[2023] KETAT 332 (KLR)

KLM Royal Dutch Airlines v Commissioner of Domestic Taxes (Tax Appeal 842 of 2022) [2023] KETAT 332 (KLR) (2 June 2023) (Judgment)

Neutral citation: [2023] KETAT 332 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 842 of 2022

RM Mutuma, Chair, EN Njeru, D.K Ngala, EK Cheluget & RO Oluoch, Members

June 2, 2023

Between

Klm Royal Dutch Airlines

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is legally known as Royal Aviation Company Inc. (Koninklike Lutchvaart Maatschappij) and is the flag carrier of the Netherlands with its headquarter in Armsterdam.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5(1) of the Act, the Kenya Revenue Authority (the Authority) is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its function under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Appellant lodged an online VAT refund claim of Kshs 2,715,190. 71 for the month of March 2017. This Appeal emanates from the Tribunal’s Ruling issued on 10th September, 2021 where the Tribunal directed the Respondent to verify the Appellant’s refund claims based on information provided by the Appellant and to communicate its decision by either paying the outstanding refund or giving reasons why the same cannot be paid.

4. The Respondent reviewed the Appellant’s claim and vide its letter dated 29th July, 2022, issued its Objection decision rejecting the Appellant’s VAT refund claim amounting to Kshs 2,712,190. 71.

5. Being dissatisfied with the Respondent’s decision, the Appellant filed its Notice of Appeal on 1st August, 2022 and proceeded to lodge its Memorandum of Appeal and Statement of Facts dated 11th August, 2022 and filed on 12th August, 2022.

The Appeal 6. This Appeal is premised on the following grounds:a.That the Respondent erred in rejecting the March 2017 refund claim contrary to conditions set under Section 17 (5)(a) of the VAT Act, 2013. b.That the Respondent erred in rejecting the March 2017 refund claim on the basis of utilization against a non-existent VAT liability in the month of April, 2017. c.That the Respondent violated the Appellant’s right to fair administrative action under Article 47 of the Constitution of Kenya in failing to acknowledge and rectify the non-existent VAT liability in the month of April 2017. d.That the Respondent wrongfully ignored the recommendations under the OECD Guidelines on neutrality of VAT before rejecting the refund claim for March 2017. e.That the Respondent erred in rejecting the March 2017 refund claim since it is legitimately expected to qualify for refund based on the uncontested and absolute zero-rated status of the Appellant’s business.f.That the Respondent’s decision is subjective, punitive and unequitable contrary to generally accepted canons of taxation.

7. The Appellant prays that the Tribunal allows the Appeal; anda.Uphold the objection filed by the Appellant;b.Sets aside and annuls the Objection Decision by the Respondent; andc.Makes such other orders that it may deem appropriate.

The Appellant’s Case 8. On the issue of criteria for refund under the VAT Act, the Appellant averred that there are two main conditions set by the VAT Act that are relevant to the approval of the Appellant’s refund claim for the month of March, 2017 which conditions are set out under Section 17 (5) of the VAT Act 2013 and states as follows:“Where the amount of input tax that may be deducted by a registered person under subsection (1) in respect of a tax period exceeds the amount of output tax due for the period, the amount of excess shall be carried forward as input tax deductible in the next tax periods provided that any such excess shall be paid to the registered person by the commissioner where –a.The Commissioner is satisfied that such excess arises from making zero rated supplies;b.The registered person lodged the claim for the refund of the excess tax within twelve months from the date the tax becomes due and payable”1. Following the provision above, the Appellant asserted that its business is zero-rated and the month of March was no exception, further that the refund claim was lodged within the twelve months from the dates the inputs became due and payable. It argued further that these were the only conditions that the Respondent was supposed to satisfy itself before processing or approving a VAT refund claim.2. The Appellant contended that it was only the actual refund payment that can thereafter be utilized or set-off against other tax arrears that a taxpayer owes the Respondent, hence the Appellant should not be expected to have any principal tax liability relating to VAT since its business has always bear zero-rated. This therefore disapproves the Respondent’s claim that a tax liability existed in the month of April 2017 that was offset against the March 2017 refund claim.3. The Appellant contended that the reason presented in the Respondent’s Rejection Decision dated 27th June, 2022, that a full utilization of the available credits had occurred after amendment of the April, 2017 return is economical with facts and infringes on the Appellant’s Constitutional right to fair administrative action. The action was therefore unfair, unreasonable, in bad faith and violates the Appellant’s legitimate expectation.4. The Appellant averred that it encountered a challenge in filing its VAT return for the month of November 2016 arising from an i-Tax system anomaly which was explained vide the Appellant’s letter to the Respondent dated 17th March, 2017 followed by several meetings between the parties to resolve the same.5. The Appellant averred that several reminder letters were done dated 20th July, 2017, 26thJanuary 2018, 29th May, 2018 and 18th December 2018. During the meetings, specifically after the letter of December 2018, the Appellant was instructed by a supervisor working for the Respondent one, George Murehia to amend the April, 2017 return in order to enable processing of the March, 2017 refund claim. The Respondent’s failure to resolve the system’s anomaly compelled the Appellant to file this Appeal.6. It was the Appellant’s contention that the OECD guidelines sufficiently recommend the refund of input VAT incurred by foreign businesses like the Appellant’s and that these guidelines have been sufficiently embraced in several cases involving the Respondent touching on the interpretation of VAT laws. The basic principles of VAT are broadly same across jurisdictions that impose VAT where they seek to ensure that foreign businesses do not incur irrecoverable VAT.

The Respondent’s Case 15. In response to the Appellant’s Appeal, the Respondent through its Statement of Facts filed and dated 9th September, 2022, has addressed each ground stating as follows: -a.That Section 24 of the Tax Procedures Act (TPA), 2015 allows a taxpayer to submit tax returns in the approved form and manner prescribed by the Respondent, and that the Respondent is not bound by the information provided therein and can assess for additional taxes based on any other available information.b.That although the Appellant may initially have been entitled to a tax benefit in terms of a tax refund for the month of March, 2017, the fact that it made amendments to its returns, the refunds were spent and are now not payable.c.That the allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts unless where in agreement with the Respondent, are unfounded in law and not supported by evidence.d.That it reiterates that the Appellant failed to discharge its burden of proof in proving that the Respondent’s tax decision is incorrect as per the provisions of Section 56(1) of TPA.e.That the confirmed Assessment is proper and the same should be upheld.

16. The Respondent prays that this Tribunal do find;f.That the Objection Decision issued on 29th July, 2022 rejecting the VAT refund claim for the month of March, 2017 amounting to Kshs 2,715, 190. 71 be found to be valid, proper in law and to be upheld.g.That this Appeal be dismissed with costs to the Respondent as the same lacks merit.

Submissions of the parties 17. It its Written Submissions dated 3rd February, 2023 and filed on 7th February 2023, the Appellant has submitted on two issues: -a.Whether there is contributory negligence on the part of the Appellant that should justify the Respondent’s refund decision and absolve it from its own system anomaly.

18. The Appellant submitted that the Respondent’s allegation that the tax liability for April 2017 which it offset against the excess credit for March 2017 was a creation of the Appellant after amending its original return and how the Respondent demonstrated this alleged contributory negligence falls short of the basic tenet of contributory negligence under case law.

19. In arguing the case of contributory negligence, the Appellant cited a ruling in the case of Jones V Livox Quarries Limited 1952 2 Q B 608 where Lord Denning ruled that:-“A person is guilty of contributory negligence if he ought reasonably to have foreseen that, if he did not act as a reasonable prudent man he might hurt himself and in his reckonings he must take into account the possibility of others being careless”.

20. The Appellant therefore submitted that arising from the holding in the above case, the Respondent ought to prove the following in its allegation of contributory negligence on the part of the Appellant;i.the Appellant ought to have reasonably foreseen that its failure to act as a reasonable prudent man might hurt it.ii.the Appellant must consider the possibility of others being carelessiii.the fact that the injury or accident was essentially caused by the Appellant’s negligence or was consistent only and strictly with the presence of Appellant’s negligence.

21. The Appellant submitted that it is in fact the Respondent’s system anomaly that was the root cause of the erroneous tax liability for April 2017 and that this was caused by an instruction from the Respondent’s officer who ought to have reasonably foreseen that his instructions would lead to injury as the owners of the i-Tax system.b.Whether the Respondent approached the case and the Tribunal with unclean hands and violated the Appellants right to fair administrative action under Article 47 of the Constitution of Kenya.

22. It was that Appellant’s submission that the Respondent is being mischievous by claiming that the Appellant failed to provide evidence that there never existed any tax liability in the month of April, yet the Appellant kept on reminding the Respondent of its System anomaly. The Respondent’s silence on the issue of system anomaly begs the question of whether the Respondent is coming to the Tribunal with clean hands. The Appellant submitted further that the doctrine of unclean hands requires the court to deny equitable relief to a party who has violated good faith with respect to the subject of the claim.

23. It was the Appellant’s assertion that the Respondent is well aware of its system anomaly that caused the April 2017 tax liability but has chosen to take refuge in a misguided action against the Appellant to justify a rejection of refund for March 2017 even after conceding to the fact that there was excess credit in the Appellant’s return for March 2017 as well as the original return for April 2017. The Appellant submitted that the Respondent was therefore approaching the Tribunal with unclean hands by seeking to uphold its rejection decision.

24. The Appellant submitted that the Respondent’s mischief also infringes on the Appellant’s Constitutional right to fair administrative action under Article 47 and Section 7 of Fair Administrative Actions Act as it is procedurally unfair, unreasonable and in violation of the Appellant’s legitimate expectation.

25. On its part, the Respondent, through its Written Submissions dated 17th January, 2023 and filed on 26th January, 2023 has submitted on one issue.c.Whether the Respondent was justified in disallowing the Appellant’s refund application for the month of March, 2017

26. The Respondent submitted that for an application for refund to be allowed, the same should be in line with the provisions of Section 47 of the TPA on refunds as read with Section 17(5) of the VAT. Further that in the Appeal herein, whereas it is not in dispute that the Appellant had made claim for refund for the month of March 2017 which was disallowed, refund claims for the month of November and December 2016 were allowed.

27. The Respondent contended that despite the Appellant’s claims that refund claims for the month of March 2017 is similar to those of November and December 2016, the point of departure is that for the month of March 2017, the refunds could not be paid due to the following reasons:i.The Appellant had amended its April 2017 VAT returns upwards and reduced the tax due and payable by Kshs 20,817,179. 01 as at December, 2017. ii.The effect of the amendment is that the overall position of the return for the month of April 2017 is a debit of Kshs 16, 306, 901. 06. iii.Pursuant to the provisions of Section 47 of TPA, a review of the Applicant’s returns show that the Appellant had made amendments to its returns which then utilized the refunds that were due and payable for the March, 2017.

28. The Respondent invited the Tribunal to take note of the following effect upon the Appellant amending the April, 2017 return;a.As per the Appellant’s April, 2017 return, the credit carried forward was Kshs 4,510,844. 27b.The original credits amount was subsequently reduced to Kshs 3,575,722. 05 as per the Amended return for the month of April.c.The credit of Kshs 3,579,722. 05 was utilized to settle the amended VAT tax of an equal sum, Kshs 3,579,722. 05.

29. The Respondent submitted that contrary to the second ground of Appeal, the Appellant indeed made amendments which then utilized the existing overpaid taxes as demonstrated by the extracts of returns from the Appellant’s i-Tax ledgers for the month of April, 2017. The Respondent submitted further that as guided by the provisions of Section 17 of the VAT Act, it correctly interpreted the tax law and upon identification of taxes which were due and payable for the month of April,2017 the excess taxes that had been paid for the month of March 2017 were utilized without requesting the Appellant to pay for the same.

30. The Respondent cited the holding in the case of Cape Brandy Syndicate vs Inland Revenue Commissioners (1920) 1 KB 64 where it was stated at page 240 that:-“… In a taking Act, one has to look merely at what is clearly said. There is no room for intendment as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used….if a person sought to be taxed within the letter of the law he must be taxed; however great the hardship may appear to the judicial mind to be. On the other hand, if the crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.”

31. The Respondent submitted further that the Appellant failed to provide any evidence before the Respondent and the Tribunal to prove that there in fact never existed any liabilities for the month of April 2017 as claimed and as such the claim remains as an averment without evidence. To buttress its argument, the Respondent referred to the observation in the case of Trust Bank Limited vs Paramount Universal Bank Limited and 2 others (2009) eKLR where it was observed that: -“It is trite that where a party fails to call evidence in support of its case, the party’s pleadings remain mere statements of fact since in doing so the party fails to substantiate its pleadings.”

32. The Respondent submitted that in utilizing the overpaid taxes, it was exercising its statutory mandate which is collection of taxes due and owing in accordance with the set tax laws, which is the VAT Act. Further that it exercised this authority which was not arbitrary, in bad faith, bias or discriminatory in disallowing the refunds claimed by the Appellant.

33. The Respondent stated that in determining whether to pay the refunds that had been claimed, it relied on information that was available to it and more specifically the returns made by the Appellant in its i-Tax returns which only the Appellant can make such returns. The Respondent therefore submitted that the Appellant failed to demonstrate that the decision of the Respondent was illegal, irrational and not anchored on the law and as such the Appellant’s prayer seeking to have the Respondent’s decision issued on 29th July, 2022 be set aside must fail.

34. It was the Respondent’s submission that having conducted itself according to the law in utilizing the taxes which were due and owing for the month of April, 2017 the Appellant’s fair administrative right were not infringed in any way, and in the same way the Appellant’s legitimate expectation was not infringed for reasons that the Respondent is empowered by the law to utilize any overpaid taxes for any subsequent taxes that become due and owing as was the case in the appeal herein.

35. On the issue of the OECD Guidelines as argued by the Appellant, the Respondent stated that these guidelines are just recommendations and the applicable statute on issue of VAT is the VAT Act which the Respondent based its decision on.

36. In conclusion, the Respondent submitted that it was justified in disallowing the Appellant refund claim for the month of March 2017 and that its decision was not subjective as alleged by the Appellant. That this is because the refunds for the months of November and December 2016 were found to be due and payable and the same paid accordingly to the law. However, for the month of March 2017, the same was not paid as there was a tax liability that was found to be due and owing pursuant to the amendment to the returns by the Appellant for the month of April 2017.

Issues for Determination 37. Having considered the pleadings and the submissions of the parties and the documentation availed, the Tribunal is of the considered view that this Appeal raises one issue for its determination.Whether the Appellant’s refunds application for the month of March 2017 is payable.

Analysis and findings 38. The Tribunal will now proceed to analyse the said issue as herein under.Whether the Appellant’s refund application for the month of March 2017 is payable.

39. The Appellant had contended that due to the system anomaly in the Respondent’s i-Tax system it experienced challenges in lodging its VAT returnss for the months of November and December 2016, March 2017. Out of these three claims the one for March 2017 could not be processed due to the persisting system anomaly. It contended further that on the advice of the Respondent’s officer, it amended its April 2017 so as to enable processing of the refund claim. However, the amendment failed to resolve the issue, instead it created a tax position which the Respondent offset with the credit claim.

40. The Respondent on the other had argued that whereas it was not in dispute that the Appellant had made a refund claim for March 2017 that was disallowed, the refund claims for the months of November 2016 and December 2016 were allowed. The point of departure was that for the month of March 2017 the Appellant’s amendment for the April VAT return upward created a tax due position and the refund claim was therefore used to offset.

41. It is worth noting that the Appellant’s services are zero-rated as per the Second Schedule to the Value Added Tax Act as it is in the business of transportation of passengers by air carrier on international flights as per Section 7 of the VAT Act which provides:“(1)Where a registered person supplies goods or services and the supply is zero-rated, no tax shall be charged on the supply, but it shall, in all other respects be treated as a taxable supply.(2)A supply or importation of goods or services shall be zero-rated under this section if the goods or services are of the description for the time being specified in the Second Schedule.”

42. Section 17(5) (a)(d) of the VAT Act also sets out conditions to be fulfilled when making an input VAT refund claim. It provides as follows-“Where the amount of input tax that may be deducted by a registered person under subsection (1) in respect of a tax period exceeds the amount of output tax due for the period, the amount of the excess shall be carried forward as input tax deductible in the next tax period. Provided that any such excess shall be paid to the registered person by the Commissioner where –a)Such excess arises from making zero-rated supplies; or(d)The registered person lodges the claim for the refund of the excess tax within twenty four months from the date the tax becomes due and payable”

43. The Tribunal has been made aware from the Appellant’s pleadings of the system anomaly in the Respondent’s i-Tax system that made it impossible to process the Appellant’s request. The original return for the month of March 2017 was filed on 20th April 2017 declaring an excess input tax of Kshs 2,715,190. 71. However, the Appellant’s efforts to file the online refund claim was not successful. The Tribunal has sighted the several correspondence from the Appellant to the Respondent seeking resolution of the system anomaly. This was done vide letters dated 17th March, 2017, 20th July,2017,25th January 2018, 29th May 2018 and 18th December, 2018.

44. The Appellant has averred that it was advised by one of the Respondent’s officers in one of the several meetings, to amend the April 2017 returns to facilitate processing of the March 2017 refund claim application, an allegation the Respondent has not refuted. Further the said suggestion to amend the April 2017 return to facilitate the refund claim is not supported by any statute.

45. From the pleadings and submissions of the parties, it is evident that the Appellant fulfilled the conditions of Section 17(5)(a)(b) of the VAT, as it offered zero rated services as per Second Schedule of the VAT Act. Further, that the i-Tax system anomaly and the advice given by the Respondent’s officer have not been refuted by the Respondent and that the same advice to amend the April 2017 returns in order to facilitate the refund claim is not anchored on any law. The Tribunal has noted that the Appellant persistently and consistently pursued the resolution of the matter vide its several letter, which the Respondent failed to action on. It would be against the principle of justice and fairness for the Respondent to purport to offer a solution then turn around and reject the Appellant’s request.

46. In view of the foregoing, the Tribunal finds that the Appellant’s refund claim for the month of March 2017 is payable.

Final Decision 47. The upshot of the above is that the Appeal is merited and the Tribunal accordingly proceeds to make the following final Orders:-a.The Appeal be and is hereby allowed.b.The Respondents Objection decision dated 29th July, 2022 be and is hereby set asidec.The Respondent to process and effect the refund claim on the part of the Appellant within Ninety(90) days of the date of delivery of this Judgment.d.Each party to bear its costs.

48. Orders accordingly.

DATED and DELIVERED at NAIROBI this 02nd day of June, 2023. ROBERT M. MUTUMA - CHAIRPERSONDELILAH K. NGALA - MEMBERELISHAH N. NJERU - MEMBEREDWIN K. CHELUGET - MEMBERRODNEY O. OLUOCH - MEMBER