[2024] KETAT 157 (KLR)

Samasource Kenya EPZ Limited v Commissioner of Domestic Taxes (Tribunal Appeal 1363 of 2022) [2024] KETAT 157 (KLR) (Civ) (9 February 2024) (Judgment)

Neutral citation: [2024] KETAT 157 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tribunal Appeal 1363 of 2022

Grace Mukuha, Chair, E Komolo, Jephthah Njagi, T Vikiru & G Ogaga, Members

February 9, 2024

Between

Samasource Kenya EPZ Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a private limited liability company incorporated in Kenya under the Companies Act whose principal business activity is the exportation of artificial intelligence services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. 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 Parts I and II of the First Schedule to the KRA Act for the purposes of assessing, collecting, and accounting for all revenues in accordance with those laws.

3. On 24th November 2021 the Appellant lodged with the Respondent a Value Added Tax (VAT) refund claim of Kshs. 2,445,538. 59 for the period of December 2020.

4. The Respondent stated that it reviewed the refund claim of Reference number KRA202121823016 and disallowed Kshs. 2,183,752. 00 of the refund claim. It then issued a VAT assessment of the same amount on 28th September 2022.

5. The Appellant, dissatisfied with the refund decision, filed its Notice of Appeal on 28th October 2022.

The Appeal 6. The Appeal is premised on the Memorandum of Appeal dated and filed on 11th November 2022 which raised the following grounds: -a.That the Respondent erred in law and fact by rejecting the Appellant’s application for refund of Kshs. 2,183,752. 00 validly lodged under provisions of Section 17 (5) (d) of the Value Added Tax Act, 2013 (VAT Act) by deeming the Appellant’s input VAT to be attributable to exempt supplies.b.That the Respondent erred in law and fact by disallowing the Appellant’s input tax amounting to Kshs. 2,183,752. 00 that was incurred within the requirements envisaged in Section 17 (1) of the VAT Act.c.That the Respondent failed to update the Appellant’s tax status as an Export Processing Zone (EPZ) on the Appellant’s iTax page as soon as the Appellant obtained the EPZ license on 14th October 2020.

Appellant’s Case 7. The Appellant’s case is premised on the following documents filed before the Tribunal: -a.Its Statement of Facts dated and filed on 11th November 2022 and the documents attached thereto; andb.Its Written Submissions dated 27th June 2023 and filed on 29th June 2023 and the documents attached thereto.

8. The Appellant lodged with the Respondent a refund claim of Kshs. 2,445,538. 59 on 24th November 2021 for the period December 2020.

9. The Appellant stated that the Respondent through iTax partially approved the refund claim for payment and disallowed Kshs. 2,183,752. 00 and raised an assessment order of the same amount on 29th September 2022.

10. The Appellant appealed against part of the refund decision through a Notice of Appeal filed on 28th October 2022.

11. The Appellant averred that the Respondent in the assessment order dated 29th September 2022 attributed the Appellant's disallowed input VAT for December 2020 to 'input VAT attributable only to exempt supplies'.

12. The Appellant stated that in its December 2020 VAT return, the Appellant only declared purchases taxable under the standard rate of 16%.

13. The Appellant averred that the Respondent did not contest the validity of the Appellant's refund application for the period December 2020 because, according to the Appellant, its claim was validly lodged pursuant to Section 17 (5) of the VAT Act 2013 which provides: -“(5)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;”

14. The Appellant stated that the Respondent grossly erred by rejecting the Appellant's application due to an erroneous assertion that the input VAT was attributable to exempt supplies.

15. The Appellant stated that it relied on the wordings of Section 17 (5) of the VAT Act 2013 with the emphasis on the phrase 'shall be'. That as it is not in dispute that the Appellant makes zero rated supplies and that the refund application was validly lodged, the law thus mandates the Respondent to allow such a claim for refund of input VAT.

16. The Appellant prayed that the Tribunal be guided by the principle in Cape Brandy Syndicate vs. Inland Revenue Commissioner [1921] 1 KB 64, where the court held: -“In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used ...”

17. That based on the foregoing, the Respondent ought to have allowed the refund application for the period December 2020 in full. That the Respondent's rejection of the refund claim for the period December 2020 is without merit and not hinged on any tax law.

18. The Appellant stated that the December 2020 input VAT claim in dispute amounts to Kshs. 2,183,752. 00 and that the input VAT relates to expenses it incurred in making of its taxable supplies, exportation of artificial intelligence services to SIS. The Appellant attached to the appeal the detailed schedules of the input VAT for this period to ascertain the above.

19. The Appellant cited Section 17 (1) of the VAT Act 2013 which provides that: -“(1)Subject to the provisions of this section and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.”

20. The Appellant submitted that the applicable test in determining whether a deduction is allowable or whether the expenditure was incurred to meet a continuing business demand and generate income was stated in the case of Hancock vs General Reversionary and Investment Company (1919) 1 K.B. 25. That in this case, the court stated as follows: -“…the proper test to apply is this; was the expenditure Incurred in order to meet a continuing business demand, in which case it should be treated as an ordinary business expense and an admissible deduction…”

21. The Appellant requested the Tribunal to expunge the assessment order by the Respondent for the period in dispute, as the same lacks legal and factual merit.

22. The Appellant stated that it was granted its license to operate as an EPZ enterprise, by the Export Processing Zone Authority on 14th October 2020. That this would mean that all taxable supplies to the Appellant by resident suppliers would be deemed as exports and taxed at a zero rate.

23. The Appellant further stated that its new tax status was updated by the Respondent on iTax on 11th December 2020, as reflected on the Appellant's PIN certificate.

24. That in light of the above, the Appellant paid for its supplies against invoices issued with VAT loaded thereon at the standard rate of 16%. That the suppliers then filed their VAT returns declaring the sales made to the Appellant with the output VAT thereon.

25. That as reflected in the Appellant's VAT return extract for the period December 2020, the purchases by the Appellant for the period December 2020 were made in November 2020. That consequently, the input VAT was incurred by the Appellant before the Respondent updated the Appellant's new tax status as an EPZ on iTax on 11th December 2020.

26. The Appellant averred that it is unfair for the Respondent to subsequently disallow the Appellant's validly lodged refund claim for the period December 2020, on the premise of the Appellants' EPZ status whilst it was the Respondent's delay in effecting the said status on the Appellant's iTax page that necessitated the Appellant to incur the input VAT. That the subsequent assessment order of Kshs. 2,183,752. 00 raised by the Respondent was even more damning and unfair to the Appellant.

27. The Appellant further submitted that the court in Republic vs. Kenya Revenue Authority Ex-parte Bata Shoe Company (Kenya) Limited (2014) eKLR held that: -“This brings me to the role and interpretation of tax laws. Payment of tax is an obligation imposed by the law. It is not a voluntary activity. That being the case, a taxpayer is not obliged to pay a single coin more than Is due to the taxman. The taxman on the other hand is entitled to collect up to the last coin that is due from a taxpayer.”

28. The Appellant averred that the Respondent's rejection of the Appellant's VAT refund and subsequent assessment order of Kshs. 2,183,752. 00 is unfair and unlawful and prayed that the Tribunal sets it aside.

29. The Appellant identified the following issues for determination by the Tribunal: -a.Whether the Respondent erred in law and fact by rejecting the Appellant's application for refund of Kshs. 2,183,752. 00 validly lodged under the provisions of Section 17 (5) (d) of the VAT Act by deeming the Appellant's input VAT to be attributable to exempt supplies; andb.Whether the Respondent erred in law and fact by disallowing the Appellant's input tax that was incurred and claimed within the requirements envisaged in Section 17(1) of the VAT Act.

a.On whether the Respondent erred in law and fact by rejecting the Appellant's application for refund of Kshs. 2,183,752. 00 validly lodged under the provisions of section 17 (5) (d) of the VAT Act by deeming the Appellant's input VAT to be attributable to exempt supplies. 30. The Appellant submitted that the Respondent alleged that the input VAT it claimed was only in relation to exempt supplies.

31. The Appellant contended that the VAT returns of December 2020 only included input VAT incurred in the purchasing of supplies vatable at the standard rate of 16%.

32. The Appellant asserted that the input VAT it claimed relates to the input costs incurred in the provision of exported services which are zero rated. That the Respondent's allegation that the Appellant has no claim to the input VAT has no factual basis.

33. The Appellant submitted that it procured goods and services in the course or furtherance of a business carried on by it and paid consideration including input VAT.

34. The Appellant averred that when determining whether a taxpayer is entitled to a deduction of input tax it must be considered whether the expenses to which the input tax is attached were incurred for the furtherance of the business the person claiming the deduction. It referred to the decision in Commissioners of Customs and Excise v Redrow Group Plc [1999] UKHL 4 where the court held that: -“The matter has to be looked at from the standpoint of the person who is claiming the deduction by way of input tax, was something done for him for which, in the course or furtherance of a business carried on by him, he has had to pay a consideration which has attracted value added tax.”

35. The Appellant argued that the fact that the input VAT exceeded the output VAT in the December 2020 tax return allows the VAT refund under Section 17 (1) as read with Section 17(5) of the VAT Act 2013.

b.On whether the Respondent erred in law and fact by disallowing the Appellant's input tax amounting that was incurred and claimed within the requirements envisaged in Section 17(1) of the VAT Act. 36. The Appellant averred that VAT Act 2013 allows for taxpayers to claim input VAT pursuant to Section 17 (1) which provides for the offsetting of input tax against output tax but only to the extent that the supply or importation was incurred to make a taxable supply. That a taxable supply is defined in Section 2 of the same Act as any supply made in Kenya by a person in the course or furtherance of a business carried on by the person.

37. The Appellant cited Section 17 (2) and (3) of the VAT Act 2013 and submitted that according to the provisions of law in VAT Act 2013, for one to lodge a valid claim for input VAT, a taxpayer must prove that the supply or importation was acquired to make taxable supplies using an original tax invoice or certified copy, and that the claim was lodged within 6 months after the end of the tax period in which the supply or importation occurred.

38. The Appellant submitted that the claimed input VAT for the period December 2020 related to office supplies such as office internet service, professional services such as tax consultancy, legal fees, office tea and office cleaning expenses. The Appellant buttressed this by providing a schedule detailing supply. That the schedules prove that the input tax claimed is in relation to expenses incurred by the Appellant in the running of its business.

39. That in the case of Income Tax Appeal No. 6 2018 Mars Logistics Ltd Vs Commissioner of Domestic Taxes it was held that the applicable test in determining whether a deduction is allowable is determining whether the expenditure was incurred to meet a continuing business demand and generate income was stated in the case. In this case, the court stated as follows: -“All expenses attached to the performance of a business operation bona fide performed for the purpose of earning income are deductible, irrespective of whether such expenses are necessary for its performance or attached to it by chance or are bona fide incurred for the efficient conduct of such business operation, provided they are so closely linked to it that they can be regarded as part of the cost of performing it......In order to determine whether a specific expenditure is incurred in the production of income, it has to pass the following dual test, namely, the expenditure must have been incurred for the purpose of producing income. This is the subjective leg of the test. It should be assessed by considering the stated intention of the taxpayer at the time when the expenditure was incurred. The effect of the expenditure must have been to produce income. This is the objective leg of the test. It requires a direct nexus between the expenditure and the income. The criterium for determining whether expenditure was incurred in the production of income is, in my view, whether the expenditure was connected to the taxpayer's income earning operations, rather than whether the expenditure actually produced income or was directly linked to income.”

40. That it was also held in the case of Hancock vs General Reversionary and lnvestment Company (1919) 1 K.B. 25, with the court stating that: -“…the proper test to apply is this; was the expenditure incurred in order to meet a continuing business demand, in which case it should be treated as an ordinary business expense and an admissible deduction.”

41. The Appellant directed the Tribunal to the decision of the Indian Supreme Court in Sasoon J. David & Company P (Ltd) vs CIT 1971 AIR 1441, 1979 SCR 3(878) where the court expressed itself on the meaning of the term 'wholly and exclusively': -“It has to be observed that the expression wholly and exclusively' does not mean necessarily. Ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily, and without any necessity and if it is incurred for promoting the business and to earn profit, the assessee can claim deduction."

42. Further to the above, the Appellant submitted that the claim for input VAT for the tax period was done within six months of the supply as required by Section 17 (2) of the VAT Act 2013. That this assertion is well demonstrated and supported by the schedules annexed to the Appellant's Statement of Facts dated 11th November 2022.

43. It was the Appellant's submission that the established principle of VAT law that a taxable person who makes transactions in respect of which VAT is deductible may deduct the VAT in respect of the goods or services acquired by him, provided that such goods or services have a direct and immediate link with the output transactions in respect of which VAT is deductible. That this threshold has been met by the Appellant as illustrated in the arguments above.

44. The Appellant submitted that the Respondent fully appreciated the fact that the Appellant lodged valid input VAT claims having fully complied with the requirements of Section 17 of the VAT Act 2013 and provided sufficient documentation to support the validity of its claim.

45. The Appellant stated that it was licensed to operate as an EPZ enterprise, by the Export Processing Zone Authority on 14th October 2020. That the license granted by the EPZ Authority grants the Appellant the benefits espoused in Section 29 of the EPZ Act which provides that: -“(1)The export processing zone enterprises, the export processing zone developers and the export processing Zone operators shall be granted exemption from all existing and future taxes and duties payable under the Customs and Excise Act (Cap. 472) and Value Added Tax Act on all export processing zone imports for use in the eligible business activities of the export processing zone enterprise including machinery and equipment, spare parts, tools, raw materials, intermediate goods, construction materials and equipment, office equipment and supplies, and transportation equipment subject to the limitations on goods specified in the Second Schedule to this Act and according to the conditions specified in the Customs and Excise Act and the Value Added Tax Act.”

46. The Appellant argued that its status as an EPZ enterprise should not withhold them from claiming input VAT.

47. The Appellant submitted that Paragraph 2 of the Second Schedule to the VAT Act 2013 provides that the supply of goods or taxable services to an export processing zone business specified in the Export Processing Zones Act as being eligible for duty- and tax-free importation shall be zero rated.

48. The Appellant further submitted that upon receiving its license on 14th October 2020, the Respondent delayed in acknowledging the Appellant's EPZ status on iTax updating the same on 11th December 2020.

49. The Appellant submitted that up and till 11th December 2020 it paid for its supplies against invoices issued with VAT due to the fact that the suppliers could not forgo including VAT in their invoices for their own compliance requirements.

50. The Appellant further submitted that the input VAT deduction in its December 2020 VAT return was in relation to supplies made in November 2020, before the Appellant's new tax status as an EPZ enterprise was loaded on iTax by the Respondent. That therefore, its status as an EPZ cannot be a valid ground to disallow input VAT claim that had been validly incurred as demonstrated above.

51. The Appellant averred that the Respondent fully appreciated the fact that the Appellant lodged valid input VAT claims having fully complied with the requirements of Section 17 of the VAT Act 2013 and that it provided sufficient documentation to support the validity of its claim.

52. The Appellant finally submitted that that the rejection decision should be vacated in its entirety and the input VAT claimed therein be allowed in its entirety.

Appellant’s prayers 53. The Appellant prayed that the Tribunal: -a.Allows the Appeal.b.Sets aside the Respondent’s decision dated 29th September 2022 in its entirety.c.Awards the costs of and incidental to this Appeal.d.Any other orders that the Tribunal may deem fit.

Respondent’s Case 54. The Respondent’s case is premised on the following documents:a.Its Statement of Facts dated and filed on 9th December 2022; andb.Its Written Submissions dated 19th July 2023 and filed on 21st July 2023.

55. The Respondent stated that on 24th November 2021 the Appellant lodged with the Respondent a refund claim of Kshs. 2,445,538. 59 for the period of December 2020.

56. The Respondent stated that it reviewed the refund claim of reference number KRA202121823016 and disallowed Kshs. 2,183,752. 00 of the refund claim and issued a VAT assessment on 28th September 2022.

57. That the Appellant being dissatisfied with the assessment subsequently filed this Appeal vide a Notice of Appeal dated 11th November 2022.

58. It was the Respondent’s averment that it did not err in law or fact as it carefully examined the information available to it before issuing the assessment.

59. The Respondent stated that it was guided by Section 56 (1) of the Tax Procedures Act, 2015 (TPA) that in any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.

60. The Respondent considered the following to be the issues for determination in the matter: -a.Whether the Appellant has discharged its burden of proof by providing the relevant documentation in support of its refund application.b.Whether the Appellant attempted all the remedies available.

a. On whether the Appellant has discharged its burden of proof by providing the relevant documentation in support of its refund application. 61. The Respondent cited Section 17 (1) and (2) of the VAT Act 2013 which provides that:-“(1)Subject to the provisions of this section and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.(2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1)—(a)the person does not hold the documentation referred to in subsection (3), or(b)the registered supplier has not declared the sales invoice in a return,the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation:Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

62. The Respondent invited the Tribunal to note that the Appellant in its Appeal did not challenge the assessment on grounds that the Respondent failed to review the documents submitted. That this gives credence to the Respondent's position that the Appellant never submitted all the documentation required to support its refund application.

63. The Respondent averred that the Appellant did not contest that Kshs. 261,786. 59 was partially allowed in the its refund application.

64. The Respondent stated that the Appellant was registered as an Export Processing Zone on 14th October 2020. That Paragraph 2 of Part A of the Second Schedule to the VAT Act 2013 provides that the supply of goods or taxable services to an export processing zone business as specified in the Export Processing Zones Act is zero-rated.

65. The Respondent averred that supplies to the Appellant after 14th October 2020 ought not to be charged VAT. That if the Appellant was charged VAT it ought to have claimed it as tax paid in error instead.

66. The Respondent submitted that since the Appellant has not presented any evidence to show that the Respondent's assessment is incorrect, erroneous or excessive, the Appellant has not discharged its burden of proof. The Respondent submitted that due to this, the Respondent’s decision retains its presumption of correctness.

67. In reliance on the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2o21] eKLR Nairobi High Court Income Tax Appeal No. E125 of 2020, the Respondent submitted that the High Court held as follows at paragraph 32 of the judgment: -“32. The shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the Commissioner's assessments or determinations of deficiency. [10] The commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position. [11] If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer.”

68. That in TAT No. 28 of 2018 Joycott General Contractors Limited -VS- Kenya Revenue Authority, the Tribunal in dismissing the appeal held that: -“We find that the Appellant seems to forget that it bears the burden of proof; in law, to demonstrate to this Tribunal that the Respondent's assessment was wrong. Especially with regards to the under declarations and variance in respect of VAT and income sales. On the contrary, the Appellant has not bothered to substantially traverse the assessment raised. All it has done is to make sweeping and expansive accusations without substantial support.”

69. The Respondent reiterated that Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act place the burden of proof upon the taxpayer.Section 56 (1) of the TPA provides 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 of the Tax Appeals Tribunal Act provides as follows: -“In any proceedings under this part, the burden shall be on the taxpayer to prove that a decision is incorrect,"a.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.”

70. The Respondent submitted that the documents and literature provided by the Appellant did not provide any additional information, which would have led to the Respondent granting the Appellant the whole refund amount applied for.

b.On whether the Appellant attempted all the remedies available. 71. The Respondent referred to the doctrine of exhaustion as defined in Black's Law Dictionary 10th Edition as follows: -“exhaustion of remedies. The doctrine that, if an administrative remedy is provided by statute, a claimant must seek relief first from the administrative body before judicial relief is available. The Doctrine's purpose is to maintain comity between the courts and administrative agencies and to ensure that courts will not be burdened by cases in which juridical relief is unnecessary”

72. Further, the Respondent cited Sections 47A and 47B of the TPA which provide as follows: -“Section 47A of the TPA provides that: -(1)Where tax has been paid in error, the Commissioner shall, except as otherwise provided in this Act or the relevant tax law, refund such tax.(2)In processing a refund under subsection (1), the provisions of section 47 (1), (2), (3), (4) and (5) shall apply, with the necessary modifications.(3)For the purposes of this section, "tax paid in error" means any tax paid which the Commissioner is satisfied ought not to have been paid.”Section 47B of the TPA provides that: -“The Commissioner may, upon approval by the Cabinet Secretary, refund a tax paid in error in any case where the supply is exempt or zero-rated under the Act but such exemption or the zero rating was not processed within the specified period due to circumstances beyond the control of the taxpayer.”

73. The Respondent submitted that the Finance Act 2022 introduced Section 47A and 47B in the TPA with an aim of providing a remedy for any situation where the taxpayer pays taxes in error, and averred that it is statute bound to follow the set procedure relating to tax paid in error.

74. The Respondent relied on the decision of a 5-Judge Bench in Mombasa High Court Constitutional Petition No. 159 of 2018 consolidated with Constitutional Petition No. 201 of 2019 (2020) eKLR where the court elaborately dealt with the doctrine of exhaustion. That the court stated as follows: -“52. The question of exhaustion of administrative remedies arises when a litigant, aggrieved by an agency's action, seeks redress from a Court of law on an action without pursuing available remedies before the agency itself. The exhaustion doctrine serves the purpose of ensuring that there is a postponement of judicial consideration of matters to ensure that a party is, first of all, diligent in the protection of his own interest within the mechanisms in place for resolution outside the Courts. This encourages alternative dispute resolution mechanisms in line with Article 159 of the Constitution and was aptly elucidated by the High Court in R vs. Independent Electoral and Boundaries Commission (I.E.B.C) Ex Parte National Super Alliance (NASA) Kenya and 6 others [2017] eKLR, where the Court opined thus:”

75. The Respondent averred that the Appellant had an alternative process to claim the alleged tax paid in error, and that the dispute resolution mechanism should have been invoked and or exhausted before the Appellant approached the court. It submitted that a refund procedure has been provided for to address grievances such as those raised by the Appellant.

76. The Respondent further cited the decision in the case of William Odhiambo Ramogi &3 others v Attorney General & 4 others; Muslims for Human Rights & 2 others (Interested Parties) [2020] eKLR where the court held as follows: -“The question of exhaustion of administrative remedies arises when a litigant, aggrieved by an agency's action, seeks redress from a Court of law on an action without pursuing available remedies before the agency itself. The exhaustion doctrine serves the purpose of ensuring that there is a postponement of judicial consideration of matters to ensure that a party is, first of all, diligent in the protection of his own interest within the mechanisms in place for resolution outside the Courts.”

Respondent’s prayers 77. The Respondent prayed that the Tribunal:a.Upholds the Respondent’s assessment dated 29th September 2022. b.Dismisses the Appeal with costs to the Respondent.

Issues for Determination 78. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issues for determination as follows:a.Whether the Respondent’s decision to reject the Appellant’s refund claim of Kshs. 2,183,752. 00 was proper in law.b.Whether the Respondent was justified in issuing a VAT assessment of Kshs. 2,183,752. 00.

Analysis and Findings 79. Having identified the issues that call for its determination, the Tribunal proceeds to analyse them as hereunder.

80. On 24th November 2021 the Appellant lodged with the Respondent a Value Added Tax (VAT) refund claim of Kshs. 2,445,538. 59 for the period of December 2020.

81. The Respondent stated that it reviewed the refund claim of reference number KRA202121823016 and disallowed Kshs. 2,183,752. 00 of the refund claim. It then issued the Appellant with a VAT assessment of Kshs. 2,183,752. 00 on 28th September 2022.

82. The Appellant, dissatisfied with the refund decision, filed its Notice of Appeal on 28th October 2022. a.Whether the Respondent’s decision to reject the Appellant’s refund claim of Kshs. 2,183,752. 00 is proper in law.

83. The Respondent stated that the Appellant was registered as an Export Processing Zone on 14th October 2020. That Paragraph 2 of Part A of the Second Schedule to the VAT Act 2013 provides that the supply of goods or taxable services to an export processing zone business as specified in the Export Processing Zones Act is zero rated.

84. The Respondent averred that supplies to the Appellant after 14th October 2020 ought not to be charged VAT. That if the Appellant was charged VAT it ought to have claimed it as tax paid in error instead.

85. The Respondent further submitted that the documents and literature provided by the Appellant did not provide any additional information, which would have led to the Respondent granting the Appellant the whole refund amount applied for.

86. The Appellant rebutted the Respondent’s finding by submitting that the Respondent delayed in acknowledging the Appellant's EPZ status on iTax and that the Respondent updated the same on 11th December 2020.

87. The Appellant submitted that up and till 11th December 2020, it paid for its supplies against invoices issued with VAT due to the fact that the suppliers could not forgo including VAT in their invoices for their own compliance requirements.

88. Further, the Appellant submitted that the input VAT deduction in its December 2020 VAT return was in relation to supplies made in November 2020, before the Appellant's new tax status as an EPZ enterprise was loaded on iTax by the Respondent. That therefore, its status as an EPZ cannot be a valid ground to disallow input VAT claim that had been validly incurred.

89. The Appellant averred that the Respondent did not contest the validity of the Appellant's refund application for the period of December 2020 because, according to the Appellant, its claim was validly lodged pursuant to Section 17 (5) of the VAT Act 2013.

90. The Tribunal reviewed all the information and documents adduced by the Appellant and determined that alongside the Statement of Facts and submissions outlined above, the Appellant provided only the following documents in relation to the impugned objection decision:a.An excerpt of the Appellant’s December 2020 VAT return.b.The Appellant’s December 2020 refund application acknowledgment receipt dated 24th November 2021. c.The Appellant’s list of purchases which it was charged VAT of Kshs. 2,183,752. 00 and claimed a refund of, which the Respondent subsequently disallowed.d.The Respondent’s assessment order dated 29th September 2022 charging the Appellant VAT of Kshs. 2,183,752. 00 for the period of December 2020. e.The Appellant’s KRA PIN certificate.

91. The Tribunal observes that it is not disputed by the parties that the Appellant was granted by the Export Processing Zone Authority a license to operate as an export processing zone (EPZ) business on 14th October 2020.

92. The Tribunal notes that the VAT Act 2013 and the VAT Regulations clearly prescribe the VAT treatment of EPZ businesses and should be the reference guide on the applicability of VAT to the transactions related to an EPZ business.

93. Paragraph 2 of Part A of the Second Schedule to the VAT Act 2013 provides that the supply of goods or taxable services to an export processing zone business as specified in the Export Processing Zones Act (Cap. 517), as being eligible for duty and tax free importation.

94. Further, Regulation 14 of the Value Added Tax Regulations, 2017 lists the documents relating to supply to an EPZ business or an SEZ as follows: -“14. (l)The documents relating to a supply required as proof of a supply of goods or services to an Export Processing Zone business or Special Economic Zone shall be-

(a)a copy of the recipient's export processing zone licence; or Special Economic Zone licence;(b)a certificate signed by the recipient of the supply stating that the goods have been received and are for use in the approved operations of an export processing zone enterprise; and(c)for goods, the export entry duly certified by the proper officer of customs.”

95. According to Section 2 of the VAT Act 2013, a ‘registered person’ means any person registered under Section 34, but does not include an export processing zone enterprise or a special economic zone.

96. It was the Tribunal’s observation that the Appellant reiterated several times in its pleadings and submissions that it claimed a refund of VAT which it perceived to have overpaid under Section 17 (5) of the VAT Act 2013 which provides that: -“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;” (our emphasis supplied)

97. Section 17 (1) of the VAT Act 2013 provides that: -“Subject to the provisions of this Act and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.” (our emphasis supplied)

98. The Tribunal finds that the Appellant, having been licensed to operate as an EPZ business from 14th October 2020, was expressly excluded from being considered a registered person for purposes of VAT pursuant to the meaning of ‘registered person’ provided in Section 2 of the VAT Act 2013 (cited above).

99. The Tribunal finds that the Appellant’s allegation that the Respondent failed to acknowledge and update the Appellant’s EPZ status on its iTax profile until 11th December 2020, which as per the Appellant, led to the Appellant’s suppliers charging it VAT, as not relevant.

100. The Appellant did not demonstrate with evidence, how the Respondent’s alleged omission compromised the validity of the Appellant’s EPZ licence which was granted by the EPZ Authority under the EPZ Act, and how the Respondent’s alleged omission impeded the applicability of the expressly provided VAT compliance requirements under the VAT Act and VAT regulations.

101. Based on the foregoing, from 14th October 2020, the Appellant was not allowed to deduct the Kshs. 1,892,692. 25 input tax in its December 2020 return as a deduction under Section 17 (1) of the VAT Act 2013.

102. It is the Tribunal’s considered view that the Respondent was justified in determining that the input tax that the Appellant incurred from 14th October 2020 was indeed tax paid in error. The Tribunal however points out that the Appellant, having desired to be refunded this tax, ought to have claimed the refund of tax under the now repealed Section 30 of the VAT Act 2013 which read as follows: -“Where, in respect of any supply, tax has been paid in error, the Commissioner shall, except as otherwise provided by the regulations, refund such tax:Provided that no refund shall be made under this section unless a claim in respect thereof is lodged within twelve months from the date the tax became due and payable under section 19. ”

103. The Tribunal maintains that the input VAT of Kshs. 1,892,692. 25 which the Appellant incurred from 14th October 2020 and claimed a refund of, ought to have been sufficiently supported by the Appellant to enable the Respondent to approve the refund claim. The Tribunal observed that the Appellant failed to provide original tax invoices issued for the supplies or certified copies of invoices and the supporting documents listed in Regulation 14 of the VAT Regulations 2017 before the Respondent and the Tribunal for review. The Appellant merely provided a list of purchases made and the computed input tax that it deducted in its December 2020 VAT return.

104. The Tribunal further notes that from the list of purchases the Appellant attached to its Appeal, the Appellant declared to have incurred input tax prior to 14th October 2020, when it was licensed to operate as an EPZ business. These purchases and corresponding input tax are in the table below:PIN of supplier Name of supplier Invoice date Description of goods/services Taxable value (Kshs.) Amount of VAT (Kshs.)

P000600799B Nairobi Sports House Limited 7 Oct 2020 Purchase of games and sports equipment for EPZ office 263,550. 85 36,897. 12

P000617198L Odds and Ends Limited 1 Sep 2020 Purchase of chairs for EPZ 298,947. 37 41,852. 63

P000591376W Ryce East Africa Ltd 24 Aug 2020 Payment for generator installation and commissioning at EPZ 1,516,500. 00 212,310. 00

Total input tax incurred before 14th October 2020 deducted in Dec 2020 VAT return 291,059. 75

105. The Tribunal maintains that the input VAT of Kshs. 291,059. 75 which the Appellant incurred before 14th October 2020 and claimed as refundable under Section 17 (5) of the VAT Act 2013 ought to have been sufficiently supported by the Appellant to enable the Respondent to approve the refund claim. The Tribunal notes that the Appellant failed to demonstrate how the supplies in the table above were acquired to make taxable supplies, failed to prove that it incurred the input VAT in the making of zero rated supplies, and failed to provide original tax invoices issued for the supplies or certified copies of invoices as expressly required under Section 17 (3) of the VAT Act 2013 before the Respondent and Tribunal for review. The Appellant merely provided a list of purchases made and the computed input tax that it deducted in its December 2020 VAT return.

106. 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.”

107. Accordingly, the Tribunal finds that the Appellant did not discharge its burden of proof to demonstrate that the Respondent’s refund decision on the VAT refund claim for the period of December 2020 was incorrect as required under Section 56 (1) of the Tax Procedures Act, 2015, and also 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.

108. Based on the foregoing, the Tribunal finds that the Appellant failed to sufficiently support its refund claim that arose from input tax it incurred before and after 14th October 2020 when it was licensed to operate as an EPZ business.

109. Consequently, the Tribunal finds that the Respondent’s decision to disallow the VAT refund claim of Kshs. 2,183,752. 00 for the period of December 2020 is proper in law.b)Whether the Respondent was justified in issuing a VAT assessment of Kshs. 2,183,752. 00.

110. Following the Respondent’s decision to partially reject the Appellant’s refund claim for the period of December 2020, the Respondent issued the Appellant with a VAT additional assessment of Kshs. 2,183,752. 00 in an assessment order dated 29th September 2022.

111. The Tribunal observes that its jurisdiction is provided in Section 3 of the Tax Appeals Tribunal Act (TAT Act) which states: -“There is established a Tribunal to be known as the Tax Appeals Tribunal to hear appeals filed against any tax decision made by the Commissioner.”

112. The TAT Act does not define the term ‘tax decision’. However, the term is defined in the Section 3 of the Tax Procedures Act 2015 (TPA) which provides that: -“‘tax decision’ means—(a)an assessment…”

113. Section 3 of the TPA defines ‘appealable decision’ as an objection decision and any other decision made under a tax law other than a tax decision or a decision made in the course of making a tax decision.

114. The Tribunal asserts that a taxpayer who wishes to dispute a decision by the Commissioner must first exhaust remedies available under a tax law before seeking remedies under another law as provided in Section 51 (1) of the TPA cited below: -“A taxpayer who wishes to dispute a tax decision shall first lodge an objection against that tax decision under this section before proceeding under any other written law.”

115. Section 51 (8) of the TPA provides that after receiving a validly lodged notice of objection to a tax decision that was lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and Commissioner's decision shall be referred to as an ‘objection decision’.

116. The Tribunal notes that Section 51 (1) of the TPA as read together with the meaning of appealable decision under Section 3 of the TPA elaborates the jurisdiction of the Tribunal. These provisions of the TPA uphold the doctrine of exhaustion and demonstrate that tax decisions of the Commissioner are not appealable decisions.

117. Further, Section 52 (1) of the TPA provides as follows: -“(1)A person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the provisions of the Tax Appeals Tribunal Act, 2013 (No. 40 of 2013).”

118. The Tribunal relies on the case of Transfix Limited vs Commissioner of Domestic Taxes Miscellaneous Application No. 178 of 2022 where the court stated that in the absence of a valid objection by a taxpayer that: -“…there was no decision issued by the Commissioner that could possibly form a basis for an appeal before the Tribunal… In the circumstances, the Tribunal finds that there is no conceivable appeal with merit that could be possibly filed by the Applicant for appropriate determination by the Tribunal.”

119. The Tribunal is further guided by the decision in case of W.E.C. Lines Ltd vs. The Commissioner of Domestic Taxes [TAT Case No.247 of 2020] where it was held at paragraph 70 while reiterating the holding in Krystalline Salt Ltd vs KRA [2019] eKLR that: -“Where there is a clear procedure for redress of any particular grievance prescribed by the constitution or an Act of Parliament, that procedure should be strictly followed. Accordingly, the special procedure provided by any law must be strictly adhered to since there are good reasons for such special procedures. The relevant procedure here is the process of opposing an assessment by the Commissioner.”

120. The Tribunal notes that the Appellant did not object to the VAT additional assessment of Kshs. 2,183,752. 00 raised by the Respondent in the assessment order dated 29th September 2020, and that there is no objection decision.

121. Based on the foregoing, the Tribunal finds that there is no appealable decision. Without an appealable decision, the Tribunal lacks the jurisdiction to determine the matter of the VAT assessment that the Respondent issued to the Appellant.

Final Decision 122. Based on the foregoing analysis, the Tribunal finds that the Appeal is devoid of merit. Accordingly, the Tribunal proceeds to make the following Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent’s refund decision dated 29th September 2022 be and is hereby upheld.c.Each party to bear its own costs.

123. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9THDAY OF FEBRUARY, 2024. GRACE MUKUHA - CHAIRPERSONDR ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBERTIMOTHY VIKIRU - MEMBERGLORIA A. OGAGA - MEMBER