[2024] KETAT 1654 (KLR)

Malco Group Limited v Commissioner of Domestic Taxes (Tax Appeal E176 of 2024) [2024] KETAT 1654 (KLR) (21 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1654 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E176 of 2024

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

October 21, 2024

Between

Malco Group Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability Company incorporated in Kenya under Companies Act, CAP 486 of the Laws of Kenya.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter referred to as “the Act”). Under Section 5 (1) of the Act, the Kenya Revenue 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 functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 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 Respondent issued an assessment order to the Appellant dated 31st October 2023 on VAT for period of November 2020 for principal tax amounting to Kshs. 14,000,000. Upon receipt of the assessment, the Appellant objected to it on 29th November 2023.

4. The Respondent issued its objection decision vide a letter dated 21st December 2023 on the Appellant’s objection partially confirming its decision for demand of additional tax amounting to Kshs. 17,315,790. 00.

5. The Appellant being dissatisfied with the objection decision filed an Appeal vide its Notice of Appeal dated and filed on 19th January 2024.

The Appeal 6. In its Memorandum of Appeal dated 12th February 2024 and filed on 13th February 2024, the Appellant raised the following grounds of appeal:a.That the Respondent erred in fact and law by holding that the payment of Kshs 100,000,000. 00 to the Appellant by the Ministry of Petroleum & Mining was inclusive of VAT.b.That the Respondent erred by disregarding the tax-exempt status of the Appellant's goods, established at contract inception, which renders the demand for VAT remittance to the Respondent factually unsustainable.c.That the Respondent erred in holding that the VAT assessment of Kshs 17,315,790. 00 (inclusive of interest and penalties) is due and payable.d.That the Respondent erred in fact and law in finding that the additional assessments were duly raised.e.That the Respondent erred in fact and law in disregarding the unique circumstances of the supply made by the Appellant that involved exempt goods tendered by a government institution.f.That the Respondent erred in fact and law in disregarding the loss suffered by the Appellant and the subsequent double jeopardy by imposing VAT that was not charged at the time of supply.

Appellant’s Case 7. In support of the Appeal, Appellant lodged the statement of facts. The Appellant also filed its written submissions dated 28th August 2024 on even date and the same were adopted by the Tribunal on 11th September, 2024.

8. The Appellant’s case was that in a joint venture with Pearl Print Pack Ltd, was awarded a tender by the Ministry of Petroleum & Mining, State Department of Petroleum, vide a letter dated 15th May 2020. The contract was signed on 22nd June 2020. It stated that the financial quote for this contract was included in the tender documents submitted on 16th March 2020 and that the quote was in line with the existing taxation laws as at that time, whereby the supplies were exempt from Value Added Tax (VAT) pursuant to the First Schedule on exempt supplies of the Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”).

9. The Appellant stated that the contract was serviced later, after the Finance Bill 2020 had come into force, introducing new taxes, to wit, imposing VAT of 14%. The timing of this application of law was after the Ministry of Petroleum had already awarded tenders without taking into account any VAT as per the law at that time. The Appellant also noted that this supply was made under the Public Procurement and Asset Disposal Act, CAP 412C of the Laws of Kenya (hereinafter “PPAD”), hence subject of a financial quote that informed the lowest bidder. It argued that the supply, having been exempt from tax, was not subject to any VAT at the time of the tender awards and that no changes were made and the payment was paid as per the initial quotation allocated at the tendering stage.

10. The Appellant stated that the purchase of the goods from the manufacturers by the appellant and the pricing at the time of bidding were all informed by the fact that the goods were tax exempt. It argued that if taxes were applicable the price quoted would have changed significantly by the same margin.

11. The Appellant noted that when the goods were being cleared at the port, the law had already changed, and the importer was forced to pay VAT on the goods to get them released. This occasioned an unplanned payment of VAT on the items to the tune of about Kshs 11,737,395. 00 which necessitated the Appellant to adjust the terms of credit issued by the financing bank leading to a loss for the Appellant.

12. The Appellant stated that it raised the issue of VAT with the Ministry of Petroleum through various letters which have been unanswered and that the Ministry of Petroleum has never remitted the VAT on the goods as the sale was exempt at the time of making the order. It was the Appellant’s case that the Respondent erroneously held that the Appellant was paid the VAT which is the subject of the impugned assessment. It argued that it is now faced with a double jeopardy of being tasked to remit taxes they never received.

13. The Appellant stated that VAT is a consumer tax that is not payable by the supplier but by the recipient of the supplies. This means that no tax can be legally claimed from the supplier unless the said tax was received by the supplier. In this case the Appellant averred that no VAT was paid to the Appellant and therefore the charge by the Respondent of failure to pay does not arise. The Appellant averred that the Respondent cannot lawfully, force the Appellant to remit VAT that was not charged in the first place and which was not paid by the recipient of the goods. The Appellant claimed that the only claim against the Appellant is that of failure to charge VAT and not failure to pay VAT.

14. The Appellant averred that the quote was made before the enactment of the Finance Bill 2020 and as such, the amount was exclusive of VAT. The Appellant argued that the law on VAT at the time of the contract with the Ministry of Petroleum provided that the goods in question were exempt from VAT.

15. The Appellant stated that it incurred losses as a result of the additional VAT import tax and the Respondent cannot therefore count the VAT claimed as an advantage that creates a demand for VAT. The Appellant further averred that notwithstanding that no VAT was charged, it has made efforts to reach out to the Ministry of Petroleum for clarity.

16. The Appellant agreed that the instant dispute ultimately hinges on whether the amount paid by the Ministry of Petroleum & Mining for the supply was inclusive of VAT. On this issue, the Appellant argued that the price quoted in the tender document was Kshs 100,000,000. 00, which was made before the enactment of the Finance Bill 2020 that included 14% VAT on the goods supplied by the Appellant. It is for this reason that the Appellant averred that the money paid by the Ministry of Petroleum was indeed not inclusive of VAT.

17. The Appellant further stated that the Respondent in its objection decision, while accepting the VAT implication of the Finance Act 2020, supports the Appellant's contention that the Kshs. 100,000,000. 00 tender price, fixed prior to the legal change, excluded VAT.

18. In the written submissions, the Appellant identified the following three issues for determination:i.Whether the payment of Kshs 100,000,000. 00 paid to the Appellant by the Ministry of Petroleum & Mining was inclusive of VAT.ii.Whether the assessment and demand for VAT remittance to the Respondent is factually sustainable.iii.Whether Respondent erred in fact and law in disregarding the loss suffered by the Appellant and the subsequent double jeopardy by imposing VAT that was not charged at the time of supply.

19. The Appellant’s reiterated its statement of facts to a large extent, the same as are summarised statement of facts, however, the Appellant’s submissions where it largely analysed the 3 issues that it had identified for determination are summarised as hereunder.

20. On whether the payment of Kshs 100,000,000. 00 paid to the Appellant by the Ministry of Petroleum & Mining was inclusive of VAT, the Appellant relied on section 5 (4) of the VAT Act which states as follows:“(4)The amount of tax payable on a taxable supply, if any, shall be recoverable by the registered person from the receiver of the supply, in addition to the consideration.”

21. The Appellant submitted that it did fall within tax bracket at the time of the supply. The Appellant cited the case of Keroche Industries Ltd v Kenya Revenue Authority & 5 Others eKLR, where the court cited with approval the case of Cape Brandy Syndicate v Inland Revenue Commissioners (1921) K.B 64 where it was held as follows:“In a taxing Act one has to look merely at what is clearly said. There is no room for intendment...if a person sought to be taxed comes with the letter of the law, he must be taxed."

22. The Appellant submitted that having discharged its burden of proof, the burden then shifted to the Respondent to prove that indeed the payment made to the Appellant was inclusive of VAT as per the holding in Hickman Motors Ltd V Canada, [1997]2 S.C.R.336.

23. On whether the demand for VAT remittance to the Respondent is factually sustainable, the Appellant relied on the Tribunal finding in Bhai Company Limited vs Commissioner of Domestic Taxes, Appeal No. 130 of 2018, where it was emphasized that the right to claim input VAT undergirds the VAT scheme and in principle may only be limited in exceptional circumstances and that it must be exercised immediately in respect of all the taxes charged on transactions relating to inputs.

24. The Appellant also relied on the case Sambiba Distributors Ltd v Commissioner of Investigations & Enforcement, where it was held that pursuant to Section 17 (3) (a) of the VAT Act, the right to claim input VAT is premised on the assumption that the taxpayer paid VAT during the purchase of the supplies. It is required that the relevant information is supplied to ascertain such payment.

25. The Appellant submitted that Section 17 of the VAT Act is clear that the only conditions provided for a Taxpayer to qualify for input VAT as follows:“a.That the input tax was incurred on a taxable supply made to or on importation madeb.That the input tax is deducted by a registered person on taxable supplies made by a taxpayer at the end of the tax period, him; andc.That the input tax is to be allowable for deduction within six months after the end of the tax period in which the supply or importation occurred.”

26. The Appellant submitted that it proved that indeed the input tax was incurred on importation made by it and by fulfilling the above set parameters it was entitled to claim input VAT.

27. On whether the Respondent erred in fact and law in disregarding the loss suffered by the Appellant and the subsequent double jeopardy by imposing VAT that was not charged at the time of supply; the Appellant submitted that the imposition of VAT is irregular and unlawful, given that the benefit of exempt status had accrued to the Ministry of Petroleum and Mining which had procured the items well before the enactment of the Finance Act 2020. It also submitted that following the conclusion of the public procurement process, a contract was signed between the parties.

28. The Appellant also cited the provisions of section 23 of the Interpretation and General Provisions Act which provides as follows:“(3)Where a written law repeals in whole or in part another written law, then, unless a contrary intention appears the repeal shall not—a.Revive anything not in force or existing at the time at which the repeal takes effect; orb.affect the previous operation of a written law so repealed or anything duly done or suffered under a written law so repealed; orc.Affect aright privilege obligation or liability acquired, accrued or incurred under a written law so repealed; or(d)Affect a penalty, forfeiture or punishment incurred in respect of an offence committed against a written law so repealed.”

29. The Appellant also relied on the case of Samuel Kamau Macharia & another Kenya Commercial Bank Limited &2 others [2012] eKLR the supreme court ruled out retrospective application of laws, unless where it was the intention of legislature to do so.

Appellant’s Prayers 30. The Appellant prayed for the following reliefs:a.That the Appeal be allowed;b.That the decision of the Respondent dated 21st December 2023 be set aside;c.That the Respondent be directed to amend the Appellant’s ledger to remove the erroneous VAT of Kshs 14,000,000. 00 and any consequential interests added to the Appellant's ledger;d.That the costs of this Appeal be in cause.

Respondent’s Case 31. In opposition to the Appeal, the Respondent filed its statement of facts dated 21st May 2024 and filed on 22nd May, 2024. The Respondent also filed its written submissions dated 23rd July 2024 on even date and the Tribunal adopted its submissions during the hearing on 11th September, 2024.

32. The Respondent stated that the basis of assessment was that the Appellant had claimed VAT totalling to KShs 11,209,743. 32 on imported LPG table top cookers in the month of November 2020 but never declared the corresponding supply of the LPG table top cooker in their VAT returns.

33. The Respondent noted that the company was awarded a tender to supply LPG table top cookers by the Ministry of Petroleum and Mining on 15th May 2020. During that period LPG top cookers were VAT exempt, but by the time goods were imported and delivered the law had changed through the finance Act 2020 changed LGP table top cookers from VAT exempt to vatable at 14%.

34. The Respondent also noted that the company had raised an invoice of Kshs 100,000,000 but did not charge and declare output VAT Kshs 14,000,000. 00 which resulted to Respondent raising additional assessment.

35. The Respondent relied on the provisions of Section 5 of the VAT Act, that primarily outlines the imposition of VAT on taxable supplies. The Respondent stated that the key elements of Section 5 are as follows:i.Charge to VAT: VAT shall be charged on a taxable supply made by a registered person in Kenya, on the importation of taxable goods or services into Kenya;ii.Rate of VAT: The VAT rate shall be as specified in the Third Schedule of the Act, unless the supply is zero-rated or exempt; andiii.Time of Supply: VAT is payable at the time of the supply of goods or services, as determined under the Act.

36. The Respondent’s case was that while Section 5 of the VAT Act does not explicitly state that all prices are presumed to be VAT inclusive, it is a standard practice in VAT administration that prices for taxable supplies are assumed to include VAT unless otherwise specified. It argued that this practice ensures transparency and compliance with tax obligations.

37. The Respondent stated that the contract between the Appellant and the Ministry of Petroleum and Mining revealed that there was no explicit exclusion of VAT in the contract. Consequently, it averred that the total payment received of Kshs 100,000,000. 00 is deemed to be inclusive of VAT based on business practice and based on the law, which is Section 5 of the VAT Act. Further, the Respondent maintained that the Ministry, being a government institution, is expected to adhere to these practices, ensuring the amount paid inherently included VAT.

38. In response to ground (b) of the Memorandum of appeal where the Appellant claimed that its goods were tax-exempt at the inception of the contract, which renders the demand for VAT remittance to the Respondent factually unsustainable, the Respondent stated that while the goods were tax-exempt at the inception of the contract, the Finance Act, 2020, which became effective in July 2020, amended the VAT status of LPG table top cookers from exempt to vatable at 14%.

39. The Respondent stated that tax laws are subject to change, and businesses are required to comply with the prevailing tax laws at the time of supply. Since the goods were supplied after the change in legislation, the Appellant was legally obligated to account for VAT as per the updated law. The Respondent relied on Section 5 of the VAT Act which it argued that it supports this by emphasizing that the tax status of goods at the time of supply determines the VAT liability.

40. In response to ground (c) of its memorandum of appeal where the Appellant contended that the VAT assessment, including interest and penalties, is not due and payable, the Respondent stated that the VAT assessment of Kshs 17,315,790. 00, which includes interest and penalties, is lawful and enforceable. It relied on Section 5 of the VAT Act which mandates taxable persons to declare and remit VAT on all taxable supplies. The Respondent argued that the Appellant failed to declare the output VAT on the supply of LPG table top cookers leading to an additional assessment issued in line with Section 31 of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”).

41. In response to the ground that the additional assessments were not properly raised, the Respondent maintained that the assessments raised were raised in accordance with the provisions of the TPA.

42. The Respondent stated that it has the authority to conduct audits and issue additional assessments if discrepancies or omissions are identified in a taxpayer’s returns. In this case, the Appellant claimed input VAT on imported LPG table top cookers but failed to declare the corresponding output VAT on the supply of these goods. The Respondent averred that Section 31 of the TPA permits the Respondent to correct such discrepancies by issuing additional assessments. It maintained the assessments were therefore, duly raised following a review of the taxpayer's records and information derived from the i-Tax system.

43. The Respondent stated that the law applies uniformly to all taxable supplies, irrespective of the nature of the recipient. According to the Respondent, the unique circumstances cited by the Appellant do not alter the statutory obligation to comply with VAT regulations.

44. The Respondent relied on The Finance Act, 2020 which amended the tax status of the supplied goods, and the Appellant was required to charge and remit VAT accordingly. The Respondent argued that the Appellant was fully aware as evidenced by its letters to the Ministry where it was asking that the Ministry pay VAT in line with the changes in the law.

45. The Respondent averred that the fact that the supply was made to a government institution does not provide grounds for exemption from VAT if the goods were vatable at the time of supply. The Respondent relied on Section 5 of the VAT Act to reinforce that the tax treatment of goods is determined by their status at the point of supply, ensuring consistent application of tax laws.

46. In response to the ground that the Appellant suffered a loss and argues that the imposition of VAT constitutes double jeopardy, the Respondent stated that the concept of double jeopardy does not apply in this context. The Respondent maintained that the requirement to declare and remit VAT on taxable supplies is a legal obligation under the VAT Act. It also argued that the Appellant’s failure to charge VAT at the time of supply was a lapse in compliance, not a ground for exemption from subsequent enforcement.

47. In addition to the foregoing, the Respondent stated that the Appellant’s argument of suffering a loss did not negate its obligation to comply with the VAT law as amended by the Finance Act, 2020. The Respondent asserted that adjustment of VAT is a correction of an oversight in the Appellant’s returns, not an instance of double jeopardy.

48. In addition to the statement of facts, the Respondent relied on its written submissions. The assertions in the said submissions are the same as the assertions in the Respondent’s statement of facts. However, the Respondent emphasised that it is the supplier's responsibility to collect VAT from the recipient at the point of sale and remit it as is explicitly outlined in Section 5 of the VAT Act.

49. The Respondent submitted that the assessments were issued in compliance with section 31 of the TPA, which permits the Respondent to amend discrepancies in returns by issuing additional assessments.

50. Consequently, the Respondent's submitted that the assessment is grounded in the statutory obligations outlined in the VAT Act and the TPA. The Respondent asserted that the Appellant's appeal lacks merit as it fails to acknowledge the binding nature of tax law changes and its obligations to comply with them.

Respondent’s prayers 51. The Respondent prayed that this Appeal be dismissed with costs to it as the same was devoid of merit and that the objection decision dated 21st December, 2023 be upheld and the taxes be deemed due and collectible.

Issues for Determination 52. The Tribunal having considered the parties pleadings, documents and submissions puts forth the following single issue for determination:Whether the Respondent’s demand for VAT on the supply of LPG table top cookers made by the Appellant, is due and payable.

Analysis and Findings 53. The Tribunal wishes to analyse the issues as hereunder.Whether the Respondent’s demand for VAT on the supply of LPG table top cookers made by the Appellant, is due and payable.

54. There is no dispute about the fact that the Appellant and the Ministry of Petroleum and Mining, State Department of Petroleum entered into a contract for the supply of LPG two burner table top cookers. The Parties herein agree that at the time of the signing the contract, the goods in issue were exempt from VAT as per the First Schedule of the VAT Act. The parties are also agreement that as from 1st July 2020, the goods were subjected to VAT at the rate of 14% pursuant to changes introduced by the Finance Act 2020.

55. The dispute is that the Appellant was of the opinion that the contract was made before the Finance Act 2020 and that therefore, the contractual sum was not subject to VAT. The Respondent on the other hand took a different position that the goods were subject to VAT because they were supplied after the amendments by the Finance Act 2020 had taken effect.

56. The Tribunal observes and notes the Appellant’s position that laws do not apply retrospectively unless the legislature expressly provides so. Consequently, it would be unlawful for the Respondent to subject the Appellant’s goods to 14% VAT before 1st July 2020 when the relevant provisions of the Finance Act 2020 took effect. Prior 1st July 2020, the goods that the Appellant imported were exempt from VAT, the goods became vatable from 1st July 2020 pursuant to the provisions of section 1(b) of the Finance Act 2020.

57. As to which party bore the liability for VAT and when it becomes due, the Tribunal takes note that section 5(3) of the VAT Act provides as follows:(3)Tax on a taxable supply shall be a liability of the registered person making the supply and, subject to the provisions of this Act relating to accounting and payment, shall become due at the time of the supply.’’

58. The Tribunal’s view is that the import of the above provision is that the VAT status of any supply is determined at the point of supply and not at any other point. In the instant case, at the point of supply, the goods were subject to VAT and therefore the Appellant ought to have charged the same and remitted to the Respondent as envisaged in the VAT Act. The view of the Tribunal is that the amendment in law meant that the goods were subject to VAT at the point of supply even though the same goods were exempt at the time of entering the contract. The Appellant could not therefore disregard the prevailing law.

59. The Tribunal notes that this position is well articulated in the case of Commissioner of Domestic Taxes & another v Integrated Payment Solutions Limited and another (Income Tax Appeal E180 of 2021) [2023] KEHC 3556 (KLR) where the High Court held as follows:It is not disputed that VAT is a consumption tax payable by the end consumer. However, Section 5(3) of the VAT Act places the burden of accounting for VAT in the Supplier of the service and hence the responsibility to collect and remit the said tax in the particular case was one to be borne by the Respondent; Section 5(3) Provides as follows; “(3) Tax on a taxable supply shall be a liability of the registered person making the supply and, subject to the provisions of this Act relating to accounting and payment, shall become due at the time of the supply.”

60. Consequently, the Tribunal finds and holds that the Respondent’s demand for VAT on the supply of LPG table top cookers made by the Appellant, is due and payable.

Final Decision 61. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal lacks merit and consequently makes the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 21st December 2023 and is hereby upheld.c.Each party to bear its own cost.

62. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 21ST DAY OF NOVEMBER, 2024. ………………………CHRISTINE A. MUGA - CHAIRPERSON…………………………BONIFACE K. TERER - MEMBER………………………ELISHAH N. NJERU - MEMBER………………………EUNICE N. NG’ANG’A - MEMBER………………………OLOLCHIKE S. SPENCER - MEMBER