[2009] UGHC 258

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## **THE REPUBLIC OF UGANDA IN THE HIGH COURT OF UGANDA AT KAMPALA [COMMERCIAL DIVISION] HCT - 00 - CC - CA - 15 - 2008**

# UGANDA REVENUE AUTHORITY **APPELLANT ^a**

#### **VERSUS**

**SHOPRITE CHECKERS (U) LTD RESPONDENT**

#### **BEFORE: HON JUSTICE GEOFFREY KIRYABWIRE**

## **JUDGME ^N T:**

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This is an appeal from the decision of The Tax Appeals Tribunal (hereinafter referred to as "TAT") dated 28th July 2008 involving the Respondent and the Appellant. The said decision was made in favour of the Respondent from which the Appellant how appeals.

The facts of the appeal were well set out by the Appellant. The Respondent is a supermarket that deals in a wide range of products which include zero-rated, standard rated and exempt items for VAT purposes.

'[The Appellant carried out ^a comprehensive audit of the Respondent'^s books for the period 2001 to 2005 after the Respondent had submitted VAT cash refund claims for the period March 2005 to July 2005 for the sum of Shs. 1,695,140,719/= having carried out offsets on the said amounts since it started business in 2000.

**E**¹ ^A point I Respondent of contention arose when the Appellant discovered that the had applied the Standard Alternative Method (hereinafter referred to as "SAM") of calculating VAT since 2004 a method that required the written approval of the Commissioner General of the Uganda Revenue Authority (hereinafter referred to as "URA") which permission had not been obtained.

The Respondent then wrote to the Appellant on the 27^th February 2007 and 4^th May 2007 seeking authority to use SAM from the Appellant on the grounds that the Standard Method (hereinafter referred to as "SM") of calculating VAT put them at a disadvantage. The Appellant then approved the use of SAM from the 1^st March 2007 and not retrospectively from 2001 as the Respondent had requested. The Appellant then applied the SM of VAT and the apportionment resulted into a credit of Shs.74,634,994/ $\pm$ which was paid to the Respondent.

Meanwhile in a related transaction, the Respondent also applied for another refund for Withholding Tax (hereinafter referred to as with The Appellant while acknowledging that the Respondent was entitleto a refund of WHT decided to apply Section 113(3) of the Income TAX Auto defray this amount against VAT arrears for Shs, 1,695,140,719/=. In so doing, the Appellant was able to recover Shs. 1,276,900, $\frac{200}{408}$ .

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The Respondent appealed to TAT who ruled in their favour as follows;

- That the Standard Alternative Method be applied for calculation $\mathbf{a}$ the Respondent's VAT input tax credit retrospectively effective June 2001. - That the Third Party Agency Notice issue by the Resmandent of $\mathbf{b})$ against the Applicant (Shoprite Checker (U) Ltd) wids disched forthwith;

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- That the refund of Shs. 1,695,140,719/= sought by the Applicant (Shoprite Checkers (U) Ltd) from the Respondent (URA) for VAT in put credit plus interest at 2% per month from 28th July 2008 till payment in full is allowed. - **a d)** That the withholding tax amount of Shs. 1,276,900,368/= due to the Applicant (Shoprite Checkers (U) Ltd) should be refunded to the Applicant with interest of 2% per month with effect from 1st December 2004 till payment in full. - e) That the Respondent (URA) pays the costs of this Application to the Applicant.

The URA now appeals that decision. At the scheduling conference the parties reviewed the grounds of appeal but the Respondent also raised a preliminaiy objection. It was agreed that this be handled at the time of judgment. The parties then set the following grounds for trial.

Preliminary objection.

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- 1) Whether this purported appeal is a nullity or incompeted? If answered in the negative them. - **2)** That the Honourable members of the Tribunal erred when they held that the Respondent correctly applied the Standard Alternative Method between the year 2001 and 2006 in the computation of Value Added Tax payable without express written approval of the Commissioner General of the Appellant. - **3)** That the Honourable members of the Tribunal erred in law when they held that the Appellant is estopped from denying the Respondent's use of the Standard Alternative Method on VAT in put calculation.

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That t Ho embers of th- ribunal erred u. law when they held the ;. , respondent's use of the Standard Alternative Method retrospectively is permissible under the law.

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- 5) That the Honourable members of the Tribunal erred in law when they held that the Respondent is not liable to pay VAT in the sum of Shs. 1,695,140,719/= to the Appellant. - 6) That the Honourable members of the Tribunal erred in law when they held that the Appellant is liable to a refund to the Respondent Shs.1,276,900,368/= plus interest at 2% per month from the date of the application. - 7) That the Honourable members of the Tribunal erred in law when they held that the Appellant cannot compel a tax payer to pay more than 30% of the taxes assessed.

Mr. Ali Ssekatawa appeared fort he Appellant while Mr. Enos Tumusiime appeared for the Respondent.

**4.** Counsel for the Respondent raised an objection that the appeal is a nullity or incompetent. He submitted that the Appellant filed a notice of Appeal but did not file a memorandum of Appeal contrary to the express and mandatory provisions of Order 43 rule ¹ and 2 of Civil Procedure Rules 'CPR Cap 71) Laws of Uganda. Counsel for the Respondent submitted that a notice by itself without a memorandum does not constitute an appeal.

In reply, counsel for the Appellant referred court to Section 27(2) of the Tax Appeals Tribunal Act that provides

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$\cdot$ "... An ap_l $\exists h$ Court may be an questions of lapping and the Notice of $r_{\Psi}$ and that the questions of law that will be raised on the appeal..."

He also referred me to the case of

Uganda Revenue Authority V Toro & Mityana Tea Company Ltd HCCA No. 4 of 2006.

### Where Justice Lameck Mukasa held

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"... This is a specific type of appeal. The Section negates the requirements of 043 of the CPR. See **Uganda Communications** Commission V Uganda Revenue Authority (M. A 775 of 2006). Therefore even if the document... is only regarded as a Notice of Appeal, it satisfies the specific provisions of S. 27 of the TAT Act whereby an appeal is commenced by lodgment of a Notice of Appeal with the Registrar of the High Court stating the questions of law to be raised..."

That being the case, a Notice of Appeal stating the questions of appeal is sufficient to make an appeal from TAT competent. I agree with counsel for he Appellant and the authorities he has cited. An appeal from TAT means an appeal within the meaning of Section $27(2)$ of the Tax Appeals Tribunal Act. The preliminary objection therefore stands over ruled.

As to the substantive grounds of appeal, I paraphrase them and address them one by one.

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The first grot >sue of whe: • r can be used in the computation of VAT without the express written approval of the Commissioner General of the Appellant.

Counsel for the Appellant submits that SAM cannot under the law be applied without the express written consent of the Commissioner General of URA. Counsel referred court to the operative sections of the law on the matter. ^I was first referred to Section 28(7) of the VAT Act which provides

Subject to subsections (9) and (10), the input tax that may be credited by a taxable person for a tax period is:-

- a) Where all of the taxable persons supplied for that period are taxable supplies, the whole of the input tax specified in subsection (1) or (2) or - b) Where only part of the taxable person's supplies for that period are taxable supplies, the amount calculated according to the formula specified in Section 1(f) of the fourth schedule.

Section 28(9) furthermore provides

*"Where the fraction B/C in subsection 1(f) of the fourth schedule is more than 0.95, the taxable person may credit all input tax for that period".*

Section 28(10) of the Act further provides

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*"Notwithstanding subsection (7) (b), the Commissioner General may approve a proposal by a taxable person for the apportionment of input*

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. *tax cred supplies...*

*taxable person makes both taxable a d exempt*

Counsel also referred court to Regulation 15(1) of The Value Added Tax Regulations, 1996 which provides

*...where a registered taxpayer who is making taxable and exempt supplies is disadvantaged by the provisions of Section 28 (7) (b) of the Act, the Commissioner General may approve an alternative method of calculating the input tax to be credited, as described in paragraphs (2) and (3), which shall be known as the Standard Alternative Method..."*

Regulation 15 (4) further provides

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*"...where a registered tax paper wishes to use the Standard Alternative Method or any other method which is not provided for in Section 28 (7) (b) of the Act, that tax payer must seek the -written approval ofthe Commissioner General..."*

^I It was the finding of TAT (at P. 180 of the record) that the procedure set out in the fourth schedule and Regulation 14 are merely procedural and ^I cannot override the right given under the Act or deprive the Applicant of '^the right under the Act. The irregularity is therefore curable or remediable ^I under the Act. That being the case, the tribunal found

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*"...that the Applicant (Respondent in this case) correctly and lawfully applied the Standard Alternative Method. The Tribunal therefore rules in favour Applicant... "*

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Counsel for th icant ointed out for starters that the ./anal made mistake by referring to Regulation 14 instead of 15. ^I agree with that observation but ^I find that all understood that the Tribunal actually had Regulation 15 in mind and therefore ^I shall bear that in mind without upsetting their finding.

That being the case, counsel for the Appellant submitted that use of the word "...must..." in Regulation 15 (4) made the application to get the written approval of the Commissioner General to use SAM mandatory. In this regard, counsel for the Appellant referred me to the speech of Lord **Russel of Kilowen CJ** in the case of **Attorney General V Carlton Bank** [1989] ¹ KB 64 at 71 where he held

*"...the duty ofthe court is... in all cases is the same whether the Act to be construed related to taxation or to any other subject, namely to give effect to the intention of the legislature as that intention is to be gathered from the language employed, having regard to the context in connection with which it is employed. The court must no doubt ascertain the subject matter to which that particular tax is by the statute intended to be applied, but once that is ascertained, it is not open to the court to narrow or whittle down the operation ofthe Act by* **A** *consideration of hardship or business convenience or the like... "*

Counsel for the Appellant also referred me to the case of

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**Inland Revenue Commissioner** & **Ors V Ross Minister Ltd** & Ors [1980] AC 998 where it was held

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*Judges i constitutions . notion of expounding what wards used* ; . *piu.mment in legislation mean must not be over zealous to reach for ambiguities or obscurities in words which on the face of them are plain, simply because the members of the court are out of sympathy with the policy to which the Act appears to give effect..."*

Counsel for the Appellant submitted that to qualify for SAM the taxable person must demonstrate to the Commissioner-General the disadvantage they face using the SM. He further submitted that any such irregularity as in this case is not curable or remediable under Act as such would be ^clearly spelt out in the law and not applied "whimsically" (sic).

Counsel for the Respondent submitted that TAT had found that the Appellant had authorized the Respondent to use SAM and this is a matter of fact and not law. He further submitted that that was not contested at TAT and should therefore not be appealable.

^I have reviewed the submissions of both counsel and the record of TAT on this point. ^I find that this is an important point of law that has to be addressed.

The law as provided in the VAT Act and Regulations on this point provides a mechanism for calculating VAT using one of two methods that is SM or SAM depending on whether supplies of the taxable person are taxable or exempt. Simply put if a taxable person deals in both taxable and exempt supplies for purposes of VAT but suffers a disadvantage by using SM he/she/it may use SAM subject to the approval of the Commissioner-General.

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**5Q)** a the law? followed. intention of the law? My reading of the ... is not that .ne Commissioner-General's approval is not required. Actually to that extent, the reading of the Act and Regulations together are to the effect that a taxpayer who wants to use SAM must first demonstrate a disadvantage in using SM and then aPPty to the Commissioner-General for approval to use SAM. However, that is not all. To extent that the ground of appeal is framed that way, ^I find that the written approval of the Commissioner-General is necessary. In so doing, the Commissioner-General is clothed with a discretion that should be exercised "Judiciously" or in other words fairly. In so exercising, his or her discretion the Commissioner-General is given the same responsibility as a court would have as outlined in the case of **Calton Bank (supra)** to give effect to the intention of the legislative on these provisions. What then is the intention of the legislature regarding the application of SAM as far as can be gathered from the language employed in the law? To my mind, it is those taxpayers who deal in supplies of taxable and exempt goods that suffer a disadvantage by using SM, and that is the only condition, can in the alternative use the SAM. That in my finding is the subject matter to which these provisions of the VAT Act and Regulations are intended to be applied. That is the primary consideration. How then does an eligible taxable person who has suffered demonstratable disadvantage by the use of the SM benefit from the ^I find that such a taxable person must apply for pproval to the Commissioner-General. Is that the primary intention of Of course not, ^I find that it is the procedure that has to be To that extent ^I must agree with the findings TAT that the application for approval to the Commissioner-General is procedural and cannot override the right given under the Act or deprive the Applicant of

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the, right und able person .ises the right before getting the express p... Commissioner-General is that fatal to the right? ^I say it depends on the facts of each case. If the taxable person has indeed demonstrated a disadvantage in using the SM why should the taxable person be denied the use of this legal right? This is where a discretion, as opposed to a conditional right as counsel for the Appellant submitted, properly exercised comes in and yes, ^I find that such an irregularity can therefore be curable.

The next ground of appeal is that the Tribunal erred in law when they held that the Appellant is estopped from denying'the Respondent's use of the Standard Alternative Method on VAT input calculation.

Counsel for the Appellant referred court to page 182 of the Record of Appeal where the Tribunal found

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*"...since the inception of the Applicant's business, the Applicant had consistently used the Standard Alternative Method under the direction and approval of the Respondent... that a person who has some legitimate expectation should not be unfairly deprived of it. In all fairness... the Respondent is led the Applicant to believe all along that the use of the Standard Alternative Method was agreed and accepted by the Respondent... "*

Counsel for the Appellant submitted that the Respondent only sought ⁱ approval of the Commissioner-General on the 27th February 2007 to use SAM. He further submitted that the law on estoppel is clear that is estoppel cannot operate to prevent or hinder performance of a positive ^I statutory duty. In this regard, ^I was referred to the case of

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# **Maritim General** Dr . td [1937] All ER 748

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And the decision of this court in **K. M. Enterprises and Ors Vs Uganda Revenue Authority** HCCS No. 599 of 2001 where **Justice Egonda** (as he then was) held **e** *"...exercise ofstatutory powers and duties cannot be fettered or*

*overridden by agreement, estoppel, lapse of time, mistake and such other circumstances... "*

In reply, counsel for the Respondent submitted that TAT's findings were based on facts which were not contested and are not appealable.

I agree with the decision in **M/s Maritime Electric Co. Ltd** (supra) and **^I 4** have indeed followed it in my own decision in

# **13 Pride Exporters ^V Uganda Revenue Authority** HCCS No. ⁵⁶³ of 2006.

A positive duty imposed by statute cannot be estopped. In this, ^I agree with counsel for the Respondent. ^I however believe that TAT misdirected itself as to issue of estoppel. The statute actually imposes on the Commissioner-General a legal discretion as outlined above which in implementing inter alia requires due process, impartiality, fairness and equity.

The next ground is that the Tribunal erred in law when they held that the Respondent's retrospective use of the Standard Alternative Method is permissible under the law. Counsel for the Appellant disagreed with the Tribunal's decision to retrospectively apply the Standard Alternative

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**E** Method effec jqi ^qov ..omitted that the Commissioner-Genu ea t, to approve a proposal is "futuristic" in nature. He submitted that the VAT Act has specific express powers to effect retrospective actions are provided for in Sections 8(3), 8(6) and 9(7) which deal with the registration and deregistration of a taxpayer. Counsel for the Appellant therefore submits that the Commissioner-General can only give approval to

*"...those transactions that are subsequent to such approval..."*

Counsel for the Respondent like before submits that this ground is based on TAT's finding of fact which were not contested and therefore are not appealable.

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It is clear that the Appellants have taken a very strict view that any approval given by the Commissioner General must be for subsequent VAT calculations.

In this case, the Respondent had formally applied to use SAM on the 27th February 2007. At first the Appellant out rightly refused by their letter dated 3rd April 2007 to approve the use of SAM because the Respondent had not demonstrated any disadvantage by its using the ordinary method (SM).

However, following that, the parties to this appeal met and on the 10th July 2007, the Appellants approved the use of SAM effective 1st March 2007. That letter signed by one J. B. Ssegane for the Commissioner Domestic Taxes, is very interesting. In the second paragraph to that letter, it is written

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*"…A reı* esented in the seeting has been $a$ ade and we would die to unit that, whereas the VAT Act, Cap 349 does not prohibit retrospective application of SAM, by virtue of the fact that a proposal to use the SAM must be approved the Commissioner General, then it implies that such approval should precede the application for the use of SAM and that the use of the method is effective from the *date of approval going forward..."* (emphasis mine)

This letter some what contradicts the submission of counsel for the Appellant that the retrospective application is not possible under the VAT Act.

Secondly if SAM can only applied from the "date of approval going forward..." then why the letter seeking approval dated 10^th July 2007 given back dated approval to $1^{st}$ March 2007? Is this not fact a retrospective approval even though for a few months? I say it is and that the Appellant is clearly contradicting itself.

As I have found earlier this all a question of discretion properly exercised. As to this ground, therefore I find that the Tribunal did not err both in law and practice when if found that SAM is retrospectively permissible.

The next ground is that the Tribunal erred in law when held that the Respondent is not laible to pay VAT in the sum of Shs.1,695,140,719/ $=$ to the Appellant.

This ground arises from the Respondent obtaining a tax credit of Shs.1,695,140,719/ $=$ by applying SAM retrospectively.

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This tax SAM not. assessment , ⁱ m-.md is an a result of the Appellant stating that can only be applied after approval and not retrospectively whereas The Respondent has been applying SAM inn calculating VAT for many years while filing returns to the Appellant without any resistance until a special audit was concluded on the Respondent by the Appellant dated 19th September 2007. ^I really in light of my findings above cannot see why this was not curable and agree with Tribunal that the Respondent is entitled to that credit to which the Respondent is entitled to a refund of Shs. 1,695,140,719/=.

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O^he next ground is that the Tribunal erred in law when they held that the ^I Appellant is liable to a refund to the Respondent Shs, 1,276,900,368/=. This amount from the evidence which is not contested was defrayed from ⁱ Withholding Tax (WT) that Respondent was entitled to from the Appellant by applying Section 113(3) of the Income Tax Act. This in my view would ^I be justifiable if the VAT was due and owing which ^I have found is not. . Therefore in answer to this ground, the Appellant is liable to refund the sum of Shs. 1,276,900,368/= as WT due to it.

The last ground is that the Tribunal erred in law when they held that the Appellant cannot compel a taxpayer to pay more 30% of the taxes assessed.

Counsel for the Appellant referred court to Section 15(1) of the TAT Act which provides

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"... A taxpayer who odged a notice objection to an a sessment shall, pending final colution of the objection, pay 30 percent of the tax assessed or that part of the tax assessed not in dispute, which *ever is greater...*"

Counsel for the Appellant submitted that this does not mean that the Appellant cannot compel a taxpayer to pay the taxes not in dispute, albeit being greater than the 30% of the tax assessed.

Counsel for the Respondent on the other hand submits that Section 15(1) of the TAT Act does not support the contention of the Appellant.

I think Section $15(1)$ of the TAT Act is clear. Pending the resolution of an objection, the taxpayer may pay 30% if the tax assessed or that part of the tax assessed <u>not in dispute</u>, which ever is the greater. So clearly there are two options of payment i.e. 30% of the tax assessed or that part of the tax assessed that is not in dispute which ever is the greater. For a taxpayer to pay more than 30% of the assessed tax, that tax should not be in dispute by the taxpayer. Consequently, with that caveat, I do not see how the Appellant (URA) can compel a taxpayer to pay more than 30% of the taxes assessed. That answers the last ground.

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All in all, save $\epsilon$ is object, I fin that this $\omega_1$ . $\mathop{\rm id}\nolimits\mathop{\rm fail}\nolimits$ and the decisions of the Tribunal upheld. Taking the preliminary objection into consideration, I award the Respondent 3/4 of the taxed costs.

Geoffrey Kiryabwire

**JUDGE**

Date: 17/09/2009

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### 17/09/09

10:04am

## Judgment read and signed in open court in the presence of:

- E. Tumusiime for Respondent - H. Arike for Appellant

In Court

- No parties in court - Rose Emeru Court Clerk

rue Geoffrey Kiryabwire

**JUDGE**

Date: 17/09/09

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