[2024] KETAT 941 (KLR)

Sterling and Wilson Renewable Energy Limited v Commissioner of Legal Services and Board Co-ordination (Tax Appeal E243 of 2023) [2024] KETAT 941 (KLR) (12 July 2024) (Judgment)

Neutral citation: [2024] KETAT 941 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E243 of 2023

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

July 12, 2024

Between

Sterling and Wilson Renewable Energy Limited

Appellant

and

Commissioner of Legal Services and Board Co-ordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company registered in Kenya under the Company’s Act dealing in the business of renewal of energy.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority is charged with the responsibility of among others, assessment, collection, accounting, and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Appellant on 8th December 2022 lodged a VAT refund application on the iTax portal under the amended Section 47 (1) (b) of the Tax Procedures Act as amended by Finance Act 2022. The Respondent rejected the said application via email by the Commissioner on 21st January 2023 on grounds that the company does not have zero rated sales. The Appellant lodged a manual objection through a letter dated 13th February 2023. The Appellant made another manual objection through a letter dated 16th February 2023.

4. The Respondent considered the objection and issued its decision vide a letter dated 25th April 2023 rejecting the objection.

5. Being aggrieved with the Respondent’s decision, the Appellant filed this Appeal vide Notice of Appeal dated and filed on 24th May 2023.

The Appeal 6. The Appellant lodged the Memorandum of Appeal dated and filed on 24th May 2023 and set out its grounds of appeal as follows;a.The Appellant on 8th December 2022 lodged a VAT refund application on iTax portal (Annexure 1) and uploaded the attached letter (Annexure 2) to support the VAT refund application under the amended Section 47 (1) (b) of the Tax Procedures Act as amended by Finance Act 2022 and which was effective from 1st July 2022. b.The said application was rejected via email by the Commissioner on 21st January 2023 (Annexure 3), with reason for rejection being that the company does not have zero rated sales. The rejection notices mentioned in the attached email consist of credit adjustment vouchers which are attached below;Credit adjustment voucher number 20148259646 for the VAT refund for the month of October 2021 amounting to Kshs. 1,427,673/- (Annexure 4).Credit adjustment voucher number 20148259645 for the VAT refund for the month of December 2021 amounting to Kshs. 1,691,534/- (Annexure 5).Credit adjustment voucher number 20148259647 for the VAT refund for the month of July 2021 amounting to Kshs. 4,173,120/- (Annexure 6).Credit adjustment voucher number 20148259648 for the VAT refund for the month of April 2021 amounting to Kshs. 4,383,061/- (Annexure 7).Credit adjustment voucher number 20148259643 for the VAT refund for the month of March 2022 amounting to Kshs. 109,675,108/- (Annexure 8).Credit adjustment voucher number 20148259639 for the VAT refund for the month of October 2022 amounting to Kshs. 216,654/- (Annexure 9).Credit adjustment voucher number 20148259642 for the VAT refund for the month of June 2022 amounting to Kshs. 349,206/- (Annexure 10).Credit adjustment voucher number 20148259640 for the VAT refund for the month of August 2022 amounting to Kshs. 358,816/- (Annexure 11).Credit adjustment voucher number 20148259644 for the VAT refund for the month of January 2022 amounting to Kshs. 365,931/- (Annexure 12).Credit adjustment voucher number 20148259641 for the VAT refund for the month of July 2022 amounting to Kshs. 559,221/- (Annexure 13).c.On 13th February 2023, the Appellant made a manual objection letter for the above to the VAT refund section addressing it to Mr. Stephen China Wafula, the officer who had rejected the original refund claim (Annexed 14).d.On 16th February 2023, the Appellant made another manual objection letter for the above to the Chief Refunds Officer addressing it to the attention of Mr. Hezron Ligare (Annexure 15).e.The Respondent confirmed receipt of the above letter dated 16th February 2023 via email on 28th February 2023, informing the Appellant that the objection has been redirected to the Legal Service and Board Co-ordination Department Tax Dispute Resolution Division also called the Internal Review of Objections Department. (Annexure 16).f.The independent review of objections department responded via an email dated 22nd March 2023 requesting the Appellant to provide ground as to why the excess VAT input has been considered as an overpayment (Annexure 17).g.The Appellant responded on the same via email on 22nd March 2023 (Annexure 18) and provided the attached letter (Annexure 19) re-iterating the validity of the VAT refund application.h.On 25th April 2023, the Legal Services and Board Co-ordination Department Tax Dispute Resolution Division responded with their decision (Annexure 20), rejecting the objection, and stating that the VAT refund was ab initio devoid of merit as it was lodged on a misapprehension of law. The objection was thus disallowed, and the Appellant was advised to appeal the decision via the Tax Appeals Tribunal.

The Appellant’s Case 7. The Appellant’s case is premised on its;i.Statement of Facts dated and filed on 24th May 2023 together with the documents attached thereto; and,ii.Written submissions dated 28th January 2024 and filed on 28th January 2024.

8. The Appellant stated that it carried out contractual works relating to construction of a solar project in Kenya, which project is vatable. The Appellant had only one client namely Malindi Solar Group Limited. The project was carried out between years 2019 and 2021 and it is in the operations and maintenance stage.

9. The Appellant engaged various sub-contractors to carry out the project however due to the Covid-19 pandemic and financial constraints, the overall venture ended up being a loss-making project. The Appellant stated that the delay in completing the project led to vatable contractual damages thus ended up being in a VAT credit position due to excess input VAT claimed over output charged.

10. The Appellant argued that it does not have any other contract in place against which it can utilize the excess input VAT credit as it has resolved to close the Kenyan branch. Consequently, the Appellant proceeded to file for refund of its excess input VAT.

11. The Appellant stated that Prior to the commencement of the Finance Act 2022 which came into force on 1st July 2022, the client’s status for refund of VAT was enshrined under the old Section 47 of Tax Procedures Act governing overpaid taxes which provided as follows:‘‘Section 47 of TPA: Refund of overpaid tax(1)When a taxpayer has overpaid a tax under a tax law the taxpayer may apply to the Commissioner, in the approved form, for a refund of the overpaid tax within five years of the date on which the tax was paid.Provided that for value added tax the period of refund shall be as provided for under the Value Added Tax Act, 2013 (No. 35 of 2013).’’

12. According to the Appellant, from the above, the refunds application and period for refund was guided by the VAT Act, which restricted VAT refund application to excess input due to zero-rated sales, VAT on bad debts and Withholding VAT refunds.

13. The Appellant asserted that the Finance Act 2022 repealed the whole of Section 47 of the Tax Procedures Act and replaced it with a new Section 47 which now provides as follows:“Section 47. Offset or refund of overpaid tax(1)Where a taxpayer has overpaid a tax under any tax law, the taxpayer may apply to the Commissioner, in the prescribed form—(a)To offset the overpaid tax against the taxpayer's future tax liabilities; or(b)for a refund of the overpaid tax within five years, or six months in the case of value added tax, after the date on which the tax was overpaid.”

14. The Appellant interpreted the new section to mean that taxpayers who had VAT credits as of 15th July 2022 can now apply for refunds of those VAT credits within six months, as the process of refunds is now solely governed by the Tax Procedures Act without reference to the VAT Act.

15. Consequently, the Appellant stated that it rightfully applied for VAT refund for the excess credits for which it is entitled to.

16. The Appellant in its written submissions identified two issues for determination:i.Whether the request for VAT refund is valid; and,ii.What is the total amount due to the Appellant in VAT refund.

17. On the first issue, the Appellant relied on Article 201 (b) of the Constitution which provides as follows:“The following principles shall guide all aspects of public finance in the Republic—(b)The public finance system shall promote an equitable society, and in particular—(i)the burden of taxation shall be shared fairly.’

18. The Appellant submitted that its client, Malindi Solar Group Limited raised the liquidated damages invoice to the Appellant on which VAT was declared and paid by the client. The Appellant submitted that it is unable to offset the same against any output VAT by virtue of it not having any projects and thus carrying the burden of tax unfairly and unjustifiably in contravention to Article 201 (b) and (i) of the Constitution of Kenya.

19. The Appellant relied on Section 17 of the VAT Act 2013 to submit that taxpayers have obligation to deduct input tax. However, the Appellant submitted that the Respondent selectively applied the law by relying on Section 17 of the VAT Act only to make its decision when it should have read the said section alongside the amended Section 47 of the Tax Procedures Act.

20. The Appellant relied on the case of Commissioner of Domestic Taxes vs. Metoxide Limited (Income Tax Appeal E100 of 2020) [2021] KEHC 3 (KLR) (Commercial and Tax) (2 September 2021) (Judgment), Income Tax Appeal E100 of 2020 where while upholding the Tribunal’s decision to refund the Taxpayer his VAT claim, the court stated as follows:“With greatest respect to the Tribunal, the beginning point is the wording in section 17 of the VAT Act. The important words are “taxable supply to, or importation made by”. In order for a trader to be entitled to a refund on input VAT, he must prove ‘a taxable supply or importation’. The basis of the refund is not just evidence of payment of the claimed VAT, but prove that there was ‘a taxable supply or importation’ for which the tax was paid and therefore input tax is claimable.”

21. Further, the Appellant relied on Commissioner of Income Tax vs. Westmont Power (K) Ltd Nairobi High Court Income Tax Appeal No. 626 of 2002, wherein the Court while citing Inland Revenue vs. Scottish Central Electricity Company [1931] 15 TC 761 expressed itself as follows:“Even though taxation is acceptable and even essential in democratic societies, taxation laws that have the effect of depriving citizens of their property by imposing pecuniary burdens resulting also in penal consequences must be interpreted with great caution. In this respect, it is paramount that their provisions must be express and clear so as to leave no room for ambiguity...any ambiguity in such a law must be resolved in favour of the taxpayer and not the Public Revenue Authorities which are responsible for their implementation.”

22. With regards to the second issue, the Appellant submitted that the claim for a refund arose after this amendment to the Tax Procedures Act. Therefore, Appellant submitted that the VAT Credit as from 30th November 2022, stood at Kshs. 123,200,327. 47.

Appellant’s Prayers 23. The Appellant requested the Tribunal to instruct the Respondent to approve the VAT refund claim in accordance with the attached Statement of Facts.

Respondent’s Case 24. The Respondent’s case is premised on its;a.Statement of Facts dated and filed on 23rd June 2023 together with the documents attached thereto; and,b.Written submissions dated 9th February 2024 and filed 12th February 2024.

25. The Respondent’s case is that the Appellant vide its VAT refund application letter dated 8th December 2022 revealed that the company was primarily engaged for one project and lacked alternative means to utilize the accumulated VAT credits as it was winding up its business in Kenya.

26. The Respondent rejected the refund application on 21st January 2023 on account of the credits not being derived from zero-rated sales vide system generated email. The Appellant objected to the refund rejection on 16th February 2023. The Respondent then issued its Objection Decision vide a letter dated 25th April 2023 wherein it rejected the Appellant’s objection.

27. Just like the Appellant, the Respondent relied on Section 47 (1) of the Tax Procedures Act. The Respondent also relied on Section 17 (5) of the VAT Act that states as follows:‘‘(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)The Commissioner is satisfied that such excess arises from making zero rated supplies; andThe registered person lodges the claim for the refund of the excess taxes within twelve months from the date the tax becomes due and payable.’’

28. The Respondent stated that the Appellant’s refund application was premised on misapprehension. It argued that the Appellant deemed its VAT input credits as an overpayment of tax. Consequently, the Respondent stated that the Appellant’s application for refund was therefore, null and void ab initio.

29. Apart from the above, the Respondent averred that the Appellant bears the burden of proof pursuant to Section 56 (1) of the Tax Procedures ACT. The Respondent maintained that the Appellant failed to demonstrate with sufficient clarity how the Respondent erred in computing, investigating and raiding the assessments in question.

30. The Respondent in its written submission identified three issues for determination that is,i.What law is applicable in an application for refund of VAT credits that accrued between the years 2019 and 2021;ii.Whether the Respondent was justified in rejecting the application for refund; and,iii.Whether the Appellant discharged the burden of proof.

31. In regards to the first issue, the Respondent submitted that the Appellant alleged that the project was undertaken between the year 2019 and 2021. The Responded therefore, submitted that the VAT credits claimed accrued between years 2019 and 2021. The Respondent further submitted that the law applicable is the law as was at the time the cause of action, in this case accrual of the excess VAT, arose and not when the taxpayer such as the Appellant herein seeks a remedy.

32. Apart from the above, the Respondent submitted that the amendment to Section 47 of the Tax Procedures Act by Section 28 of the Finance Act 2022 meant that an application for refund or offset of any VAT credits that accrued on or before 30th June 2022 is to be governed by the law before the amendment and for those that accrues after 1st July 2022 is to be made within six (6) months of the overpayment.

33. The Respondent relied on the Supreme Court in the case of Samuel Kamau Macharia & another vs. Kenya Commercial Bank Limited & 2 others [2012] eKLR wherein the court stated as follows:“(61)As for non-criminal legislation, the general rule is that all statutes other than those which are merely declaratory or which relate only to matters of procedure or evidence are prima facie prospective, and retrospective effect is not to be given to them unless, by express words or necessary implication, it appears that this was the intention of the legislature.’’

34. The Respondent submitted that law does not apply retrospectively and that the law applicable for a refund of VAT credits that accrued between the year 2019 and 2021 was the provisions of Section 47 of the Tax Procedure Act as read together with Section 30 and 31 of the Value Added Tax Act.

35. Finally, on this issue, the Respondent relied on the Court of Appeal decision in the case of Mount Kenya Bottlers Ltd & 3 others vs. Attorney General & 3 others [2019] eKLR to support the preposition that tax laws should be interpreted strictly.

36. On whether the Respondent was justified in rejecting the application for refund, the Respondent relied on Section 47 (1) of the Tax Procedure Act submitted as at the time the VAT credits accrued to the Appellant, which is between 2019 and 2021, the refund application and period for refund was guided by the VAT Act which restricted VAT refund application to excess input due to zero-rated sales, VAT on bad debts and/or Withholding VAT refunds.

37. It submitted that prior to the amendments in the Finance Act 2022, Section 47 (2) of the Tax Procedure Act required the Respondent to subject the claim for a refund to an audit and that Appellant failed to provide documents to prove that the VAT credits was as a result of zero-rated sales, VAT on bad debts and/or Withholding VAT therefore, the Respondent relied on the available materials. The Respondent cited the case of Oliver Merrick Fowler & another vs. Kenya Revenue Authority [2022] eKLR where the court stated that the commissioner should consider fairly the material placed before it to make a decision.

38. Finally, on this issue, the Respondent submitted that it considered the available information and in absence of the evidence that the Appellant’s VAT claim accrued from zero-rated sales, VAT on bad debts and/or Withholding VAT, it rejected the Application for refund.

39. On whether the Appellant discharged the burden of proof, the Respondent submitted that the Appellant failed to discharge the burden of proof are required under Section 56 (1) of the Tax Procedures Act. The Respondent relied on the case of Commissioner of Income Tax vs. Lerematesho Ltd [1976] eKLR to submit that the Appellant has a duty to prove by providing evidence that the Respondent’s decision is wrong. Consequently, the Appellant submitted that the Appellant failed to discharge the burden of proof.

Respondent’s prayers 40. The Respondent prayed that the Honourable Tribunal;a.Upholds the Respondent’s Objection Decision dated 25th April 2023 as proper and inconformity with the provisions of the law; and,b.That this Appeal be dismissed with costs to the Respondent.

Issues For Determination 41. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts and submissions, puts forth the following issues for determination:i.Whether Section 47 of Tax Procedures Act after amendment by the Finance Act 2022 was the Applicable law for the Appellant’s VAT Refund claim; andii.Whether the Respondent was justified in rejecting the Appellant’s refund claim.

Analysis And Findings 42. The Tribunal having identified the issues for determination, shall analyse the same as herein under;i.Whether Section 47 of Tax Procedures Act after amendment by the Finance Act 2022 was the Applicable law for the Appellant’s VAT Refund claim.

43. Whereas the Appellant argued that the Applicable law is Section 47 of Tax Procedures Act after amendment by the Finance Act 2022, the Respondent argued that the applicable law is Section 47 of Tax Procedures Act prior amendment by the Finance Act 2022.

44. The Tribunal has examined the provisions of Section 42 of the Finance Act No. 22 of 2022 and agrees with both parties that said law amended the Tax Procedures Act 2015, by repealing Section 47 and replacing with a new Section 47 of the Tax Procedures Act. Pursuant to Section 1 of the said Finance Act, the new Section 47 of the Tax Procedures Act commenced on 1st July, 2022.

45. Section 47 (1) of the Tax Procedure Act as amended by the Finance Act 2022 provides as follows:“47. Offset or refund of overpaid tax(1)Where a taxpayer has overpaid a tax under any tax law, the taxpayer may apply to the Commissioner, in the prescribed form—(a)To offset the overpaid tax against the taxpayer's outstanding tax debts and future tax liabilities; or(b)for a refund of the overpaid tax within five years, or six months in the case of value added tax, after the date on which the tax was overpaid.’’

46. On the other hand, Section 47 of the repealed Section 47 of the Tax Procedure Act provided as follows:“47. Refund of overpaid tax(1)When a taxpayer has overpaid a tax under a tax law the taxpayer may apply to the Commissioner, in the approved form, for a refund of the overpaid tax within five years of the date on which the tax was paid.

Provided that for value added tax the period of refund shall be as provided for under the Value Added Tax Act, 2013 (No. 35 of 2013).”

47. The relevant provision of VAT Act is Section 17 (5) as was when the Appellant undertook the project which provided as follows:‘‘(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)The Commissioner is satisfied that such excess arises from making zero rated supplies; and(b)The registered person lodges the claim for the refund of the excess tax within twelve months from the date the tax becomes due and payable.’’

48. The Tribunal is of the view that what matters be it under the repealed Section 47 Tax Procedures Act or under the new Section 47 of the Tax procedures Act, is the time of overpayment.

49. It then follows that if the overpayment occurred under the repealed Section 47 Tax Procedures Act, the applicable law would be the repealed law. If the overpayments occurred under the new Section 47 of the Tax Procedures Act, then the applicable law would be the new Section 47. The time of overpayment also determines whether the claim is valid or time barred. We say so because time starts running after the date on which the tax was overpaid under the new Section 47 of the tax procedures Act, or from the date the tax becomes due and payable under Section 17 (5) (b) of the VAT Act as read together with the repealed Section 47 of the Tax procedure Act.

50. The Tribunal has examined refund application dated 8th December 2022 wherein the Appellant claimed Kshs. 123,200,324. 00. If the Appellant carried out the projected in 2019 to 2021, yet Section 17 (5) (b) of the VAT Act required the Appellant to lodge the claim for the refund of the excess tax within twelve months from the date the tax becomes due and payable, why did the Appellant wait until 8th December 2022 to lodge the claims? The Appellant’s pleadings do not answer this question.

51. The Appellant carried out the project in 2019 to 2021. The Finance Act 2022 was not in picture at the material time. Then why would the Appellant seek to benefit from a law that was not in force in first place? There is nothing under the new Section 47 of the Tax Procedures Act that indicates that the said section was meant to apply retrospectively to claims that were supposed to be lodged before the said section took effect. Then why would the Appellant attempt to rely on the said provision?

52. The Appellant made overpayments under the Section 47 before it was repealed by Finance Act 2022. Therefore, the Appellant claim falls under the said section. This is a case where the Appellant slept on its rights. Equity aids the vigilant, not the indolent. In fact, it is the Appellant’s case that the new Section 47 of the Tax Procedure Act does not require reference to the VAT Act. It appears that the Appellant choose an easy route to claim its refunds instead of following the ‘tedious’ process under the VAT Act. It appears that the Appellant was avoiding the provisions of VAT Act at all costs and the Appellant chose the path of indolence.

53. This Tribunal is alive to the general principle that laws do not apply retrospectively unless the law in issue indicates express intention to apply retrospectively. In Samuel Kamau Macharia & another vs. Kenya Commercial Bank Limited & 2 others [2012] eKLR observed that all statutes other than those which are merely declaratory or which relate only to matters of procedure or evidence are prima facie prospective. In Duncan Otieno Waga vs. The Attorney General Petition No. 94 of 2011, the High Court held that the Constitution of Kenya is only prospective and the acts occurring prior to the Constitution are, unless otherwise stated by the Constitution itself, to be judged by the existing legal regime that is, the former Constitution.

54. Since the Appellant relied on Section 47 of the Tax Procedure Act as amended by Finance Act 2022, the Appellant failed to discharge its mandate under Section 17 (5) of the VAT Act.ii.Whether the Respondent was justified in rejecting the Appellant’s claim

55. As demonstrate herein above, the Appellant having proceeded under the wrong law, the Appellant did not discharge the mandate under Section 17 (5) of the VAT Act. There is nothing on record that attempts to demonstrate that excess that the Appellant claim arises from making zero rated supplies as required under Section 17 (5) of the VAT Act. The Appellant’s Statement of Facts is ambiguous without particularity. The Appellant merely stated that;‘‘the Appellant carried out contractual works relating to construction of a solar project in Kenya, a vatable project.’’

56. The Statement of facts does not have material facts to support the Appeal.

57. In Darwine Wholesalers Limited vs. Commissioner of Investigations and Enforcement (Income Tax Appeal E051 of 2021) [2023] KEHC 23537 (KLR) the court held as follows:“Under section 59 of the TPA and section 43 of the VAT Act the Commissioner is expressly empowered to ask for additional information to ascertain the tax chargeable. This legal position is in consonance with section 107 and 112 of the Evidence in that the balance of proof lies with the party with the knowledge of facts. Further section 30 of the Tax Appeals Tribunal Act (TATA) and section 56 of the TPA imposes the burden of proof on the tax payer to prove that an assessment was wrong or that it was excessive.’

58. Similarly, in Tumaini Distributors Company (K) Limited vs. Commissioner of Domestic Taxes [2020] eKLR the Court held that the taxpayer has the burden to prove that the tax decision is wrong. This Tribunal in the case of Digital Box Limited vs. Commissioner of domestic investigations and Enforcement [2020] affirmed that that the burden to prove that the Respondent’s decision is wrong falls on the taxpayer. Tribunal is of respective view that the Appellant herein has not discharged this burden of proof.

59. Under the circumstances, the Tribunal is unable to fault the Respondent’s decision.

Determination 60. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal lacks merit and consequently makes the following orders; -a.The Appeal be and is hereby dismissed;b.The Respondent’s decision issued on 25th April 2023 is hereby upheld; and,c.Each party to bear its own cost.

61. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF JULY 2024ROBERT M. MUTUMA - CHAIRMANELISHAH N. NJERU - MEMBERMUTISO MAKAU - MEMBERBERNADETTE M. GITARI - MEMBERABDULLAHI DIRIYE - MEMBER