MAFAM LTD v. RWANDA REVENUE AUTHORITY (RRA)

# MAFAM LTD v. RWANDA REVENUE AUTHORITY (RRA)

- Source: Amategeko - Section: Decisions (Judgements) - Date: 2022-07-20 - Case/document no.: RCOMAA 00030/2022/CA - Collection: Court of Appeal

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MAFAM LTD v. RWANDA REVENUE AUTHORITY (RRA) [Rwanda COURT OF APPEAL – RCOMAA 00030/2022/CA (Ngagi, P.J.,) July 20, 2022] Overruled precedent – Commercial law – Tax – Value Added Tax (VAT) – Transportation Business – Value Added Tax (VAT) on Transportation – Transportation services provided by licensed person are exempted from Value Added Tax – Law Nº40/2016 of 15/10/2016, article 2 modifying and complementing Law nº37/2012 of 09/11/2012 establishing the Value Added Tax as modified and complemented to date which modified article 6. This precedent was overruled by the one that was set in the case RS/INJUST/RCOM00017/2022/SC, Rwanda Revenue Authority (RRA) v. Societé Rwandaise de Distribution et Services LTD (SRDS LTD) rendered on 22/12/2023 [Reported in RLR V.2-2023]. Stating that the transport activity which is exempt from VAT is that carried out as a principal activity of transporting people and goods. Commercial law – Registration of business – Transportation business – Transportation business – Registion of a transportation business is different from getting a license to operate a transportation business. Facts: Rwanda Revenue Authority conducted an audit on the company MAFAM Ltd for BRALIRWA beverages that it sells to its customers, and imposed a value-added tax amounting to 132,112,680 Frw, including penalties for

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tax evasion and late payment of tax, based on the fact that for every sale price, MAFAM Ltd used to deduct a certain amount from the invoice, considering it as exempted from VAT because it is related to transportation of the goods that it wholesaled from BRALIRWA, it did not pay VAT for the transportation services which were not exempted from it, without indicating the license for transportation services issued by the competent organ (RURA). MAFAM Ltd appealed against such tax to the Commissioner General of RRA seeking its removal because it was illegally deducted, it submits that the transportation of goods by road is exempted from VAT, so it should not be imposed VAT because the transportation business it runs is exempted from it, therefore it sued RRA in the Commercial Court requesting the removal of the VAT amounting to 132,112,680 Frw deducted from the transportation service while it was exempted from it. The same Court declared the claim of MAFAM Ltd unfounded and upheld that the value added tax and penalties amounting to 132,112,680 Frw levied to MAFAM Ltd by RRA were legally imposed, and therefore maintained. MAFAM Ltd was not satisfied with the court decision and appealed to the Comercial High Court stating that the Court based its decision on the fact that MAFAM Ltd does not have a license for transportation services, which is not the reason which the Commissioner General based his decision, and that it should not have been levied the value added tax for the transportation service it performed because it was exempted from it, so it did not wrongly

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calculate the tax it should pay, it claimed for different damages. The Commercial High Court adjudicated the case and declared the appeal of MAFAM Ltd unfounded, and the appealed judgment was sustained. MAFAM Ltd appealed again to the Court of Appeal, arguing that it should not have imposed the value added tax on the transportation service as it was exempted from it according to the law. RRA advances that this case is different from the previous cases, in those cases the taxpayers presented the licenses for providing transportation services issued by RURA. Therefore, due to the fact that MAFAM Ltd does not have a license for transportation services issued by the competent organ, it cannot pretend that it provides transportation services. It further adds that in the previous cases, even though they did not indicate that they provided transportation services, they had the licenses proving that they provided such services, but MAFAM Ltd does not provide evidence proving that it provides transportation services, and it does not have the license issued by RURA to provide transportation services, and he submits that MAFAM Ltd itself admits that it provided unauthorized transportation services, but since 2011 regulations are providing that the transportation service provider must be licensed by RURA, even if the business is registered in RDB, thus the value added tax levied to MAFAM Ltd should be maintained. Held: 1. With regard to the last tax of 15/10/2016, the Court deems it necessary to determine whether MAFAM

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Ltd has provided authorized transportation service. The Court finds that the evidence in the case file indicates that MAFAM Ltd had a license dated 16/10/2019, meaning after the imposition of the disputed tax. The Court finds that since MAFAM Ltd fails to prove that after 15/10/2016, it provided transportation services licensed by RURA, the value added tax imposed from 15/10/2016 by the time of application of the Law Nº40/2016 of 15/10/2016, article 2 modifying and complementing Law nº37/2012 of 09/11/2012 establishing the Value Added Tax as modified and complemented to date was levied in accordance with the law and must be maintained. 2. The Court also finds baseless the statements of MAFAM Ltd that even after the Law Nº40/2016 of 15/10/2016, article 2 modifying and complementing Law nº37/2012 of 09/11/2012 establishing the value added tax as modified and complemented to date was into force, it should pay the value added tax imposed from 15/10/2016 to 19/07/2017, when it registered the transportation business in RDB, because, as explained above, MAFAM Ltd should have the license issued by RURA, therefore the tax levied after 19/07/2017 until it got the license issued by RURA should be imposed, therefore it should also be maintained. 3. Transportation of goods is exempted from value-added tax (VAT) if the service provider is authorized by RURA.Appeal has merits in parts; The court fees cover the expenses of judicial proceedings.

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Statutes and statutory referred to: Law Nº40/2016 of 15/10/2016, article 2 modifying and complementing Law nº37/2012 of 09/11/2012 establishing the Value Added Tax as modified and complemented to date which modified article 6, Case laws referred to: Judgment RRA v SODAR LTD; RCOMAA 00034/2020/CA decided by the Court of Appeal on 19/02/2021. Judgment RRA v SRDS LTD RCOMAA 00001/2022/CA decided by the Court of Appeal on 25/03/2022. Judgment RRA v SUGIRA LTD ; RCOMAA 00057/2021/CA decided by the Court of Appeal on 25/03/2022 Judgment I. BACKGROUND OF THE CASE

Rwanda Revenue Authority has conducted an audit of MAFAM Ltd on BRALIRWA beverages that it sells to its customers, and imposed a value added tax amounting to 132,112,680 Frw, including penalties for tax evasion and late payment of tax, based on the fact that for each sale price, MAFAM Ltd used to deduct a certain amount from the invoice, considering it as exempted from VAT because it is related to the transportation of the goods that it wholesaled from BRALIRWA, it does not

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pay for the transportation service which was not exempted from it, without indicating the license for transportation services issued by the competent organ (RURA).

MAFAM Ltd appealed against that tax to the Commissioner General of RRA seeking its removal because it was illegally imposed, given that the transportation of goods by road is exempted from VAT, based on article 6.5 d) of Law nº37/2012 of 09/11/2012 establishing the value added tax as modified to date, and it has the license to provide transportation services so that it should not be imposed VAT because the transportation service it provides is exempted and it did not get it, even BRALIRWA so proceeds when it supplies beverages to MAFAM Ltd. The Commissioner General decided that the tax imposed on MAFAM Ltd and the penalties for tax evasion as well as late payment of tax amounting to 132,112,680 Frw should be maintained as per the law. MAFAM Ltd was not satisfied with the decision, so it sued RRA in the Commercial Court seeking the removal of the VAT amounting to 132,112,680 Frw imposed for the transportation service which was exempted from it.

In the case RCOM 01431/2020/TC decided by the Commercial Court on 08/12/2020, the same Court ruled that the claim of MAFAM Ltd is unfounded, it declared that the value added tax and penalties attached to it amounting to 132,112,680 Frw imposed to MAFAM Ltd by RRA were legally levied and maintained ; it ordered to MAFAM Ltd to pay to RRA 500,000 Frw as counsel’s fees.

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MAFAM Ltd was not satisfied with the court decision, and on 07/01/2021, it lodged an appeal to the Commercial High Court stating that the Court based its decision on the fact that MAFAM Ltd does not have a license for providing transportation services, while it was not the reason on which the Commissioner General based in taking the decision, the value added tax would not be imposed for the transportation services which were exempted from it, so it did not wrongly calculate the tax it should pay, it claimed for different damages.

On 24/12/2021, the High Commercial Court ruled in RCOMA 00020/2021/HCC that MAFAM Ltd's appeal is unfounded, it declared that MAFAM Ltd must pay RRA 400,000 Frw as counsel's fees and 100,000 Frw as procedural fees; it ordered that the appealed judgment is sustained, the amount of 40,000 Frw MAFAM Ltd deposited as court fees cover the expenses of judicial proceedings.

MAFAM Ltd appealed again to this instant Court, stating that Value Added Tax should not be deducted from the transportation service as it was exempted from it according to the law, and requesting to be refunded the counsel's fees, its appeal was registered on RCOMAA 00030/2022/CA.

The hearing was held in public on 06/07/2022, MAFAM Ltd was represented by Counsel Twiringiyemungu Joseph, and RRA was represented by Counsel Twahirwa Jean Baptiste.

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In general, in the course of the hearing, the debates between the parties were focused on whether the levied value added tax and related penalties amounting to 132,112,680 Frw were legally imposed on MAFAM Ltd. II. ANALYISIS OF LEGAL ISSUES 1. Determine whether the Value Added Tax charged to MAFAM Ltd by RRA on the transportation service should be removed as it is exempted by the law

The legal counsel of MAFAM Ltd states that when MAFAM Ltd was ordered to pay the imposed Value Added Tax, it appealed to the Commissioner General on the grounds that the transportation of goods by road is exempted from VAT based on article 6.5 d) of Law nº37/2012 of 09/11/2012 establishing the Value Added Tax as modified to date, and MAFAM Ltd has a license for having registered transportation as authorized activity, VAT should not be imposed to MAFAM Ltd which provides exempted transportation service and it did not get it, and even BRALIRWA so proceeds when it supplies beverages to MAFAM Ltd, and that the Rwanda Revenue Authority does not charge VAT to it on the transportation service for which it establishes invoice and it mentions the example on BRALIRWA's invoice.

He submits that the audit covered the period from February to December 2015, 2016, and 2017 and from July to December 2018. He state that from February 2015 to October 2016, at the time the Law was modified, the existing law provided that transportation services were

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exempted, and the license was not required. He further submits that the license for the transportation service was provided under the Law of 2016. He sustains that MAFAM Ltd registered its activities in RDB on 19/07/2017, and these activities include transportation services, he admits that between the time the Law came into force in 2016 and the time MAFAM Ltd obtained the license to operate the transportation service issued by RDB, that is the only time MAFAM Ltd should be imposed of VAT.

He also submits that the Commissioner General of Rwanda Revenue Authority did not criticize the grounds given by MAFAM Ltd, but he stated that MAFAM Ltd exempted a part of the price of BRALIRWA drinks distributed by MAFAM Ltd. The statements of the Commissioner General were also upheld by the Commercial High Court, where in paragraph 34 of the appealed case, the Court decided that : « The transportation it alleges that it is exempted is not the one from which it gets money, rather it gets it from the goods and then reduces its cost and considers it as transportation ». He explains that this is not true, because MAFAM Ltd delivers BRALIRWA drinks to the designated areas using its vehicles meant for that service, as it could use the vehicles of other people who perform the same work, and the services they provide are exempted. It sells beverages separately, and it separately charges for the transportation service, this service is exempted from Value Added Tax and the exemption is established and removed by law, as provided by article 164 of the Constitution of the Republic of Rwanda. He sustains that Rwanda Revenue Authority

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has not denied that MAFAM Ltd does not provide transportation service or is not authorized to provide it, and the law provides that it is exempted from value added tax, therefore there is no reason not to recognize such exemption when its basis is undoubtful in any way.

He explains that separately establishing an invoice for the transportation service and the cost of the drinks does not violate the law and that it is not a particular case for MAFAM Ltd, because even BRALIRWA which sells beverages does not deduct VAT on the transportation service provided to MAFAM Ltd concerning the transportation of beverages to its main store. Therefore, the tax fairness principle must be applied because all taxpayers are equal before the law.

He also explains that in the defense submissions of RRA, it avers that MAFAM Ltd deducts 300 Frw from the cost of each rack it considers as transportation cost, the Court admits it as such, but it did the calculations based on one invoice produced as evidence in the Court and other invoices were prepared in the same way, it finds that RRA's statements that it deducts 300 Frw from each rack are not true, but it disregards such fact and confirms that MAFAM Ltd deducts 300 Frw to each rack, while it is not aware of the remaining difference between the prices of BRALIRWA and MAFAM.

He states that the Court decided as follows : "What is evident is that on the invoice presented above, it gets the price agreed with BRALIRWA and deducts 300 Frw allegedly for transportation and unjustified amount of 100 Frw and all fees are paid by the customer. This is

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evidenced by the fact that Mutzig (33 cl) was offered at 9,910 Frw whereas it is 10,310 Frw, TURBO (50 cl) at 9,600 Frw whereas it is 10,000 Frw, TURBO (33 cl) at 7,600 Frw whereas it is 8,000 Frw, AMSTEL (33 cl) for 11,700 Frw whereas it is 12,1000 Frw. He submits that this indicates that the money paid by the customer was for the cost of the products of BRALIRWA, but the Value Added Tax was not fully deducted from all costs, because MAFAM Ltd deducted 300 Frw allegedly for transportation and unjustified 100 Frw » as indicated in paragraph 33 of the appealed judgment.

He explains that the Court intended to support the statements of RRA while it notes that its statements that MAFAM Ltd always deducts 300 Frw for each rack are not true, without explaining the difference between the retail price of MAFAM Ltd and the price fixed by BRALIRWA as asserted by the Court, rather it avers that « another amount of 100 Frw is not justified", it disregarded the ground of MAFAM Ltd which pleaded that it is not a principle to comply with the prices set by BRALIRWA, rather it was recommended retail price, while the article 1 of the contract they concluded stipulated that "the distributor (i.e. MAFAM Ltd) will distribute beverages in compliance with the laws of Rwanda (...) including the competition law", and that the law provides that the price is freely set by the buyer and seller, and it is often set by the seller, which means that no one orders to anyone to sell at a given price. He avers that it is not prohibited that MAFAM Ltd would reduce the prices for those who buy the drinks and transport them but it deducts the transportation price because in general such

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practice is not prohibited by the contract concluded with BRALIRWA and the business laws.

He further submits that the Commercial High Court disregarded the contradictions indicated by the RRA on that issue, it regularly conducted the tax audit for MAFAM Ltd, and it found that the method used to separate the transportation service from the drink sale complies with the provisions of the law, as indicated by the audit carried out in 2014 and 2018. It conducts an audit to correct and educate, when it finds that the procedure used by the taxpayer to declare the tax complies with the provisions of the law, it appreciates him for that and requests him to keep it up. Therefore, the fact that during the audit, Rwanda Revenue Authority found that MAFAM Ltd declares the tax according to the law, and nothing could prevent it from doing so, rather it acts contrary to reality by changing what it already knows and it relies on another reason contrary to the reality while it had appreciated the procedure used to declare VAT on its business.

He also adds that in paragraph 35 of the judgment RCOMA 00020/2021/HCC, the Court decided that " the claimed tax should not be removed due to the fact that it is calculated in a way that does not correspond to the transportation service, rather it is to take the cost paid for the product and reduce a part considered as transportation, which is inconsistent with the provisions of the law, rather it is a way of decreasing the VAT paid by its customers which it should pay". He also submits that the Regulations of RURA on which RRA is based should not be

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considered because they come into force to complement the law, but they cannot stipulate what the law does not provide. He concludes by praying for the Court to order that the tax levied to MAFAM Ltd for the exempted transportation service be removed.

When he was asked about the particularity of this case compared to previous cases decided by the courts, including this instant Court regarding the value added tax imposed on the distributors of BRALIRWA beverages, he replies that there is no particularity on this point because the underlying issue is similar with the issues that have been analysed by this instant Court in the cases uploaded in the IECMS.

The legal counsel of RRA advances that this case is different from the previous cases, in those cases the taxpayers presented the licenses allowing them to provide transportation services issued by RURA. Therefore, the fact that MAFAM Ltd does not have the license to provide transportation services issued by the competent organ, it cannot pretend that it provides transportation services. He further adds that in the previous cases, although they did not prove that they provided transportation services, they had licenses proving that they provided transportation services, but MAFAM Ltd did not provide evidence to prove that it performed transportation services, and it did not have the license issued by RURA for providing transportation services.

He explains that article 2 of Law Nº40/2016 of 15/10/2016 modifying and complementing Law nº37/2012 of 09/11/2012 establishing the value added tax,

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provides that transportation services exempted are transportation services performed by licensed persons; MAFAM Ltd does not provide the license issued by the competent organ (RURA) to provide transportation services, and even if it has provided the transportation services not exempted from that tax, MAFAM Ltd presents a license issued by RURA which is valid from 16/10/2019 to 16/10/2020 and the audit covered the years 2015, 2016, 2017 and 2018; which means that the license presented cannot be referred to in this instant case, the Commercial Court relied on those facts for upholding that MAFAM Ltd made mistakes so that it cannot be exempted from VAT.

He further adds that MAFAM Ltd itself admits to having performed unauthorized transportation service, however, since 2011 there are regulations stating that the transportation service provider must be licensed by RURA even if the business is registered in RDB so that the Value Added Tax that was charged to MAFAM Ltd should be maintained. DETERMINATION OF THE COURT

Article 6,5°, d, of the Law n0 37/2012 of 09/11/2012 establishing the value added tax stipulates that the transport of goods by road is exempted from value added tax.

Article 2 of Law n0 40/2016 of 15/10/2016 modifying and complementing Law nº37/2012 of

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09/11/2012 establishing the value added tax modifying article 6 mentioned above provides that transportation services by licensed persons are exempted from VAT.

The analysis of the aforementioned articles proves that article 6.5°, d, of Law n0 37/2012 of 09/11/2012 establishing the value added tax provided for the principle that the transportation service is exempted from the value added tax. It means that the person who provided the transportation service was exempted from the value added tax. This article was amended in 2016 by adding the condition required for the transportation service to be exempted from the value added tax, the person who performs such service must be licensed by the competent organ. In other words, it means that before the modification of article 6, 5°, d, of Law n0 37/2012 of 09/11/2012 establishing the value added tax, the requirement was to prove that a person or company provides the transportation services without prior authorisation.

In this instant case, it must be examined whether MAFAM Ltd performed the transportation services, whether during that period it provides such services, it was exempted from the value added tax by taking into account the above-mentioned legal provisions and the period for which the disputed tax was charged.

The case file contains the wholesale agreement concluded between MAFAM Ltd and BRALIRWA on 01/02/2015 as well as the invoice dated 25/02/2016 which indicates that MAFAM Ltd has provided transportation

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services and the transportation fees exempted from the value added tax as alleged by MAFAM Ltd.

On the issue of whether MAFAM Ltd transported BRALIRWA drinks, the Court, basing on the elements of evidence above produced, finds that there is no doubt that MAFAM Ltd transported BRALIRWA drinks. Basing on article 6.5, d, of Law n0 37/2012 of 09/11/2012 establishing the value added tax, as it was enforced before being modified by article 2 of Law n0 40/2016 of 15/10/2016 modifying and complementing Law nº37/2012 of 09/11/2012 establishing the value added tax, such article provides that the transport of goods by road was exempted from the value added tax, and MAFAM Ltd performed such transportation service as proved by the contract concluded with BRALIRWA and the invoice presented, it finds that MAFAM Ltd was exempted from the value added tax that was imposed before 15/10/2016, because it is the time the new law adds that the transportation service provider must be licensed.

The Court finds unfounded the statements of RRA that Regulations of RURA of 2011 required that the transportation service provider has to be licensed so that they should be complied with, and the tax imposed to MAFAM Ltd before 15/10/2016 was consistent with the law, because even if these Regulations came into force before the Law nº37/2012 of 09/11/2012 establishing the value added tax which provided that the transportation service is exempted without any other condition, the

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regulations do not contradict the law, but instead their purpose is to enforce the law and make it more clear1.

With regard to the tax imposed after 15/10/2016, the Court finds that it is necessary to determine whether MAFAM Ltd performed licensed transportation services. The Court finds that the only evidence in the case file proving that MAFAM Ltd was licensed is dated on 16/10/20192 which means after the imposition of the disputed tax. The Court finds that since MAFAM Ltd fails to prove that after 15/10/2016, it provided the transportation services with the license issued by RURA, the value added tax was charged from 15/10/2016, when Law Nº40/2016 of 15/10/2016 modifying and complementing Law nº37/2012 of 09/11/2012 establishing the value added tax came into force, it was levied in accordance with the law, and must be maintained.

The Court finds baseless the statements of the counsel for MAFAM Ltd that it was granted the license for transportation services issued by RDB, because on 19/07/2017 it registered in RDB its activities including transportation services, because the registration of a business which includes transport is different from being granted a license to provide transportation services. The Court finds that, as it has been upheld in other cases

1 See judgment RCOMAA 00034/2020/CA decided on 19/02/2021, RRA v. SODAR Ltd. 2 Authorization for transport of goods) issued by RURA valid from 16/10/2019 until 16/10/2020 on vehicle RAC 765 I.

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decided by this instant Court3, RDB does not grant a license to provide transport service, but this license is issued by RURA, which means that MAFAM Ltd performed transport service without license, therefore, it should be imposed such tax from 15/10/2016.

The Court also finds unfounded the statements of MAFAM Ltd that even after the enactment of the Law Nº40/2016 of 15/10/2016 modifying and complementing Law nº37/2012 of 09/11/2012 establishing the value added tax, the tax it should pay is the tax imposed between 15/10/2016 and 19/07/2017, when it registered in RDB the transport activities, because as explained above, MAFAM Ltd should have been licensed by RURA, so the tax which was imposed after 19/07/2017 until it was licensed by RURA, had to be imposed and is maintained.

Regarding the cross-appeal filed by RRA to determine whether MAFAM Ltd presented the license to provide the transportation service issued by RURA, and the period concerned with the VAT exemption in accordance with Law Nº40/2016 of 15/10/2016 modifying and complementing Law nº37/2012 of 09/11/2012 establishing the value added tax, the Court finds that it has been examined in the appeal of MAFAM Ltd which was analysed. 2. Determine whether the court fees and counsel's fees claimed in this instant case are founded

3 See judgment RCOMAA 00001/2022/CA, decided on 25/03/2022, RRA v. SRDS Ltd; judgment RCOMAA 00057/2021/CA decided on 25/03/2022, RRA v. SUGIRA Ltd

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Basing on the Regulation fixing the scale of fees for Advocates, the legal counsel of MAFAM Ltd requests the Court to order to RRA to pay to MAFAM Ltd 2,000,000 Frw as counsel's fees.

The legal counsel of RRA pleads about the counsel’s fees claimed by MAFAM Ltd and states that it should not be awarded such amount because it dragged itself into unnecessary lawsuits, rather RRA deserves them. Basing on the provisions of Article 111 of Law n0 22/2018 of 29/04/2018 relating to the civil, commercial, labour and administrative procedure, he requests the Court of Appeal to order to MAFAM Ltd to award to RRA 2,000,000 Frw as counsel's fees and procedural fees from the beginning, for having been dragged into unnecessary lawsuits.

The legal counsel of MAFAM Ltd pleads about the amount of counsel’s fees claimed by RRA and sbmits that they are unfounded, because it is the result of the case proceedings, and the Court awards them to a truthful party. DETERMINATION OF THE COURT

The Court finds that the counsel’s and procedural fees claimed in this cae should not be awarded because it is evident that there is the value added tax imposed to MAFAM Ltd according to the law but there is also the exempted value added tax imposed to MAFAM Ltd by RRA.

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III. DECISION OF THE COURT

Declares that the appeal lodged by MAFAM Ltd is founded in parts.

Declares that the judgment RCOMA 00020/2021/HCC decided by the Commercial High Court on 24/12/2021 is changed in parts.

Declares that MAFAM Ltd is exempted from the value added tax (VAT) levied from February 2015 to 15/10/2016.

Declares that the value added tax (VAT) imposed to MAFAM Ltd from 15/10/2016 was imposed in accordance with the law.

Orders to MAFAM to pay the value added tax (VAT) imposed from 15/10/2016, because it was levied in accordance with the law.

Orders that the court fees cover the expenses of judicial proceedings.