[2023] KETAT 164 (KLR)

Salsa Global Investment Co Ltd v Commissioner of Domestic Taxes (Appeal 254 of 2021) [2023] KETAT 164 (KLR) (10 February 2023) (Judgment)

Neutral citation: [2023] KETAT 164 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 254 of 2021

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

February 10, 2023

Between

Salsa Global Investment Co Ltd

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private liability company incorporated in Kenya under the Companies Act and whose main business is repackaging of surgical spirits among other things.

2. The Respondents is a principal officer appointed under the Kenya Revenue Authority Act, Cap 460 laws of Kenya. 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. 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 Respondent issued a Notice of assessment on 5th January 2021 for total tax amounting to Kshs. 8,819,143. 84. The Appellant objected on 26th January, 2021.

4. There were engagements between the parties including request for documents by the Respondent and subsequently on 25th March 2021, the Respondent issued its Objection Decision confirming the assessments.

5. The Appellant filed this Appeal at the Tribunal on the 27th May, 2021 challenging the Respondent’s confirmed assessments.

The Appeal 6. The Appeal was based on the following grounds as captured in the Memorandum of Appeal dated 12th May, 2021 and filed on 27th May, 2021:-i.That the Respondent erred in law & in fact, by classifying surgical spirit as a beverage whilst it was at the time a medicament.ii.That the Respondent erred in law by not finding that surgical spirit was zero rated for VAT purposes.iii.That the Commissioner failed to analyse the facts, evidence and the law leading to an erroneous decision.

The Appellant’s Case 7. Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Appellant’s Statement of Facts dated 12th May 2021 and filed on 27th May 2021 together with the documents attached thereto.ii.The Appellant’s written submissions dated 25th May 2021 and filed on 26th May 2021. iii.The Appellant’s supplementary Grounds of Appeal dated 2nd June 2022 and filed on 17th August 2022

8. The Appellant submitted that it has a resident pharmacist duly licensed by the Pharmacy and Poisons Board. That it sources its major raw material-denatured from sugar factories and for this case Mumias Sugar Company after seeking approval from Kenya Revenue Authority.

9. That on 23rd March, 2020 it made a request to Kenya Revenue Authority to purchase 100,000 litres of denatured ethanol from Mumias Sugar Company. The Respondent replied by approving the request and allowed the Appellant to purchase in batches of 20,000 litres. The same was also exempted from Excise Duty.

10. The Appellant added that further batches would only be approved after submitting reports of usage as per the Respondent’s directions. That it was able to get approval for all the ethanol it had purchased upon complying fully with the Respondent’s stringent conditions.

11. The Appellant further submitted that ethanol was pure alcohol and while inadvisable, is drinkable and used in various amounts to make alcoholic drinks. It added that denatured ethanol had a small % of denaturing agent added to make the ethanol undrinkable. That aside from the denaturing agent, denatured ethanol is exactly the same as normal ethanol. The denaturants are added to ensure that the ethanol cannot be consumed as a spirit. In this regard, denatured ethanol is very similar to methylated spirits

12. It averred that the term ‘denatured alcohol’ refers to alcohol products adulterated with toxic and/or had tasting additives (e.g methanol, benzene, pyridine, castor oil, gasoline, isopropyl alcohol and acetone), making it unsuitable for human consumption. The most common additive used is methanol (5-10%), giving rise to the term ‘methylated spirit’. Denatured alcohol is used as a lower-cost solvent or fuel for home-scale or industrial use compared with the heavily taxed pure alcohol and alcohol used in beverages.

13. The Appellant stated that it only uses denatured ethanol for its intended use. i.e making surgical spirits. That it only adds castor oil, diethyl phthalate and methyl salicylate. Such product can only be used as disinfectant or antiseptic and cannot be ingested.

14. According to the Appellant, its product is classified as a medicament and is classified as an essential medicine. The Appellant referred to page 86 of the Kenya essential medicine list 2019 published by the Ministry of Health in 2019.

15. It stated that as per the VAT Act, 2013, medicaments are zero rated for tax purposes.

16. That the term prophylactic according to Oxford Dictionary means done or used in order to prevent disease.

17. The Appellant averred that it had read the Respondent’s Statement of Facts and in particular Paragraph 19 where the Respondent argues that surgical spirit is classified under Chapter 22 of the HS Code on beverages, spirits & gases and vinegar. That under the ejustem generis rule, the term ‘spirit’ as used in this refers to a beverage to be ingested and not a disinfectant. That the Respondent was willfully treating ‘Dettol’ and ‘Jack Daniels’ as one product.

18. To support its case, the Appellant stated that in Republic v Chief Land Registrar & 3 Others ex-parte Sidian Bank Limited (Formerly known K-Rep Bank Ltd [2016] eKLR. According to ejusdem genesis rule where there are general words following particular and specific words the general words must be confined to things of the same kind as those specified. The Appellant submitted that HS Code on beverages, spirits, gases & vinegar refer to products which share a common characteristic of being ingested.

19. It explained that ethanol is denatured for the sole purpose of preventing it from being used as a recreational beverage (spirit) which the Respondent had alluded to. That indeed the denaturing was conducted at the supplier’s factory and under strict supervision of the Respondent to prevent unscrupulous traders using it to manufacture alcoholic drinks.

20. The Appellant contended that ethanol used to manufacture the spirit referred to under Paragraph 19 of the Respondent’s Statement of Facts is heavily taxed and is never exempted for Excise duty.

21. The Appellant prayed that the Tribunal finds the sales ought to have been subjected to zero percent rate and therefore no VAT was payable as denatured ethanol was zero rated.Appellant’s Prayers

22. The Appellant prayed that the Tribunal finds that;a.That the Appeal is meritedb.That the objection decision dated 25th March 2021 confirming the additional assessment be set aside and/or vacated with costs to the Appellant.

The Respondent’s Case 23. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:a.The Respondent’s Statement of Facts dated 23rd June 2021 and filed on the same dateb.The Respondent’s written submissions dated 10th August, 2022 and filed on 16th August, 2022.

24. The Respondent submitted that it carried out a review of the Appellant’s business to confirm whether it was a compliant taxpayer. That it found that the Appellant was dealing with the purchase and sale of surgical spirit but was not accounting for VAT for the years of income 2017 and 2018 and subsequently issued a Notice of Assessment on 5th January, 2021 as shown in the table below;Tax Period Tax amount

1st January 2017-31st December 2017 3,827,282. 40

1st January 2018-31st December 2018 4,991,862. 44

Total 8,819,143. 84

25. The Respondent submitted that upon receipt of the Respondent’s Notice of Assessment, the Appellant lodged a Notice of Objection on 26th January, 2021. That the Respondent reviewed the Notice of Objection and vide letter dated 16 & 17th March 2021 it requested the Appellant to provide supporting documents namely;i.Bank Statement,ii.Audited Accounts,iii.Sales and Purchases Schedules and source documents andiv.Expenses Schedule and Source documents.

26. The Respondent stated that despite the demand, the Appellant failed to avail any of the documents it had requested and subsequently on 25th March, 2021, the Appellant’s Notice of Objection was rejected and confirmed the assessments.

27. The Respondent averred that it was not until 20th April, 2021 when the Appellant responded to the confirmation letter with reason that the company had been manufacturing surgical spirit which is not vatable in a bid to reopen the case for review.

28. In response to the Appeal, the Respondent averred that the Appellant having made a supply of the surgical spirit to various health facilities as stated in Paragraph 1 of its Statement of Facts, the Appellant was expected to charge and account for VAT as provided for in Sections 5 & 6 of the VAT Act. To support its case, the Respondent cited the provisions of Section 6(1) &(4) of the VAT Act.

29. The Respondent contended that pursuant to the provisions of Section 5 & 6 of the VAT Act, the Appellant had a duty to account for VAT for the supplies made which were not zero rated as claimed. This the Appellant failed to do as it has rightfully admitted in Paragraph 2 of the Statement of Facts.

30. The Respondent further stated that although the income from the sale of the goods in issue were accounted for under the income tax, the tax in dispute was VAT governed by the VAT Act.

31. The Respondent submitted that although the surgical spirit which the Appellant deals in is used for medical purposes, the same was neither classified as exempt or zero rated supplies as provided for in the 1st and 2nd Schedule to the VAT Act, respectively and is therefore chargeable to tax.

32. The Respondent insisted that surgical spirit was classified under Chapter 22 of the HS Code on Beverages, spirits & gases and Vinegar and under Chapter Note 1(e) therein excludes medicaments of heading 30. 03 or 30. 04 and as such the goods were chargeable to VAT.

33. The Respondent contended that the value of the goods which were taxed were derived from the income for the year 2017 & 2018 for reasons that the Appellant failed to provide supporting documents as was requested for by the Respondent.

34. The Respondent stated that upon objection to the VAT assessments, the Appellant failed to provide any supporting documentation to support the objection leading to the confirmation of the VAT assessments.

35. To support its case, the Respondent relied on Section 17(3)(a) of the VAT Act which provides as follows;“The documentation for the purposes of subsection (2) shall be—a.an original tax invoice issued for the supply or a certified copy;b.a customs entry duly certified by the proper officer and a receipt for the payment of tax;c.a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction;d.a credit note in the case of input tax deducted under section 16(2); ore.a debit note in the case of input tax deducted under section 16(5).”

36. The Respondent averred that the Appellant failed to provide support for invoices leading to the confirmation of VAT assessments. That it was also guided by Section 51(3) and 51(4) of the Tax Procedures Act and Section 43(3) of the VAT Act.

37. The Respondent further stated that the input tax that was claimed by the Appellant was claimed out of time as the taxes accrued in 2017 and 2018 while the Appellant only brought up the issue of input VAT at the objection stage whereas the input tax can only be claimed 6 months after it has been incurred.

38. It was the Respondent’s contention that pursuant to Section 56 of the Tax Procedures Act, it was the obligation of the taxpayer to prove that the decision of the Respondent was incorrect. That by failing to provide the supporting documents to support its case and having failed to support the objection as required by Section 51(3) of the Tax Procedures Act, the Appellant failed to discharge its burden of proof.

39. The Respondent averred that the Appellant was accorded fair administrative actions but failed to make good use of the opportunity despite several reminders to avail supporting documents. The Respondent further averred that it is trite law under Section 107 of the Evidence Act that he who alleges must prove.

Respondent’s Prayer 40. The Respondent prayed that the Tribunal finds that;i.That the objection decision dated 25th March 2021 confirming additional assessment is proper in law and be upheldii.That this Appeal be dismissed with costs to the Respondent as the same lacks merit.

Issues For Determination 41. The Tribunal upon due consideration of the pleadings, documents and the written submissions filed on the part of the parties was of the view that there were only two issues that crystalized for its determination as follows: -a.Whether the Appellant’s Appeal was properly before the Tribunal.b.Whether the Respondent erred in its assessment of VAT on the Appellant.

Analysis And Determination a) Whether the Appellant’s Appeal was properly before the Tribunal 42. The Tribunal noted that the genesis of the Appeal was the Respondent’s Objection Decision dated 25th March 2021. The Respondent averred that it was not until 20th April, 2021 when the Appellant responded to the confirmation letter with reason that the company had been manufacturing surgical spirit which is not vatable in a bid to reopen the case for review.

43. Sections 12 and 13 of Tax Appeals Tribunal Act provides as follows as regards procedure of appeals to the Tribunal.12Appeals to the Tribunal A person who disputes the decision of the Commissioner on any matter arising under the provisions of any tax law may, subject to the provisions of the relevant tax law, upon giving notice in writing to the Commissioner, appeal to the Tribunal, Provided that such person shall before appealing, pay a non-refundable fee of twenty thousand shillings.13. Procedure for appeal1. A notice of appeal to the Tribunal shall—a.be in writing;b.be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner.

43. The appellant shall, within fourteen days from the date of filing the notice of appeal, submit enough copies, as may be advised by the Tribunal, of— (a) a memorandum of appeal; (b) statements of facts; and (c) the tax decision.”

44. Going by the provisions of Section 13(1) (b), the Appellant having been served with an Objection Decision on 25th March, 2021 ought to have filed a Notice of Appeal on or before 24th April, 2021. This Appeal was filed on 27th May, 2021 which was 63 days subsequent to the issuance of the Objection Decision by the Respondent.

45. Although the parties did not raise the issue of the Notice of Appeal, the Tribunal noted from the documents filed by the Appellant that there was no evidence of the Appellant having filed the same and therefore it was not clear when the Appellant ought to have filed its Appeal documents at the Tribunal

46. The Tribunal therefore determined that this Appeal filed by the Appellant on 27th May, 2021 which was more than 2 months after being served with the Objection Decision was filed late. The Tribunal further noted that the Appellant did not seek leave to file the appeal out of time.

47. For a taxpayer who has not filed its appeal documents in time, the law provides under Section 13(3) and (4) of the Tax Appeals Tribunal Act the procedure for the taxpayer to remedy the same. The Sections provides as follows;(3)The Tribunal may, upon application in writing, extend the time for filing the notice of appeal and for submitting the documents referred to in subsection (2).(4)An extension under subsection (3) may be granted owing to absence from Kenya, or sickness, or other reasonable cause that may have prevented the applicant from filing the notice of appeal or submitting the documents within the specified period.”

48. The Tribunal recognises that jurisdiction is a very weighty matter and which ought to be dispensed with in the first instance due to the fact that without jurisdiction the Tribunal would be acting ultra vires. In Patrick Kirunja Kithinji vs. Victor Mugira Marete Nairobi CA Civil Appeal No. 48 012014, the Court held as follows:“In our view whether or not an appeal is filed on time goes to the jurisdiction of this Court. It is trite that this Court has jurisdiction to entertain appeals filed within the requisite time and/or appeals filed out of time with leave of the Court. To hold otherwise would upset the established clear principles of institution of an appeal in this Court.Consequently, we find that an appeal filed out of time is not curable under Article 159. ”

49. Having carefully reviewed the Appellant’s appeal documents, the Tribunal confirms that the substantive Appeal was indeed lodged on 27th March, 2021 outside the mandatory period without leave from the Tribunal.

50. By using the word “shall”, Section 13 makes it mandatory that the Notice of Appeal must be filed within 30 days after the taxpayer being served with the Objection Decision. Failure to do so is fatal and can only be cured by seeking, and obtaining, leave from the Tribunal to file the appeal outside the stipulated time period. Whereas Sections 13(3) and (4) provided the Appellant with the avenue for seeking enlargement of time and thus regularising the Appeal, this avenue was not exercised by the Appellant.

51. In Equity Group Holdings Limited-vs-Commissioner of Domestic Taxes [2021] eKLR, the High Court held, at Paragraphs 52 and 53 as follows:-

52. Parliament in its wisdom deployed the word “shall” twice in section 51(11). The provision reads “The Commissioner shall make the objection decision within sixty days from the date of receipt of— (b) any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.

53. The classification of statutes as mandatory and directory is useful in analyzing and solving the problem of the effect to be given to their directions. There is a well-known distinction between a case where the directions of the legislature are imperative and a case where they are directory. The real question in all such cases is whether, a thing, has been ordered by the legislature to be done, and what is the consequence, if it is not done. The general rule is that an absolute enactment must be obeyed,or, fulfilled substantially. Some rules are vital and go to the root of the matter, they cannot be broken; others are only directory and a breach of them can be overlooked provided there is substantial compliance.”

52. In the case of The Owners of the Motor Vessel “Lillian S” vs. Caltex Oil (Kenya) Ltd (1989) KLR as reported in Peter Lai Muthoka vs. Standard Group [2017] eKLR) Nyarangi J.A., held as follows:“Jurisdiction is everything. Without it, a court has no power to make one more step. Where a court has no jurisdiction, there would be no basis for a continuation of proceedings pending other evidence. A court of law downs tools in respect of the matter before it the moment it holds the opinion that it is without jurisdiction.”

53. Flowing from the above, this Tribunal finds that this Appeal was filed out of time without seeking and obtaining prior leave of the Tribunal. The Appeal is thus found to be defective for being in contravention of the law and hence the Tribunal lacks the requisite jurisdiction to hear and determine the same.

54. Having entered the above finding the Tribunal did not delve into the other matter that fell for its determination namely; Whether the Respondent erred in its assessment of VAT on the Appellant as it had been rendered moot.

Final Decision 55. Based on the foregoing analysis the Tribunal determined that the Appeal is incompetent and completely unsustainable in law and the Orders that accordingly recommend themselves are as follows: -i.The Appeal be and is hereby struck out.ii.Each party to bear its own costs.

56. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF FEBRUARY, 2023. ERIC N. WAFULACHAIRMANCYNTHIA B. MAYAKAMEMBERGRACE MUKUHAMEMBERABRAHAM KIPROTICHMEMBERJEPHTHAH NJAGIMEMBER