.

44. That in the case of The Kenya Revenue Authority v Export Trading Company Limited (Petition 20 of 2020) [2022] KESC 31 (KLR) (Civ) (17 June 2022) (supra), the Court held as follows;“It is furthermore unacceptable to us that the respondent adopted the view that it did not matter whether there was a mis-declaration, under- declaration or a system error and that the appellant is entitled to demand for any levies discovered following the carrying out of a post-audit at any given time. To our minds, anyone who decides anything affecting the right or interest of another person if the person, body or authority against whom it is claimed exercised a quasi-judicial function of function that is likely to infringe on their right to fair administrative action, is entitled to remedies for judicial review. For these reasons, we find no difficulty in upholding the judgement of the Court of Appeal."

45. The Appellant submitted that the Respondent has continued to issue immature rejection decisions relating to various VAT refund claims submitted by the Appellant in 2018 even after this matter was filed before the Tribunal in total disregard to the fact that the revoked ruling of 6th December 2013, is under consideration before the Tribunal.

46. That the Appellant has filed subsequent appeals before that Tribunal being TAT 547 of 2021, TAT 575 of 2022 and TAT 278 of 2022 all against the Respondent, challenging the application of the decision of 4th May 2021 which revoked the decision of 6th December, 2013.

Appellant’s Prayers. 47. The Appellant prays that the Tribunal:-a.Allows the Appeal,b.Sets aside the Respondent’s objection decision dated 25th February 2022. c.Awards the Appellant the costs of this Appeal.

Respondent’s Case 48. The Respondent’s case is premised on the hereunder filed documents:-a.The Respondent’s Statement of Facts dated 28th April 2022 and filed on the same date and the attachments thereof.b.The Respondent’s written submissions dated and filed on 14th November 2022 together with the legal authorities attached therewith.

49. In response to the Appeal, the Respondent replied to issues raised by the Appellant as follows:-a.Respondent is estopped by provisions of section 120 of the Evidence Act from resiling from its rulings dated 5th August 2003, 1st August 2006 and 6th December 2013 upon which the Appellant has placed reliance for numerous years.

50. In response to this ground of Appeal, the Respondent averred that Section 5(2) of the Kenya Revenue Authority Act obligates it to enforce the written provisions of the Law. That Section 5(2) of KRA Act states that;“In the performance of its functions, the Authority is mandated to:-a). Administer and enforce the provisions of the written laws, set out in part II of the First Scheduled relating to revenue and for that purpose, to assess, collect and account for all revenues in accordance with those laws.b). to advise the Government on all matters relating to the administration and collection of revenue under the written laws”.

51. The Respondent stated that the alleged ruling by the Officer is inconsistent with the law and the same cannot be binding on the Respondent.

52. The Respondent averred that the ruling was issued contra statute hence the reason the Respondent did not adhere to it.

53. The Respondent further averred that it can only enforce the law and not a letter drafted by one of its officers otherwise it would amount to its officers altering the law as and when they please through simple letters.

54. The Respondent averred that it is within the law to correct an erroneous interpretation of any law that it administers and advise a Taxpayer of the correct position as it did in its letter of May 2021.

55. The Respondent averred that Section 67(5) of the Tax Procedures Act is clear that a private ruling contains the Commissioner’s opinion;“A private ruling shall set out the Commissioner's opinion on the question raised in the ruling and is not a decision of the Commissioner for the purposes of this Act or the Tax Appeals Tribunal Act, 2013 (No. 40 of 2013)”.

56. That it is clear that the ruling contains Commissioner's opinion and not the law.

57. The Respondent maintained that there is no estoppel against statute and that legitimate expectation cannot be contrary to statutory provisions of the law.b.The Respondent avers that it did not violate Article 47 of the Constitution of Kenya and Section 4(1) of the Fair Administrative Action Act as alleged by the Appellant.

58. The Respondent averred that it followed the proper procedure in revoking the private ruling as it notified the Appellant in writing and in a timely manner.

59. Further, the Respondent averred that it is within the law for it to correct an erroneous interpretation of any law that it administers and advise a taxpayer of the correct position as it did in its letter of 4th May 2021. c.The objection decision is immature as the dispute regarding the retrospective revocation of the private ruling issued on 6th December 2013 is still under consideration by the Tribunal.

60. The Respondent averred that the objection decision was not premature and was in response to the Appellant's objection on the refund order the Respondent had issued.

61. That Section 51(11) of the TPA requires the Respondent to issue its objection decision within 60 days from the date of receipt of the objection.

62. That the Appellant lodged an objection on 20th January 2022 objecting the decision of the Commissioner to disallow part of its claim for refund. That the Respondent issued its decision rejecting the objection on 22nd February 2022 within the statutory timelines.

63. The Respondent averred that according to Section 51(11) of the TPA provided the Appellant had filed an objection, the Respondent must issue an objection decision.

64. The Respondent averred that the Appellant cannot raise the issue of legitimate expectation where itsreliance is based on a process that was contra statute.

65. The Respondent averred that legitimate expectation must be anchored on the law and any action or document that is contra statute is void ab initio.d.The Private ruling is binding on the Commissioner where the Taxpayer has made complete and accurate disclosure of the transaction by virtue of S. 58 of VAT Act.

66. The Respondent submitted that contrary to the Appellant's allegations, the Appellant did not make material disclosure and correct description of its products. That in the application dated 30th October 2013, the Appellant gave wrong description of some of the products leading to misclassification of the products.

67. That the information was brought to the Appellant’s attention and hence the ruling cannot be binding.

68. The Respondent submitted that further, in August 2018, the Appellant supplied Thika Coffee Mills with Coffee Baren which sale was treated as zero rated and alleged that it was an auction sale at Nairobi Coffee Exchange but failed to provide any documentation to support the assertion.e.The Withdrawal of the private ruling and applying it retrospectively was arbitrary since the transactions already took place and VAT was not remitted to KRA at the time.

69. The Respondent submitted that contrary to the Appellant's allegations, Section 5(2) of the Kenya Revenue Authority Act obligates it to enforce the written provisions of the law. That the Section states that:-“In the performance of its functions, the Authority it mandated tod)Administer and enforce the provisions of the written laws, set out in part II of the First Schedule relating to revenue and for that purpose, to assess, collect and account for all revenues in accordance with those laws.e)to advise the Government on all matters relating to the administration and collection of revenue under the written laws.”

70. The Respondent submitted that provided the alleged ruling by the Officer is inconsistent with the law, the same cannot be binding on the Respondent.

71. The Respondent averred that the ruling was issued contra statute, hence the reason the Respondent did not adhere thereto.

72. The Respondent averred that the honey coated nuts did not fall under Chapter 8 of the Harmonized system of classifying goods but were properly classified under chapter 20. f.The Commissioner’s action contravened canons of taxation by partially approving a claim for refund and utilizing the same to settle VAT that is allegedly due from products which were previously exempt.

73. The Respondent averred that it has a duty to collect all the taxes that are due and owing.

74. That contrary to the Appellant's assertions that it contravened canons of taxation by utilizing funds from the refund to settle Appellant's VAT liability, the Respondent maintained that it cannot release funds to the Appellant when its records clearly indicate that the Appellant owes taxes which are collectable.

75. The Respondent averred that VAT is an agency tax which is collected by the Appellant on behalf of Respondent and the same must be collected before processing any refund.g.The Taxpayer should not be penalized years later as an agent in instances where they did not collect taxes.

76. The Respondent averred that the law is clear on the Applicable tariffs and the Appellant should not use the ruling as a scapegoat for failing to execute its role as an Agent.

77. That further, ignorance of the law is not a defense as it is presumed that everyone knows the law and the information is in the public domain.h.Export of exempted goods entitled the taxpayer to claim VAT refunds on the input tax incurred towards export sales and therefore the same should not be reduced to its detriment.

78. The Respondent averred that there is no contention in respect to exported goods since the VAT Act is clear in the 2nd Schedule where it zero rates exported goods and services.

79. That the exported services were taken into account when computing the refunds due to the Appellant.

80. In its submissions, the Respondent relied on the following cases:-a.Republic v Kenya Revenue Authority Ex-Parte Bata Shoe Company (Kenya) Limited [2014] eKLR,b.Niazons (K) Ltd. v China Road & Bridge Corporation (K) Civil Appeal No. 187 of 1999. c.Tarmal Industries Ltd v Commissioner of Customs and Excise and Commissioner of Customs and Others v Amit Ashok Doshi & 2 Others Mombasa Civil Appeal No. 157 of 2007. d.Communication Commission of Kenya & 5 others v Royal Media Services & 5 others, S. C. Petition Nos. 14, 14 A, 14 B and 14 C of 2014. e.Republic v Kenya Revenue Authority Ex-Parte: Cosmos Limited [2016] eKLR.f.Commissioner of Customs and Others v Amit Ashok Doshi and 2 Others, Msa Civil Appeal No. 157 of 2007.

Respondent’s Prayers 81. The Respondent made the following prayers to the Tribunal:-a.The Appeal be dismissed with costs.b.The Respondent’s objection decision be upheld and the principal taxes, interest and penalties be found due and payable as per the objection decision rendered by the Respondent.

Issues for Determination 82. Having reviewed the pleadings, documentation and the submissions of the parties, the Tribunal is of the respectful view that there are three main issues for determination. The issues are:-a.Whether the Respondent is estopped from denying the contents of the private ruling of 6th December 2013. b.Whether the Respondent created legitimate expectation by issuing the ruling of 6th December 2013. c.Whether the Respondent is justified to retrospectively demand VAT tax from the Appellant.

Analyisis And Findings 83. Having established the three issues for determination, the Tribunal will proceed to analyse them as hereunder:

a. Whether the Respondent is estopped from denying the contents of the private ruling of 6th December, 2013. 84. Estoppel is a principle of law by which a person is bound by the representation made by him or arising out his conduct. The Tribunal has observed the Appellant’s vigilance where at all times it sought guidance on the applicable tariff classification and VAT rates. This is evidenced by the letters the Appellant wrote to the Respondent to seek such guidance over the years.

85. The Respondent alleged that the Appellant disclosed incorrect information when seeking for advice from it. However, the Respondent neither brought to the attention of the Tribunal the alleged incorrect information the Appellant is said to have provided nor demonstrated any change in character of the products of the Appellant to justify reclassification.

86. A scrutiny of the Respondent’s rulings indicate that it responded to specific products as requested in the Appellant’s letters. It is the Tribunal’s considered view that the Respondent has the competence and legal backing to make a private ruling in instances where a taxpayer has made a complete and accurate disclosure of the transactions. For it to issue such rulings, it is expected that it has satisfied itself as to all material facts and the law.

87. The Tribunal notes that Section 65 (4) of the Tax Procedures Act, 2015 binds the Respondent to its ruling where the Appellant has made accurate disclosures. It provides as follows:“If the taxpayer has made a complete and accurate disclosures of the transaction in relation to an application for a private ruling and the transaction has proceeded in all material aspects as described in the application, the private ruling shall be binding on the Commissioner”.

88. The Respondent failed to substantiate to the satisfaction of the Tribunal, its allegation of receiving incorrect information from the Appellant which informed its revocation of the ruling of 6th December, 2013.

89. The Tribunal relies on the case of Serah Njeri Mwobi vs John Kimani Njoroge (2013) eKLR, where the Court of Appeal held that: -“The doctrine of estoppel operates as a principle of law which precludes a person from asserting something contrary to what is implied by a previous action or statement of that person”

90. The Tribunal also relies on the case of Republic vs. Kenya Revenue Authority Ex-Parte M-Kopa Kenya Limited [2008] where Justice Odunga held that:-“a validly issued private ruling creates a legitimate expectation, and a legitimate expectation can only be lawfully withdrawn where rational grounds of the intention to withdraw the same have been communicated to the beneficiary of the expectation in clear terms, and he has been given an opportunity to comment thereon.”

91. It is the Tribunal’s view that in failing to avail proof of the incorrect information it alleges the Appellant provided prior to the making of the private ruling, the Respondent is estopped from denying the contents of the ruling of 6th December, 2013.

b. Whether the Respondent created legitimate expectation by issuing the private ruling of 6th December, 2013. 92. The Tribunal observes that the Appellant sought for guidance on the tariff classification and VAT treatment of its products, which the Respondent duly responded to. A perusal of all the Appellant’s letters indicate that the products description was given and which the Respondent, using its competencies, accordingly rendered its ruling.

93. The VAT Act was repealed and made way to the VAT Act, 2013, a fact the Respondent was fully aware of, it is surprising that it took almost 8 years for the Respondent to claim at paragraph 3 of its letter dated 4th May 2021 that the ruling of 6th December 2013 was contrary to the express provisions of the law and it amounts to an illegality.

94. In the absence of proof from the Respondent that the Appellant misled it, it can only be construed that the one who committed the illegality should be the Respondent. Penalizing the Appellant would be contrary to the rules of natural justice and fairness.

95. The Tribunal’s perusal of the private ruling indicates that the Respondent clearly explained the status of the Appellant’s various goods, and for the almost 8 years, the Appellant in relying on the ruling, did not collect VAT. It cannot therefore be penalized as the “mistake” if any, was the Respondent’s.

96. The Appellant argued that the Respondent created legitimate expectation by its ruling of 6th December, 2013 which the Appellant relied on for almost 8 years in its business transactions. Therefore, where it legitimately did not collect VAT, it cannot be penalized years later.

97. The Tribunal relies on the Supreme Court of Kenya decision in Kenya Revenue Authority v Export Trading Company Ltd [2022] at page 21, paragraph 51 which relied on the definition of De Smith Woolf & Jowell “Judicial Review of Administrative Action” 6th Edition, Sweet & Maxwel page 609 which states as follows:-“A legitimate expectation arises where a person responsible for making a decision has induced in someone a reasonable expectation that he will receive or retain a benefit of advantage…. legitimate expectation would arise when a body, by representation or by past practice, has aroused an expectation that is within its power to fulfil”

98. The Tribunal also relies on the ruling in the Court of Appeal in Kenya Revenue Authority and other v Darasa Investments Limited MLD Civil Appeal No.24 of 2018 eKLR which cited with approval, the following passage in Rolland Papworth and Hughes, Constitutional and Administration Law, Text with materials (4th Ed) page 583. “Legitimate expectation refers to the principle of good administration or administrative fairness that, if a public authority leads a person or body to expect that the public authority will in the future, continue to act in a way either which it has regularly (or even always) acted in the past or on the basis of a past promise or statement which represents how it purposes to act, then prima facie, the public authority should not without an overriding reason in the public interest, negate from the representation and unilaterally cancel the expectation of the person or body that the state of affairs will continue. This is of particular importance if an individual has acted on the representation to his or her detriment”

99. The Respondent alleged that it revoked the private ruling of 6th December, 2013 because the Appellant had provided incorrect information yet it has not availed proof of its allegation. Section 107(1) of the Evidence Act Cap 80 stipulates that one has to prove any allegation if it wishes others to rely on it. The Section provides as follows:“Whoever desires any court to give judgement as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist”

100. The Tribunal has observed that the Appellant, by conduct, sought to always do the correct thing in matters of tax by always when necessary writing to the Respondent for guidance. For the Respondent to issue a ruling which has the effect of receiving less tax revenue, it is expected of it to carry out due diligence. It cannot therefore fault the Appellant for its mistakes which are not mutual.

101. Consequently, the Tribunal finds that the Respondent created legitimate expectation by its private ruling of 6th December, 2013.

c. Whether the Respondent is justified to retrospectively demand VAT from the Appellant. 102. The Tribunal notes that Section 68 (4) of the Tax Procedures Act prescribes the treatment of a private ruling that has been withdrawn. It provides as follows:-“A private ruling that has been withdrawn:a.Shall continue to apply to a transaction by the applicant commenced before the ruling was withdrawn; andb.Shall not apply to a transaction of the applicant that commenced after the ruling was withdrawn to the extent the ruling is withdrawn”

103. The import of the above Section is that the law should work prospectively and should only apply to the future events or transactions. For a period of 8 years, the Appellant relied on the private ruling of 6th December, 2013. The revocation of the ruling on 4th May, 2021 ought not to have affected previous transactions by dint of Section 68 (4) of the Tax Procedures Act.

104. The Tribunal relies on the case of Mary Kasiwa v Scorpio Enterprises Limited [2013] eKLR where the Court held that:-“Retrospective laws are no doubt prima facie of questionable policy, and contrary to the general principle that legislation by which the conduct of mankind is to be regulated ought, when introduced for the first time, to deal with future acts and ought not to change the character of past transactions carried on upon the faith of the then existing law. Accordingly, the Court will not ascribe retrospective force to new laws affecting rights unless express words or necessary implication it appears that such was the intention of the legislative……it is a general presumption of common law and rule of statutory interpretation that statutes should not be interpreted to operate retrospectively unless there is express intention by the legislative. I take umbrage for this position in the per curium holding in Yew Tew Ben case (Supra)”

105. In light of the above, the Tribunal finds that the Respondent was not justified to retrospectively demand VAT from the Appellant. The Tribunal reiterates its decision in TAT No. 547 of 2021, between it and the Respondent, as it finds no basis whatsoever to depart from its previous decision.

Final Decision 106. The upshot of the above is that this Appeal is merited and succeeds. Consequently, the Tribunal makes the following Orders: -a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 25th February 2022 be and is hereby set aside.c.The Respondent to process the disallowed VAT refund claim amounting to Kshs. 16,362,877. 00 within 90 days of this judgement.d.Each party to bear its own costs.

107. It is so ordered.

DATED* AND DELIVERED AT NAIROBI ON THIS 9TH DAY OF JUNE, 2023. .......................................ERIC N. WAFULACHAIRMAN.......................................CYNTHIA B. MAYAKA ABRAHAM K. KIPROTICHMEMBER MEMBER.......................................GRACE MUKUHA JEPHTHAH NJAGIMEMBER MEMBER