[2023] KETAT 960 (KLR)

Zensar Technologies Limited v Commissioner of Domestic Taxes (Tax Appeal 1049 of 2022) [2023] KETAT 960 (KLR) (24 November 2023) (Judgment)

Neutral citation: [2023] KETAT 960 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1049 of 2022

RM Mutuma, Chair, M Makau, EN Njeru, W Ongeti & BK Terer, Members

November 24, 2023

Between

Zensar Technologies Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a branch registered in Kenya with its Holding Company registered in India as a Public Company and a registered taxpayer. Its core business engagement is the provision of information technology services, consulting, business solution, software development and allied services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5 (2) of the act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 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 dispute in this Appeal arose when the Respondent issued the Appellant with a refund rejection notice for VAT on the 5th February 2022 amounting to Kshs. 31,548,480. 00 in respect of supplies made in the year 2016 and 2017.

4. The Appellant disputed the Respondent’s findings and lodged its notice of objection to the refund rejection on 27th July 2022.

5. The Appellant issued a decision to the Appellant’s objection on the 2nd August 2022.

6. The Appellant being aggrieved by the decision issued by the Respondent, lodged this Appeal, filing its Notice of Appeal on the 6th September 2022.

The Appeal 7. The Appellant’s Memorandum of Appeal dated 22nd September 2022 and filed on the 23rd September 2022 is premised on the following grounds, that;a.The Respondent erred in law and fact by rejecting the Appellant’s VAT refund claim provided for under Section 31 (1) of the VAT Act, 2013. b.The Respondent erred in law and in fact by rejecting the Appellant’s VAT Refund claim on iTax without reviewing documents submitted in support of the VAT claim; andc.The Respondent erred in law and in fact by arriving at a conclusion without conducting a proper audit assessment or communicating its findings and or the reason for rejecting the refund application as required under Section 49 of the Tax Procedures Act 2015.

The Appellant’s Case 8. The Appellant’s case is premised on the herein under filed documents before the Tribunal;a.The Appellant’s Statement of Facts dated 22nd September 2022 and filed on the 23rd September 2022 together with the documents attached thereto.b.The Appellant’s response to the Respondent’s Preliminary Objection dated 8th November 2022 and filed on 9th November 2022. c.The Appellant’s written submissions dated and filed on 16th March 2023.

9. That the Appellant stated that through its tax agents, initiated a VAT refund application on iTax, pursuant to Section 31 of the VAT Act in respect of supplies made to Nakumatt Holdings Limited for the period 2016 and 2017.

10. The Appellant stated that the Respondent conducted an audit on the Appellant’s refund claim for the period 2016 and 2017 with regards to vatable supplies made to the Appellant’s debtor, Nakumatt Holdings Limited and rejected the claim on iTax without disclosing to the Appellant or its agent the reasons behind the rejection.

11. The Appellant averred that through its tax agents, lodged an objection via a notice dated 27th July 2022 opposing the Respondent’s rejection of the Appellant’s VAT refund application, pursuant to Section 31 of the VAT Act, 2013.

12. The Respondent via decision dated 2nd August 2022, rejected the Appellant’s VAT refund claim amounting to Kshs. 31,548,480 and advised that the Appellant may appeal the decision if dissatisfied with the Respondent’s position.

13. The Appellant filed a Notice of Appeal on 6th September 2022, pursuant to Section 52 (1) of the Tax Procedures Act, 2015, Sections 12 and 13 (1) of the Tax Appeals Tribunal Act, 2013 and Rule 3 of the Tax Appeals Tribunal (Procedure) Rules, 2015 instituting this Appeal.

14. The Appellant submitted that Respondent filed a Notice of Preliminary Objection dated 21st October 2022 to which the Appellant responded on 9th November 2022.

15. The Appellant further averred that it identified three issues for determination, namely;a.Whether the Respondent erred in law and fact by rejecting the Appellant’s VAT refund claim provided for under Section 31 (1) of the VAT Act, 2013. b.Whether the Respondent erred in law and in fact by rejecting the Appellant’s VAT refund claim on iTax without reviewing documents submitted in support of VAT refund claim; andc.Whether the Respondent erred in law and in fact by arriving at a conclusion without conducting a proper audit assessment or communicating its findings and/or the reason for rejecting the refund application as required under Section 49 of the Tax Procedures Act 2015.

16. The Appellant stated that on 17th January 2013, it entered into a contractual agreement with Nakumatt Holding Limited for provision of services under a Master Service Agreement for subject matter expertise, support for Oracle Financials & Retail Applications.

17. That the Appellant contented that it made vatable supplies of IT service to Nakumatt Holdings Limited for the period 2016 to 2017, resulting into the VAT recoverable of Kshs. 48,209,854. 46, however the Appellant did not receive any payments from the recipient of the supply, Nakumatt Holdings Limited for the period under review.

18. The Appellant averred that its several attempts to recover the outstanding debt for the aforesaid period through it Advocates bore no fruit.

19. The Appellant further avowed that its main client, Nakumatt Holdings Limited was declared insolvent and incapable of honouring its outstanding debt obligations in 2017. Subsequently, upon the insolvency of Nakumatt Holdings Limited in 2017, the Appellant could no longer sustain its business in Kenya.

20. The Appellant asserted that as an unsecured creditor it did not receive any payment relating to vatable supplies made to the recipient of the supplies, Nakumatt Holdings Limited for the period 2016 to 2017.

21. The Appellant contented that the Administrator of Nakumatt Holdings Limited issued a letter dated 11th July 2018 on bad debts write offs under Section 15 (2) of the Income Tax Act and refund of VAT under Section 31 of the VAT Act, 2013, read together with the Legal Notice No. 37 of 2011 on Guidelines on Allowability of Bad Debts containing information applicable to creditors of Nakumatt Holdings Limited.

22. The Appellant stated that its agents on record initiated a VAT refund application on iTax amounting to Kshs. 31,548,480. 00 for invoices pertaining to the year 2017. That though the VAT recoverable was for the period 2016 and 2017 amounted to Kshs. 48,209,854. 46, the iTax was configured to disregard any invoices dated beyond 4 years from the date of application in line with the Tax Laws Amendment Act, 2020.

23. The Appellant averred that the Respondent conducted an audit of the Appellant’s VAT refund claim. The Appellant’s agent facilitated the audit process and provided all the required supporting documents via email on 25th June 2021.

24. The Appellant contented that it received an email on 28th June 2021 from the Respondent acknowledging receipt of the documents, however informed that the audit report had already been finalized and to expect official communication from the Refunds Department. That neither the Appellant nor its tax agent have to date received the Respondent’s findings and final position on the refund audit, however the VAT refund application was rejected on iTax.

25. The Appellant asserted that a review of the supporting documents submitted by the Appellant, will verify that all efforts were made to collect the bad debts, however the debt had become uncollectable.

26. It was the Appellant’s contention that the application for refund was a valid one and was made on time and in accordance to Section 31 of the VAT Act, 2013, further on the Regulations applicable to refund of bad debts and should be allowed to claim VAT refund on supplies made to Nakumatt Holdings Limited for the period 2016 and 2017.

27. The Appellant averred that it had a legitimate expectation that the Respondent would review information submitted by the Appellant before rejecting the Appellant’s VAT refund claim on iTax. Further the Appellant stated that no reason was given by the Respondent regarding the rejection of the Appellant’s VAT refund claim which is a violation of the Respondent’s duty under Article 49 of the Tax Procedures Act, 2015.

28. The Appellant averred the negative effect of the procedural irregularity denied the Appellant the opportinuty to have its VAT refund application properly evaluated based on the relevant facts and evidence provided to proof the debt and all efforts made to recover the debt.

29. The Appellant submitted in the interest of procedural fairness and justice, it should be able to claim for VAT refund relating to 2016 for the entire amount of VAT pertaining to the period 2016 and 2017.

30. The Appellant submitted that the Respondent’s rejection of VAT incurred by the Appellant is arbitrary and highly prejudicial to the Appellant and unless the Tribunal intervenes, the Appellant shall continue to suffer irreparable economic loss at the hand of the Respondent.

Response to the Respondent’s Preliminary Objection 31. The Appellant in its response to the Respondent’s Preliminary Objection filed on 9th November 2022, set out the following grounds, That;a.The Respondent wilfully intended to mislead the Tribunal by stating it issued the Appellant with a rejection notice dated 5th February 2022 on the basis that the “claimant” Appellant did not avail supporting documents yet the Appellant submitted email correspondence demonstrating that the Respondent confirming receipt of supporting documents via email dated 28th June 2021. b.The Appellant exhausted all reasonable avenues to conclude the dispute with the Respondent and filed a valid Objection application notice pursuant to Section 51 of the Tax Procedures Act, 2015. c.The Respondent’s rejection of VAT incurred by the Appellant is arbitrary and highly prejudice to the Appellant; andd.The Appeal is reasonable and fair and unless this Honourable Tribunal intervenes, the Appellant shall continue to suffer irreparable economic loss at the hands of the Respondent.

32. The Appellant while submitting on the Preliminary Objection reiterated and relied on all the averments made out in its Statement of Facts and submissions to the Appeal, which the Tribunal shall not reproduce.

Appellant’s Prayers 33. The Appellant made the following prayers to the Tribunal, that;a.The Respondent’s decision contained in the letter dated 2nd August 2022 rejecting the Appellant’s VAT refund claim amounting to Kshs. 31,548,480. 00 be set aside.b.An Order be issued directing the Respondent to review the supporting documents submitted and refund VAT as the bad debts relating to the Appellant’s debtor, Nakumatt Holdings Limited.c.A declaration from the Respondent that the debts are allowable on account of insolvency of the Appellant’s debtor, Nakumatt Holdings Limited.d.The Appeal be allowed with costs to the Appellant; ande.Any other orders that the Honourable Tribunal may deem fit.

Respondent’s Case 34. The Respondent’s case is premised on the herein under filed documents before the Tribunal;a.The Respondent’s Statement of Facts dated 12th October 2022 and filed on 13th October 2022. b.The Respondent’s Notice of Preliminary Objection dated and filed on 21st October 2022 and consequently the Notice of Preliminary Objection dated 6th March 2023. c.The Respondent’s bundle of documents dated and filed on 4th April 2023 together with the documents attached thereto.d.The Respondent’s written submissions dated and filed on 4th April 2023.

35. The Respondent stated that the Appellant made vatable supplies of IT services to Nakumatt Holding for the period 2016 to 2017.

36. That the Appellant made a refund claim application for a refund on 17th December 2020, which the Respondent issued a rejection notice on 5th February 2022.

37. The Respondent stated that the Appellant being dissatisfied with the refund rejection, it objected manually on 29th July 2022, which Objection was a late Objection.

38. That the Respondent stated that the refund claim was rejected on the basis that the Appellant had failed to avail documents in support of its claim.

39. That the Respondent made reference to VAT Regulations 12 where a refund claim should be accompanied by certain documents, being;a.Document issued to him by the person with whom he proves in the insolvency of the debtor, specifying the total amount proved, except where a claim is made because over three years have elapsed since the registered person paid the tax.b.A copy of the tax invoice provided in respect of each taxable supply upon which the claim is based.c.Records or other documents, showing that the tax has been accounted for and paid on each supply upon which the claim for a refund of tax is based.d.Evidence that every reasonable effort has been made to have a debt settled; ande.A declaration by him that he and the buyers are independent of each other.

40. The Respondent contented that based on the above, the Appellant failed to availed the documents required and as such failed to discharge the burden of proof as required under Section 56 (1) of the TPA.

41. That the Respondent asserted that the decision to reject the Appellant’s refund claim was valid.

42. That the Respondent asserted that it issued the objection decision on 29th July 2022 rejecting the application, which was within fourteen (14) days as is stipulated under Section 51 (7A) of the TPA.

43. The Respondent, in its Preliminary Objection while making the prayer for the Appeal to be struck out, raised four grounds, namely;a.The Appellant’s Appeal is out of time and is in contradiction to Section 52 (1) of the TPA as read together with Sections 13 (1) & (3) of the Tax Appeals Tribunal Act, 2013 and Rule 3 (1) (b) of the Tax Appeals Tribunal (Procedure) Rules 2015, thus contravening the law.b.Without prejudice to issue (a) above, the Appeal herein is premature and offends Section 51 of the TPA.c.The Appeal is therefore an abuse of the process of the Tribunal and waste of resources.d.The Appeal is thus fatally defective, lacks merit and must fail.

44. That the Respondent submitted that it identified one issue for determination in this Appeal, as follows;

a. Whether the Respondent’s Preliminary Objection dated 6th March 2023 is merited. 45. The Respondent submitted that the Appellant preferred an Appeal against its decision communicated vide the letter dated 2nd August 2022, the grounds of the Appeal are substantive in nature as they challenge the purported action by the Respondent to reject VAT refund claims, and invited the Tribunal to interrogate whether the aforesaid letter of 2nd August 2022 in fact disallowed the Appellant’s VAT refunds as claimed.

46. The Respondent asserted that the letter dated 2nd August 2022 is not appealable in nature, but rather an advisory/guidance to the Appellant to directly challenge the alleged refund application rejection directly to the Tribunal rather than lodge an Objection.

47. That the Respondent further placed reliance of its assertions on Section 47 of the TPA as amended by Section 42 of the Finance Act, which amendment came into effect on the 1st July 2022.

48. The Respondent contended that such advisory as contained in the letter of 2nd August 2022 cannot be a decision subject to an appeal in the manner the grounds in the Appeal are framed and the letter as drawn amounts to a private/technical ruling within the meaning of Section 67 of the TPA, which rulings pursuant to Section 67 (5) of the TPA are not decisions under the TPA or TAT Act and which are capable of interrogation by the Tribunal.

49. The Respondent asserted that the only ground of Appeal, if any, that can be raised from the said letter is whether the Respondent was right or wrong in its advisory.

50. That the Respondent admitted that it made a decision rejecting the refund application and which decision the Appellant ought to have subjected to appeal and not lodge an Objection.

51. That the Respondent placed insistence on the fact the decision rejecting the refund claim was made on 5th February 2022.

52. The Respondent submitted that there was no proper Appeal before the Tribunal as the same was filed outside time and without adhering to Section 13 (2) of the Tax Appeals Tribunal Act.

53. The Respondent submitted that prior to coming into effect of the amendment brought about by the Finance Act 2022, the rejection decision should have been challenged by the Appellant by lodging a valid objection within 30 days from the date of the rejection decision (being 5th February 2022).

54. It was the Respondent’s assertion that the Appellant was aware of the decision dated 5th February 2022 to the refund application and that is apparent from its pleadings as stated in the purported objection lodged on 26th July 2022 did not lodge an Objection within the timelines stipulated under Section 51 (2) of the TPA.

55. The Respondent submitted that the Appellant’s objection was filed late and after the change of the law there was no room for the Appellant to lodge an objection but rather prefer an Appeal before the Tribunal.

56. The Respondent further submitted that even if it were to concede that the decision was made as contained in the letter of 2nd August 2022 and that it could be subjected to an appeal, the Respondent submits that the Appellant still failed to adhere to the timelines for challenging the said decision as was required to lodge the same within 30 days of the date of such decision. The Notice of Appeal filed on 6th September 2022 and Memorandum of Appeal and Statement of Facts filed on 23rd September 2022 were outside the prescribed timelines.

57. The Respondent submitted that where a party fails to lodge an appeal within the prescribe timelines, there are provisions that exist to allow such a party to make an application for the appeal to be admitted out of time under Section 13 (3) of the TAT Act.

58. The Respondent stated that the Appellant is guilty of inordinate delay and having chosen to deliberately fail to seek enlargement of time to put its Appeal.

Respondent’s Prayers 59. The Respondent prayed that this Tribunal;i.Upholds the decision of the Respondent to reject the Appellant’s claims.ii.The Appeal be dismissed with costs to the Respondent as the same is devoid any merit.

Issues For Determination 60. The Tribunal upon the careful consideration of the pleadings and submissions made by the parties respectively, was of the view that the issues that recommend themselves for its determination are;a.Whether the Respondent’s Preliminary Objection dated 6th March 2023 is merited.b.Whether the Respondent’s refund rejection decision was justified.

Analysis And Findings 61. The Tribunal having identified the issues for its determination proceeds to analyze the same as herein under;

a. Whether the Respondent’s Preliminary Objection dated 6th March 2023 is merited. 62. The Respondent filed a Notice of Preliminary Objection to the Appeal on the 21st October 2022 and filed a subsequent Preliminary Objection dated and filed on 6th March 2023 seeking to have the Appeal struck out, the grounds thereof being, that;a.The Appellant’s Appeal is out of time and is in contradiction to Section 52 (1) of the Tax Procedures Act, 2015 as read together with Sections 13 (1) (b) & (3) of the Tax Appeals Tribunal Act, 2013 and Rule 3 (1) (b) of the Tax Appeals Tribunal (Procedure) Rules 2015, thus in contravention of the law.b.Without prejudice to issue (a) above, the Appeal herein is premature and offends Section 51 of the Tax Appeals Tribunal Act.c.The Appellant’s Appeal to decision dated 2nd August, 2022 offends Section 2 of the Tax Appeals Tribunal Act as the same does not originate from an appealable decision.d.The Appellant’s Appeal offends Section 13 (2) of the Tax Appeals Tribunal Act and there is no evidence of tax decision challenged.e.The Appeal is therefore an abuse of the process of the Tribunal and waste of resources.f.The suit is thus fatally defective, lacks merit and must fail.

63. The Tribunal shall determine the Preliminary Objection simultaneously with the Appeal.

64. The chronology in this Appeal flows from the refund applicantion made by the Appellant on the 17th December 2020 to which the Respondent issued a notice of rejection dated 5th February 2022 on iTax.

65. The Appellant then, proceeded to file an objection dated 27th July 2022 and response thereof from the Respondent was contained in the correspondence of 2nd August 2022.

66. It is noteworthy, that there was an amendment to the law relating to procedure governing disputes touching on refund of taxes, particularly Section 47 of the TPA, the effective date whereof was 1st July 2022.

67. The Tribunal upon perusal of Section 47 of the TPA, notes that prior to the amendment on 1st July 2022, any aggrieved party by the Commissioner’s decision on refund was required to file an objection within 30 days, however, post the amendment herein above, any aggrieved party may have filed an appeal to the Tribunal within 30 days and not an objection, a reading of the respective provisions is as below;Pre-amendment“47(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).(2)The Commissioner may, for purposes of ascertaining the validity of the refund claimed, subject the claim to an audit.(3)The Commissioner shall notify in writing an applicant under subsection (1) of the decision in relation to the application within ninety days of receiving the application for a refund.”Post-amendment“47(13)A person aggrieved by a decision of the Commissioner under this section may appeal to the Tribunal within thirty days after being notified of the decision.”

68. The Tribunal has observed that the Respondent issued its decision rejecting the refund application on 5th February 2022. The law in operation at that time required the Appellant if aggrieved to lodge an objection to the decision within 30 days of such decision. Further, had the Appellant elected to prefer an appeal, the same ought to have been lodged within 30 days.

69. The Appellant’s objection was lodged on 27th July 2022 after the amendment of law, particularly the introduction of Section 47 (13) of the Tax Procedures Act.

70. Similarly, the Appellant lodged its Appeal on 6th September 2022. The Tribunal notes that in either occasion when the decision is stated to have been made by the Respondent (5th February 2022 or 2nd August 2022), the Appellant’s Appeal was lodged out of the statutory timelines and without leave of the Tribunal having been sought.

71. The provisions of Section 13 (1) (b) & (3) of the Tax Appeals Tribunal Act are framed in peremptory terms and the only manner to remedy the same is either leave of the the Tribunal.

72. Therefore, it is the Tribunal’s position that the Respondent’s Preliminary Objection dated 6th March 2023 is merited and therefore the Tribunal holds that the Appeal was lodged out of time.

73. The Tribunal having established that there is no valid Appeal on record, shall not delve into the other grounds of the Respondent’s Preliminary Objection dated 6th March 2023 as well as the other issue for determination herein above as the same have been rendered moot.

Final Decision 74. The upshot to the foregoing is that the Appeal is incompetent and the Tribunal consequently makes the following orders; -a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

75. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 24TH DAY OF NOVEMBER, 2023ROBERT M. MUTUMA.............CHAIRPERSONMUTISO MAKAU..................................MEMBERELISHAH N. NJERU..............................MEMBERDR. WALTER ONGETI.........................MEMBERBONIFACE K. TERER...........................MEMBER