[2024] KETAT 427 (KLR)

Mancuchar Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal 314 of 2023) [2024] KETAT 427 (KLR) (22 March 2024) (Judgment)

Neutral citation: [2024] KETAT 427 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 314 of 2023

RM Mutuma, Chair, M Makau, EN Njeru, B Gitari & AM Diriye, Members

March 22, 2024

Between

Mancuchar Kenya Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act and its core business engagement is the sale of chemicals for cosmetics, detergents and fertilizers.

2. The Respondent is a principal officer appointed under the Kenya Revenue Authority Act, and the Kenya Revenue Authority is mandated with the responsibility for the assessment, collection, receipting, and accounting for all tax revenue as an agent of the Government of Kenya. The Respondent is also mandated with the responsibility for the administration and enforcement of the Statutes set out under the Schedule to the said Act.

3. The dispute giving rise to the Appeal herein arose out of the Respondent’s additional assessments for VAT for the month of August 2022, on the 15th November 2022 to which the Appellant objected on the 9th December 2022.

4. The Respondent issued its Objection decision on 6th February 2023 rejecting the Appellant’s objection and confirmed its additional assessment on VAT in the sum of Kshs. 6,278,009. 00 for the principal tax, penalty and interest.

5. Dissatisfied with Respondent’s aforesaid Objection decision, the Appellant lodged its Notice of Appeal electronically on 3rd March 2023.

The Appeal 6. The Appellant in its Memorandum of Appeal dated 16th March 2023 and filed on 28th April 2023 set out the following grounds of appeal, that;i.The Appellant’s notice of objection letter dated 9th December 2022 in response to the Respondent’s decision of raising additional assessment of Value Added Tax on 15th November 2022 under Additional Assessment Number KRA202218558357 in the aggregate amount of Kshs. 5,707,281. 20 for the August 2022 tax period was a valid objection within the meaning of its Objection decision dated 6th February 2023;ii.The Respondent erred in law and fact by reclassifying the subject fertilizer supplies as exempt instead of zero-rated as had been declared by the Appellant in its VAT returns for the month of August 2022;iii.Contrary to the Respondent’s reclassification, the subject fertilizer supplies declared in the month of August 2022 being calcium nitrate, ammonium sulphate, potassium sulphate and mono-ammonium sulphate are all supplies that fall under the Chapter 31 classification in the East African Community Common External Tariff 2017 (EAC-CET 2017);iv.At the municipal level; calcium nitrate, ammonium sulphate, potassium sulphate, and mono-ammonium sulphate were all supplies that were zero-rated under Paragraph 24 of Part A of the Second Schedule to the Value Added Tax Act at all times material to the declaration by the Appellant;v.The Respondent erred in law and fact by stating that effective 1st July 2022 the Finance Act 2022 reclassified fertilizers under Chapter 31 of the East African Community Common External Tariff from the Second Schedule of the Value Added Tax Act to the First Schedule of the Value Added Tax Act;v.The Respondent erred in law and in fact by failing to properly consider the sample invoice and certificates of analysis submitted by the Appellant with respect to the disputed supplies;v.The Respondent erred in law and in fact by abdicating its duty by recommending to the Appellant, that it should request the Commissioner of Customs and Border Control to conduct a laboratory analysis of the disputed supplies for the purposes of giving a formal Tariff Ruling;v.The Respondent failed to arrive at a well-reasoned and lawful decision based on a fair and statute driven consideration of the applicable facts and information presented to it by the Appellant; andv.The demand of additional Value Added Tax that is the subject of this Appeal is ultra vires, arbitrary, excessive, and erroneous; and have been levied on the Appellant in a manner that contravenes the Law;

The Appellant’s Case 7. The Appellant set out its case on its;a.Statement of Facts dated 16th March 2023 and filed on 28th April 2023 together with the annexed documents thereto; andb.Written submissions dated and filed on 13th June 2023.

8. The Appellant stated that the Respondent raised an additional assessment for Value Added Tax for the tax period 1st August 2022 to 31st August 2022 vide the Assessment Order dated 15th November 2022 in the sum of Kshs. 5,707,281. 20, to which the Appellant objected to on the 9th December 2022 vide the iTax platform.

9. The Appellant averred that the Respondent issued its Objection Decision on the 6th February 2023 disallowing the Appellant’s Objection in its entirety.

10. The Appellant contended that the Respondent’s Statement of findings contained in the Objection decision advanced, inter alia, the following reasons for rejection of the Appellant’s Objection;a.Effective 1st July 2022, the Finance Act 2022 reclassified fertilizers under Chapter 31 of the East African Community Common External Tariff from the Second Schedule to the First Schedule of the Value Added Tax Act;b.The sample invoices and certificates of analysis submitted to the Respondent by the Appellant could not only solely be used to determine the correct tariff for the products that the Appellant had classified as zero-rated in its declaration; andc.It was recommended to the Appellant by the Respondent that the Appellant should request the Commissioner of Customs and Border Control to carry out a laboratory analysis of the Appellant’s products so that the Commissioner of Customs and Border Control may issue an appropriate Tariff Ruling.

11. The Appellant stated that its notice of objection dated 9th December 2022 was received and acknowledged by the Respondent on the same date, and the said Objection met all three criteria set out in Section 51 (3) of the TPA.

12. The Appellant further stated that the Respondent, in its Objection decision acknowledged the validity of the Appellant’s Objection and thereafter proceeded to interrogate the same extensively which demonstrated that it was sufficient for the Respondent to reach a decision, albeit an incorrect one.

13. The Appellant asserted that Respondent’s reclassification was premised on its misreading of the law, the Appellant’s position was that the Finance Act 2022 did not move the fertilizers under Chapter 31 of East African Community Common External Tariff from zero-rated to exempt supplies.

14. The Appellant further asserted that according to Gazette Supplement No. 106 of 23rd June 2022, Section 31 of the Finance Act 2022 merely amended Part A of the Second Schedule of the VAT Act by inserting, inter alia, a new Paragraph 24 which incorporates into the Schedule, the fertilizers of Chapter 31 of East African Community Common External Tariff.

15. The Appellant stated that the invoices and certificates of analysis as submitted to the Tribunal and Respondent incontrovertibly demonstrate that the disputed supplies were such that fall under Chapter 31 of the East African Community Common External Tariff.

16. The Appellant submitted that the disputed supplies were fertilizer that not only fell under Chapter 31 of the East African Community Common External Tariff but also were zero-rated as per Paragraph 24 of Part A of the Second Schedule to the VAT Act.

17. The Appellant contended that the Respondent’s decision was manifestly incorrect by basing the same on a false premise that effective 1st July 2022 the Finance Act reclassified fertilizers under Chapter 31 of the East African Community Common External Tariff from the Second Schedule of the VAT Act to the First Schedule of the VAT Act.

18. The Appellant averred that Respondent erred in law and fact by failing to properly consider the sample invoices and certificates of analysis submitted by the Appellant with respect to the disputed supplies.

19. The Appellant stated that the Respondent attempts to pass the buck to the Appellant by recommending to it to engage the Commissioner of Customs and Border Control on the laboratory analysis of the disputed supplies was a curious one, the Respondent ought to have undertaken the laboratory analysis instead of making such a recommendation.

20. The Appellant submitted that the Respondent has in this matter acted ultra vires, arbitrarily and illegally and issued an assessment that is excessive and erroneous, in a manner that breaches the Tax Procedures Act, the Fair Administrative Actions Act and the doctrines of equity.

21. The Appellant relied on the flowing authorities;a.Nairobi High Court Judicial Review Application No. 599 of 2017, Republic vs. Kenya Revenue Authority, Ex Parte M-Kopa Kenya Limited.b.The Finance Bill 2023, under Gazette Supplement No. 56 of 28th April 2023.

Appellant’s Prayers 22. By reason of the foregoing submissions, the Appellant prayed to the Tribunal, that;a.This Honourable Tribunal be pleased to allow the Appellant’s Notice ofAppeal and set aside the assessment under review herein;b.This Honourable Tribunal be pleased to find and order that Appellant is not liable for the additional taxes raised and demanded in the Respondent’s Assessment Order KRA202218558357 dated 15th November 2022 and which were confirmed by the Respondent’s Objection decision dated 6th February 2023;c.This Honourable Tribunal be pleased to order the Respondent to reverse the Debit Adjustment Voucher Number 2018180694 dated 15th November 2022 by dint of which the Respondent adjusted the Appellant’s Value Added Tax position in the amount of Kshs. 5,707,281. 20 with respect to the period 1st August 2022 to 31st August 2022;c.This Honourable Tribunal be pleased to Order the Respondent to pay the costs of this Appeal; andc.This Honourable Tribunal be pleased to issue any other Order favourable to the Appellant as it may find just and expedient to issue.

The Respondent’s Case 23. The Respondent has set out its case on its;a.Statement of Facts dated 25th May 2023 and filed on 26th May 2023, together with documents annexed thereto; andb.Written Submissions dated 17th November 2023 and filed on 21st November 2023.

24. The Respondent stated that it noted that the Appellant, in its return for the month of August 2022, had exempt sales amounting to Kshs. 16,960,777. 62 which had been classified as zero-rated sales.

25. The Respondent stated that it issued an additional assessment on 15th November 2022 for Kshs. 5,707,281. 00 where input VAT claimed was apportioned. Subsequently the Appellant Objected on 9th December 2022 and an Objection decision issued on 6th February 2023.

26. The Respondent averred that the Appellant had lodged a refund claim on excess Withholding VAT Credits, wherein it was noted that the Appellant had misclassified exempt sales as local zero-rated sales.

27. That the Respondent raised a VAT additional assessment by reclassifying the sales declared subsequently apportioning input VAT claimed in the month of August 2022.

28. The Respondent contented that effective 1st July 2022, the Finance Act 2022 reclassified fertilizers under Chapter 31 of the CET from the Second Schedule to the First Schedule to the VAT Act 2013.

29. The Respondent further contended that the Appellant deals with both taxable and zero-rated supplies as was noted from its VAT returns.

30. The Respondent averred that the sample invoices and certificates of analysis provided by the Appellant could not be used to determine the correct tariff to be applied for the Appellant’s products. Further, the Respondent could not determine the exact proportion of the macro-nutrients in each of the fertilizers sold and classified as Zero-Rated supplies in the Appellant’s returns.

31. The Respondent asserted that in order to resolve the inconclusive nature of the composition of the fertilizers, the Respondent recommended in the Objection decision that the Appellant makes a request to the Commissioner of Customs and Border Control to carry out a laboratory analysis on the Appellant’s products in order to give an appropriate Tariff Ruling.

32. The Respondent contended that the Appellant misapplied the provisions of the VAT Act by relying on the Second Schedule rather than the First Schedule thereto, in line with the amendments contained in the Finance Act 2022, the result whereof was that the Appellant misclassified its products as zero-rated rather than exempt.

33. The Respondent further contended that the Appellant failed to avail the products for analysis by the Commissioner of Customs and Border Control in order to ascertain with finality the composition thereof, therefore failing to disapprove the decision of the Commissioner.

34. The Respondent averred that the Appellant failed to discharge it burden of proof as is required under Section 56 (1) of the Tax Procedures Act and stated that the burden of proof lied on the Appellant, who has failed to discharge the same.

35. The Respondent in its submissions identified one issue for determination, namely;

a. Whether the Objection Decision by the Respondent was proper and justified in law; 36. The Respondent reiterated the contents of the Statement of Fact in its submissions, which are well captured herein above, the Tribunal shall not belabor in the reiteration of the same.

Respondent’s Prayers 37. By reason of the foregoing the Respondent prayed to the Tribunal that;a.The Appeal dismissed for lack of merit.b.The costs of the Appeal be awarded to the Respondent.

ISSUES FOR DETERMINATION 38. The Tribunal having carefully considered the pleadings and submissions made by both parties herein, it is of the considered view that the Appeal herein distils into two (2) issues for its determination;a.Whether the Appellant was justified to classify the sales as Zero-rated in relation to VAT.b.Whether the Respondent’s Objection Decision issued on 6th February 2023 was justified.

Analysis and Determination 39. The Tribunal having identified the issues for determination shall analyze the same as herein under;

a. Whether the Appellant was justified to classify the sales as Zero-rated in relation to VAT. 40. The dispute giving rise to the instant Appeal herein arose out of the Respondent’s Objection decision contained in its letter dated 6th February 2023 rejecting the Appellant’s Objection and confirming the assessment on VAT in the sum Kshs. 5,707,281. 00 as the principal tax.

41. It was the Respondent’s submissions that it noted that the Appellant, in its returns for the month of August 2022, it had exempt sales amounting to Kshs. 16,960,777. 62 which had been classified as zero-rated sales.

42. The Respondent further noted from the Appellant’s returns that it was registered for VAT and that the Appellant dealt with both taxable and zero-rated supplies.

43. It was the Respondent’s submission that the Appellant had lodged a refund claim on excess Withholding VAT credits, to which the Respondent submitted had misclassified exempt sales as local zero-rated sales.

44. That the Respondent raised a VAT additional assessment by reclassifying the sales declared, subsequently apportioning input VAT claimed in the month of August 2022.

45. It was the Respondent contention that, effective 1st July 2022, the Finance Act 2022 reclassified fertilizers under Chapter 31 of the CET from the Second Schedule to the First Schedule to the VAT Act 2013.

46. That the Appellant asserted that the certificates of analysis as submitted to the Tribunal and Respondent incontrovertibly demonstrated that the disputed supplies were such that fall under Chapter 31 of the East African Community Common External Tariff.

47. It was further submitted by the Respondent that the sample invoices and certificates of analysis provided by the Appellant could not be used to determine the correct tariff to be applied for the Appellant’s products. Further, the Respondent could not determine the exact proportion of the macro-nutrients in each of the fertilizers sold and classified as zero-rated supplies in the

Appellant’s returns. 48. Subsequently, the Respondent submitted that in order to resolve the inconclusive nature of the composition of the fertilizers, it recommended in the Objection decision that the Appellant makes a request to the Commissioner of Customs and Border Control to carry out a laboratory analysis on the

Appellant’s products in order to give an appropriate Tariff Ruling. 49. The Appellant on the other hand, deemed the recommendation as unprocedural as the Respondent could have conducted or caused to be conducted the lab analysis. Further, the Appellant submitted that it had carried out its own independent analysis and had shared the same with the Respondent.

50. That there is no evidence placed before the Tribunal, that the Respondent acted beyond the recommendations to the Appellant to have the composition of the Appellant’s production subjected to a laboratory analysis.

51. Admittedly, the Respondent did not carry out any laboratory analysis of the Appellant’s fertilizer, yet it dismissed the certificates of analysis presented by the Appellant to it as well as to the Tribunal.

52. That the Respondent asserted that the Appellant misapplied the provisions of the VAT Act by relying on the Second Schedule rather than the First Schedule to the VAT Act, in line with the amendments contained in the Finance Act 2022. The resultant was that the Appellant misclassified its products as zero-rated rather than exempt.

53. It was the Appellant’s position that the Respondent’s reclassification was premised on its misreading of the law and that the Finance Act 2022 did not move the fertilizers under Chapter 31 of East African Community Common External Tariff from zero-rated to exempt supplies. That according to Gazette Supplement No. 106 of 23rd June 2022, Section 31 of the Finance Act 2022 merely amended Part A of the Second Schedule to the VAT Act by inserting, inter alia, a new Paragraph 24 which incorporated into the Second Schedule fertilizers of Chapter 31 of East African Community Common External Tariff.

54. The Appellant submitted that the disputed supplies were fertilizer that not only fell under Chapter 31 of the East African Community Common External Tariff but also were zero-rated as per Paragraph 24 of Part A of the Second Schedule to the VAT Act.

55. The Appellant contended that the Respondent’s decision was manifestly incorrect by basing the same on a false premise that effective 1st July 2022 the Finance Act reclassified fertilizers under Chapter 31 of the East African Community Common External Tariff from the Second Schedule of the VAT Act to the First Schedule of the VAT Act.

56. The Appellant submitted that Respondent erred by failing to properly consider the sample invoices and certificates of analysis submitted by the Appellant with respect to the disputed supplies.

57. The bone of contention in the instant Appeal, as the Tribunal views it, is whether Section 31 of the Finance Act 2022 amended Part A to the Second Schedule or moved the supplies to the First Schedule to the VAT Act, 2013.

58. From the onset, there is no dispute that the products that are subject of this Appeal are fertilizers covered under Chapter 31 of the East African Community Common External Tariff.

59. Section 31 of the Finance Act 2022, read as follows;“The Second Schedule to the Value Added Tax, 2013 is amended –a.In Part A by inserting the following paragraph immediately after paragraph 22-23. …………………………………23. Fertilizers of Chapter 31. 24. ………………”

60. The Tribunal noted, from the above extract that the import of Section 31 to the Finance Act, 2022 was to introduce by way of amendment to Part A of the Second Schedule to the VAT Act, fertilizers under Chapter 31 of East African Community Common External Tariff.

61. The Tribunal has perused the documents placed on record by the parties, and is unable to find any provision(s) within the Finance Act 2022 that moved the fertilizers under Chapter 31 of East African Community Common External Tariff to the First Schedule to the VAT Act.

62. It is to be noted that the Second Schedule to the VAT Act covers and/or deals with zero-rated supplies, while the First Schedule to the VAT Act address exempt supplies.

63. Sections 56 (1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, relating to burden of proof, provides as follows:-Section 56 (1) reads as follows:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”Section 30 reads as follows:-“In a proceeding before the Tribunal, the appellant has the burden of provinga.Where an appeal relates to an assessment, that the assessment is excessive; orb.In any other case, that the tax decision should not have been made or should have been made differently.”

64. To this end, the burden of proof was discharged to indeed show that the fertilizer was not covered under Chapter 31 of the East African Community Common External Tariff and that the fertilizer under Chapter 31 was reclassified from the Second Schedule to the First Schedule, the Respondent has failed to so do.

65. From the foregoing, the Appellant has demonstrated to the Tribunal that the Respondent’s assessment based on a legally unsupported assertion. The Appellant has therefore discharged its burden of proof.

66. Consequently, it is the Tribunal’s position that the Appellant did not misread or misdirect itself in classifying the fertilizers under Chapter 31 of East African Community Common External Tariff as zero-rated rather than exempt products. The Appellant, therefore was justified in classifying the fertilizers under Chapter 31 of East African Community Common External Tariff to be covered under the Second Schedule to the VAT Act as zero-rated supplies.

b. Whether the Respondent’s Objection Decision issued on 6th February 2023 was justified. 67. The Respondent’s Objection decision of 6th February 2023, was premised on the assertion that effective 1st July 2022 the Finance Act 2022 reclassified fertilizers under Chapter 31 of the East African Community Common External Tariff from the Second Schedule of the VAT Act to the First Schedule of the VAT Act.

68. The Appellant raised issues with the Respondent’s assessment being beyond the five year period within which an assessment can be carried as stipulated under Section 35 (6) of the TPA.

69. The Tribunal having established that the Respondent’s assessment was premised on the misapplication of Section 31 of the Finance Act 2022, it is the considered view of the Tribunal, that it would be an exercise in futility and an action in the chase of a red herring, in substantively analyzing and determining the above issue, as the Tribunal has held that there was no legal basis for making the assessment.

70. In light of the foregoing, the Tribunal finds and holds that the Respondent was unjustified in assessing and demanding taxes on VAT vide its Objection decision of 6th February 2023.

71. The upshot of the foregoing is that the Appellant’s Appeal is merited.

Final Decision 72. The Appeal having been found to be merited, the Tribunal issues the following orders;a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision issued on 6th February 2023 be and is hereby set aside.c.The Respondent to reverse the Debit Adjustment Voucher Number 2018180694 dated 15th November 2022, in the sum of Kshs. 5,707,281. 20 relating the VAT in the period of 1st August 2022 to 31st August 2022. d.Each party to bear its own costs.

73. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF MARCH, 2024. ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERELISHAH N. NJERU - MEMBERBERNADETTE GITARI - MEMBERMOHAMED A. DIRIYE - MEMBER