[2024] KETAT 496 (KLR)

Majorel Kenya Ltd v Commissioner of Legal Services & Board Coordination (Tax Appeal 390 of 2023) [2024] KETAT 496 (KLR) (23 April 2024) (Judgment)

Neutral citation: [2024] KETAT 496 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 390 of 2023

Grace Mukuha, Chair, E Komolo, Jephthah Njagi, W Ongeti & G Ogaga, Members

April 23, 2024

Between

Majorel Kenya Ltd

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya and whose primary business is in business process outsourcing including providing customer support to external clients.

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 is an agency of the Government for the collection and receipt of all revenue.

3. The Appellant lodged a claim of relief of Value Added Tax (VAT) incurred for making exempt supplies which became taxable, amounting to a tax of Kshs. 14,717,713. 19 for the period January 2022 to June 2022 in line with Section 18(1)(a) of the VAT Act 2013

4. On 16th September 2022, the Respondent rejected the Appellant’s claim on the basis that the input tax incurred is not trading stock and does not qualify for inventory relief as per Regulation 7(1) of the VAT Regulations, 2017

5. The Appellant objected to the decision vide its notice of objection received by the Respondent on 21st November 2022.

6. On 7th December 2022, the Respondent issued its Objection decision rejecting the Appellant’s claim of relief of input tax amounting to Kshs. 14,718,104. 00

7. Aggrieved, the Appellant sought leave of the Tribunal to file a late Appeal, and subsequently filed the instant Appeal vide a Notice of Appeal dated 16th June 2023 and filed on the same date.

The Appeal 8. The Appeal is premised on the Appellant’s Memorandum of Appeal dated 16th June 2023, and filed on the same date stating the following grounds: -a.That the Respondent erred in rejecting the claim for relief of pre-change input tax relating to the period January to June 2022 by misinterpreting the provisions of Section 18 of the VAT Act and Regulation 7 of the VAT Regulations, 2017. b.That the Respondent wrongfully applied the provisions of a subsidiary legislation in a manner that contradicted the express provisions of the Act, where it derives its authority from.c.That the Respondent wrongfully invoked the matching principle espoused in Section 17(1) of the VAT Act to deny the Appellant’s claim for relief under Section 18(1) of the VAT Act.d.That the Respondent wrongfully ignored the recommendations under the OECD Guidelines on neutrality of VAT before rejecting the claim for relief of pre-change input tax.e.That the Respondent’s decision is subjective, punitive, and unequitable contrary to generally accepted canons of taxation.

The Appellant’s Case 9. The Appellant’s case is premised on the following documents filed before the Tribunal: -a.The Appellant’s Statement of Facts dated 16th June 2023 and filed on same date, together with annextures thereto.b.The Appellant’s Written Submissions dated 6th October 2023 and filed on 22nd November 2023.

10. The Appellant averred that the Respondent’s interpretation of both Section 18 of the VAT Act and Regulation 7 of VAT Regulations 2017 had created a non-existent limitation and restriction to the application of laws.

11. The Appellant further contended that Section 18 (1) (a) of the VAT Act expressly and clearly permit claim of relief for input tax on supplies, and not trading stock only, that had already been incurred before the date when exempt supplies made by a registered person became taxable.

12. The Appellant further averred that the period within which the input tax subject to relief claim is at 24 months immediately preceding the date when exempt supplies became taxable.

13. The Appellant averred that the Respondent’s reliance on Section 17(1) of VAT Act is prejudicial and totally irrelevant in guiding approval of a claim for relief under Section 18(1) of the VAT Act, as Section 17(1) relates to the conditions for allowability of input tax credit when filing VAT returns.

14. That the Respondent’s interpretation in its decision that outrightly allows provision of Regulation 7 of VAT Regulations 2017 to supersede Section 18(1)(a) of the VAT Act is incorrect.

15. That the Respondent’s decision amounts to unfairness and inequity in tax law, which is contrary to universally recognized principles of law including under the OECD Guidelines on neutrality of VAT.

Appellant’s Prayers 16. The Appellant prayed to the Tribunal for the following orders: -a.That the Respondent’s decision be dismissed for lack of grounds and the Appellant’s objection be allowed.b.That the Respondent be compelled to approve the Appellant’s claim for relief under Section 18(1)(a) of the VAT Act, 2013.

The Respondent’s Case 17. The Respondent’s case is premised on the following documents filed before the Tribunal: -a.The Respondent’s Statement of Facts dated and filed on 13th July 2023. b.The Respondent’s Written Submissions dated 8th January 2023, and filed on 16th January 2024.

18. The Respondent averred that it reiterates its position as stated in the review decision communicated to the Appellant.

19. That the interpretation of Section 18 of the VAT Act envisaged no express limitation in the application the entitled relief from VAT incurred and that input incurred prior to the change of the VAT treatment of exported services.

20. That the Respondent was correct in relying on Regulation 7 of VAT Regulations 2017 for reasons that the Regulations contained in the Act govern the implementation of the provisions contained in the VAT Act.

21. The Respondent averred that the input tax so claimed by the Appellant cannot be subject to the relief provided by Section 18 of the VAT Act as the input relief sought by the Appellant does not relate to a taxable supply.

22. Respondent affirmed that it was fair in its review of the objection application.

23. The Respondent reiterated that the Appellant’s claim for relief on input incurred during the Appellant’s supply of exempt services as was classified is against Section 17(1) of the VAT Act.

Respondent’s Prayers 24. The Respondent prayed to the Tribunal for the following orders: -a.That the Respondent’s decision is proper and in conformity with the provisions of the law.b.That the Appellant should pay short levied taxes of Kshs. 14,718,104. 00 plus penalty and interests.c.That the Appeal be dismissed with costs to the Respondent as the same is devoid of merit.

Issues for Determination 25. The Tribunal, having carefully reviewed the pleadings and filings made by the parties and the supporting documentation is of the view that the following issue falls for its determination: -Whether the Respondent’s Objection Decision dated 7th December 2023 is justified and Proper in Law.

Analysis and Findings 26. Having determined the issue that falls for its determination, the Tribunal proceeded to analyze it as hereunder.

27. The instant dispute precipitated from the Respondent’s Objection decision dated 7th December 2022 on the Appellant’s claim of relief of VAT on input tax incurred for making exempt supplies which became taxable, amounting to Kshs. 14,718,104. 00.

28. The Respondent specifically reiterated the Appellant’s grounds of objection as outlined in the Appellant’s notice of objection as erroneous interpretation of cited laws, superiority of statute over subsidiary legislation and principles of equity in taxation under OECD Guidelines on neutrality of VAT. In its Objection decision, the Respondent dismissed all the above grounds.

29. The Tribunal noted that as a preliminary matter, it is important to clarify the law and ground on superiority of statute over subsidiary legislation. The main contention on this ground is that the Respondent relied on Regulation 7 of VAT Regulations 2017 to decline the Appellant’s VAT input claim pre-change. The Appellant had relied on Section 18(1) of the VAT Act, 2013.

30. The impugned Section 18(1) of VAT Act, 2013 provides as follows:“Where –(a)on the date of exempt supplies made by a registered person become taxable, and the person had incurred input tax on such supplies; or(b)on the date he is registered, a person has incurred tax on taxable supplies which are intended for use in making taxable supplies, the person may, within three months from that date, claim relief from any tax shown to have been incurred on such supplies”

31. On the other hand, Regulation 7 of VAT Regulations 2017 provide as follows:“(1)A person shall be entitled to a deduction of input tax incurred for trading stock on hand at the date that the person becomes registered.(2)A deduction of Input Tax shall not be allowed unless –(a)the input tax to which the deduction relates is deductible under Section 17 of the Act;(b)the registered person has provided the Commissioner with satisfactory evidence –(i)that input tax was paid on acquisition of the goods;(ii)of the quantities, descriptions, and values of the goods on hand at the time of registration.”

32. The Tribunal noted that a literal review of the above two provisions portend contradiction in implementation of claim of relief of input VAT incurred for making exempt supplies which became taxable. Whilst Section 18(1) of VAT Act permits a party to lodge a claim on supplies, Regulation 7 of VAT Regulations 2017 refers to trading stocks. The presumption is that the supplies are utilized towards production of trading stocks.

33. Be that as it may, the Tribunal noted that the question of hierarchy of laws in Kenya is settled starting from the Constitution to subsidiary laws. Indeed, the Tribunal affirmed this position in WEC Lines Kenya Ltd -vs- Commissioner of Domestic Taxes (No. 137 of 2018) where at paragraph 47 it was held as follows:“Even if the VAT Regulations 2017 were approved by the National Assembly, it is trite law that a subsidiary legislation, the Regulations in the instant case, cannot override the respective primary legislation, the VAT Act, 2013. In the Commissioner of Domestic Taxes vs Total Touch Cargo Holland, High Court Income Tax Appeal No. 17 of 2013, it was held that “A subsidiary legislation cannot repeal or contradict express provisions of an Act from which they derive their authority.”

34. Accordingly, the Tribunal reiterates that in situations where there are real or potential contradiction or conflict between a statute and a subsidiary legislation that flows from the statute, then the statute takes precedence. In the instant case, provisions of the VAT Act 2013 take precedence, and in particular Sections 17 and 18, in determining the Appellant’s claim of relief of VAT on input tax incurred for making exempt supplies which became taxable.

35. Having clarified the issue of superiority of laws, the Tribunal noted that the next main issue of contention is whether the business of the Appellant qualified for the relief as envisaged under the VAT Act.

36. The Appellant submitted that it provides a service business process outsourcing, which qualifies as an export and was reclassified from exempt to zero-rated by the Finance Act, 2022.

37. On the other hand, Section 2 of the VAT Act, 2013 defines supply to mean supply of “goods or services”.

38. The Appellant further submitted that its services qualified for relief under Section 18 (1) (a) of the VAT Act, 2013, which expressly permits for claim of relief for input tax on supplies, and not only trading stock, that had already been incurred before the date when exempt supplies made by a registered person become taxable.

39. The Appellant contended that its services qualified under conditions set in Section 18 of the VAT Act, 2013, being change of classification and input tax incurred within 24 months prior to change.

40. The Appellant submitted that its service qualifies as an exempt export of a business process outsourcing service that was reclassified from exempt to zero-rated by Finance Act, 2022.

41. The Appellant further submitted that the claim for relief for its services took effect on 1st July 2022, and its instant claim relates to input tax on supplies between January to June 2022, which is six months prior to reclassification and thus falls within the 24 months envisaged under Section 18 of the VAT Act.

42. The Tribunal noted that despite the Appellant’s contention on the services they offered during the period under review and that is the subject of the instant Appeal, there is nothing on record to confirm the same and that they qualify as taxable supplies in terms Section 17(1) of the VAT Act, 2013.

43. On the other hand, Section 17 (2) and (3) of the VAT Act, 2013 outlined documentation required to claim taxable supplies and the conditions including timelines that a taxpayer ought to follow. A taxpayer ought to produce original tax invoice or certified copy, customs entry, customs receipt and certificate, service offerings amongst others. The Tribunal noted that none of the documents was provided by the Appellant.

44. The Tribunal is guided by the decision in TAT 538 of 2021 Greenroad Kenya Limited v Commissioner of Domestic Taxes where the Tribunal cited the holding 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 fad since in so doing the party fails to substantiate its pleadings.”

45. Accordingly, the Tribunal finds that the Appellant did not discharge its burden of proof to demonstrate that the Respondent’s Objection decision dated 7th December, 2023, was incorrect as required under Section 56 (1) of the Tax Procedures Act, 2015, and failed to prove that the tax decision should not have been made or should have been made differently as required under Section 30 (b) of the Tax Appeals Tribunal Act.

46. Based on the foregoing, the Tribunal finds that the Respondent’s Objection decision dated 7th December 2013 disallowing the Appellant’s input tax relief claim was justified and proper in law.

Final Decision 47. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal proceeds to make the following Orders: -a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection decision dated 7th December 2022 be and is hereby upheld.c.Each party to bear its own costs.

48. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF APRIL, 2024. DATED AND REVISED AT NAIROBI THIS 23RD DAY OF APRIL, 2024. GRACE MUKUHA - CHAIRPERSONDR. ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBERDR. WALTER J. ONGETI - MEMBERGLORIA A. OGAGA - MEMBER