Introduction and Background
1. Before the court for determination is an appeal filed by the Appellant through its Memorandum of Appeal dated 15.02.2023 in respect of the judgment of the Tax Appeals Tribunal (“the Tribunal”) dated 10.02.2023. The Respondent (“the Commissioner”) has responded to the appeal by filing its Statement of Facts dated 12.04.2023. The appeal was disposed by way of written submissions which are also on record.
2. Before dealing with the issues in appeal, it will be important to contextualize the same by setting out the background and facts of this matter. The Appellant is a company that offers water, transport, structural, environmental and project management engineering consultancy services. Sometime in August 2016, the Kenya Roads Board (KRB) contracted SMEC International PTY Limited (“SMEC”) of Australia in association with the Appellant as sub-consultants for the provision of consultancy services to undertake road inventory and condition survey for the Western and Central Zones.
3. The Commissioner carried out an assessment on the Appellant’s tax affairs for the period 2017-2019. By its letter dated 22.06.2021, the Commissioner communicated its findings and raised additional assessments of Kshs. 30,818,305.29 in respect of Value Added Tax (VAT). The Commissioner stated that based on the explanations and documents provided to it by the Appellant, it found that the Appellant had filed VAT returns from October 2014 to the date of the letter in iTax, enumerating general rated sales only but had understated the sales in the VAT returns in comparison with the sales declared in income tax returns for the subject period. That although the Appellant explained that the amount of variance was equivalent to zero rated sales supplied to SMEC, the Commissioner held that these supplies made were not zero rated in accordance with the Second Schedule of the VAT Act, 2013. Further, that as at 31.05.2021, the Appellant had not supplied copies of exemption certificates to supply SMEC at zero rate to the Commissioner. The Commissioner therefore included sales of Kshs. 138,251,920.01 in the VAT tax computation and in arriving at the additional assessment.
4. The Appellant objected to the Commissioner’s findings and additional assessment through its letter of 09.07.2021. It followed this up with its letter dated 21.07.2021 furnishing documents in apparent support of the objection. The Appellant stated that following the signing of the Contracts with KRB, the Principal Secretary (PS) National Treasury, through his letter of 09.09.2016 to the Commissioner of Income Tax zero-rated the Consultancy services and that the Commissioner then issued a VAT remission letter dated 10.07.2017 addressed to SMEC but that the Appellant’s name was not included in the remission letter despite being in association.
5. The Appellant stated on 17.12.2020, the Commissioner through its verification team advised that in order for the remission letter dated 10.07.2017 to apply to it, it should apply for an amendment to include the its name. That KRB, through the letter dated 13.01.2021 to the Commissioner requested for the amendment and the Commissioner responded through a letter dated 16.04.2021 advising KRB to channel the request through the PS, Ministry of Transport Infrastructure Housing and Urban Development and Public Works. The PS, Ministry of Transport Infrastructure Housing and Urban Development and Public Works then requested for the amendment via a letter dated 11.05.2021. The Appellant stated that it had been informing the Commissioner’s verification team on the progress of the request for the amendment and sharing all the documents. The Appellant stated the documentation provided was sufficient for the Commissioner to allow the objection.
6. The Commissioner issued its objection decision by the letter dated 15.12.2021 (“the Objection Decision”). It restated that the supplies made by the Appellant to SMEC were not zero rated as they were not listed in the Second Schedule of the VAT Act, 2013. That the main consultant, SMEC applied for exemption pursuant to a letter dated 09.09.2016 from the National Treasury and received an exemption certificate dated 10.07.2017. The Commissioner stated that the Appellant did not apply for exemption but instead relied on the exemption certificate granted to SMEC to supply KRB free of VAT and that therefore the supplied services were not listed in the First and Second Schedule of the VAT Act, 2013 and could not be classified as exempt or zero rated and that the Appellant was not in possession of any document granting it an exempt of zero rated status as prescribed by the tax statutes. Thus, the Commissioner made the decision to reject the objection and maintain its earlier assessment of Kshs. 30,818,305.
7. The Appellant appealed to the Tribunal against the Objection Decision. The Tribunal rendered its judgment on 10.02.2023. The Tribunal crystallized the appeal before it into one issue for determination; whether the Objection Decision was valid and lawful and then analysed the material on record under the following subheadings:
a) Whether the supplied services are listed in the First or Second Schedule of the VAT Act, 2013
b) Whether the Commissioner acted ultra vires in their mandate under the VAT Act, 2013 by purporting to decide on whether the services are exempt or not,
c) Whether the Commissioner violated the doctrine of legitimate expectation by excluding the Appellant from the exemption letter
8. As to whether the supplied services were listed in the First or Second Schedule of the VAT Act, 2013, the Tribunal held that the only way the Appellant could bring these services within the VAT exemption bracket was by obtaining a VAT exemption certificate from the Commissioner and/or aligning its services to fall within the donor funded projects. On whether the Commissioner acted ultra vires, the Tribunal noted that the Appellant was never issued with an exemption certificate despite several attempts to obtain it and that Para. 20 of Part II of the First Schedule to the VAT Act, 2013, the exemption certificate sought can only be issued by the Commissioner upon approval by the Cabinet Secretary (CS), National Treasury. That whereas the Appellant presented several letters written by the PS, State Department for Infrastructure, Ministry of Transport, Infrastructure, Housing and Urban Development approving this exemption, the Appellant did not provide any letter written by the CS National Treasury specifically approving its sub-consultancy services for zero rating.
9. The Tribunal observed that from the KRB letter dated 13.01.2021, the Contract dated 01.08.2016 was between SMEC and KRB and that the Commissioner was right in interpreting the exemption from the CS National Treasury as only applicable to this contract between SMEC and KRB and not any other. Further, that the PS State Department for Infrastructure, Ministry of Transport, Infrastructure, Housing and Urban Development had in its earlier letter dated 02.06.2017 seeking an exemption for SMEC had only listed the invoices that had been served on it by SMEC and did not include the invoices from the Appellant. The Tribunal noted the subsequent letter from the PS State Department for Infrastructure, Ministry of Transport, Infrastructure, Housing and Urban Development dated 13.01.2021 to the Commissioner requesting an exemption for the Appellant but was of the view that this request for exemption ought to have been obtained from the CS National Treasury in line with Para. 20 of Part II of the First Schedule of the VAT Act, 2013 and that attempts to bring it within the tax bracket through any other way would have been illegal. That this perhaps explained why the Commissioner rightfully declined to act on this request to issue the Appellant with an exemption certificate.
10. The Tribunal concluded that since the Appellant did not present any document clearly stating that it had been exempted from VAT, it was liable to tax under section 5(1) of the VAT Act, 2013. The Tribunal stated that it could not look for the intention to exempt the Appellant in those documents and/or overlook documents that plainly and clearly stated that only SMEC had been excluded from VAT liabilities.
11. The Tribunal further relied on its decision in H.P Gauff Ingenieure GmBH & Co. KG v the Commissioner of Domestic Taxes TAT No. 165 of 2017 (UR) to hold that apart from the Appellant’s failure to obtain an exemption certificate, it also failed to prove or show that it had filed its exemption certificate application before it commenced the provision of services. That it failed to present any agreement or sub-consultancy agreement that signed with either KRB or SMEC in relation to any donor funded project which would have been the starting point for considering whether the Appellant was involved in a donor funded project. That in the absence of a specific agreement signed between it and KRB means that an agreement that can give rise to the fact that it had offered consultancy services on a donor funded project was non-existent hence it could not benefit from an exemption that is intended for donor funded projects.
12. Based on the aforesaid, the Tribunal concluded that the Commissioner merely abided by the request for the CS National Treasury and that of the PS State Department for Infrastructure, Ministry of Transport, Infrastructure, Housing and Urban Development when it granted SMEC its exempt status certificate and that it therefore acted lawfully and within its mandate in enforcing and implementing the request that had been presented to it.
13. The Tribunal rejected the argument that Commissioner violated the doctrine of legitimate expectation on the ground that the Appellant had not tabled any express promise that it was given by the Commissioner that it would issue it with an exemption certificate. Further, that the Appellant had not shown that it is a common practice that any person who applied for an exemption certificate would obtain it, that it had complied with all the pre-approval legal requirements so as to be reasonably expectant of a positive decision from the Commissioner and that there exists a specific law which compels the Commissioner to issue it with the said certificate. The Tribunal also held that the approval that was issued by the CS National Treasury was also not specific to the Appellant and it would thus not have any legitimate expectation from an approval that did not mention it or was not directly addressed to it.
14. Based on the reasons outlines, the Tribunal dismissed the appeal and upheld the Objection Decision. It is this decision that precipitated this appeal. As stated, the appeal was canvassed by way of written submissions. Since the parties regurgitated the positions they took as highlighted above, there is no need to repeat the same but I will make relevant references in my analysis and determination below.
Analysis and Determination
15. The appellate jurisdiction of this court is grounded on section 56(2) of the Tax Procedures Act, 2015 (“TPA”) which states that, “An appeal to the High Court or to the Court of Appeal shall be on a question of law only”. This means that this court is not permitted to substitute the Tribunal’s decision with its own conclusions based on its own analysis and appreciation of the facts but must give due deference to the Tribunal and intervene only where the factual conclusion cannot be supported by the evidence or application of the law is clearly erroneous (see John Munuve Mati v Returning Officer Mwingi North Constituency & 2 others [2018] eKLR).
16. The Appellant, in its submissions identifies the following 5 issues which I shall consider accordingly:
i. Whether the Tribunal erred in determining that the consultancy services provided by the Appellant to KRB for the Project were neither donor-funded projects nor VAT exempt
ii. Whether the Tribunal erred in concluding that the VAT exemption certificate under the Project only applied to SMEC
iii. Whether the Tribunal erred in finding that the Appellant was required to obtain fresh approvals to be exempted from VAT
iv. Whether the Tribunal erred in failing to find that the Respondent acted ultra vires in its mandate under the VAT Act by purporting to decide on whether the services are exempt or not
v. Whether the Tribunal erred in finding that the Appellant was not deprived of the right of legitimate expectation by being excluded from the exemption letter.
Whether the services provided by the Appellant were for a donor-funded project and thus VAT exempt
17. The Appellant submits that the consultancy services it provided to KRB were VAT exempt under the First Schedule of the VAT Act, 2013 and relies on Para. 20 of Part Il thereof which provides for exemption of, ‘Taxable services for direct and exclusive use in the implementation of official aid funded projects upon approval by the Cabinet Secretary to the National Treasury. Section 2 of the VAT Act, 2013 defines an “official aid funded project” as ‘a project funded by means of a grant or concessional loan in accordance with an agreement between the Government and any foreign government, agency, institution, foundation, organisation or any other aid agency’
18. The Appellant submits that the services provided were directly related to a donor-funded project financed by the International Development Association (IDA) and were approved by the CS as such. That the letter from the National Treasury dated 09.09.2016, explicitly mentioned the IDA funding, making the services eligible for zero-rating under the Second Schedule of the VAT Act, 2013 and that the Tribunal erred in concluding that the services were neither listed in the First nor Second Schedule of the VAT Act,2013. It submits that no taxes were payable for the services as they fell within the scope of the First Schedule as the project was donor funded and under the Second Schedule as the National Treasury explicitly declared that they qualify for zero-rating.
19. The Commissioner contends that from a reading of Para. 20 of Part II to the VAT Act, 2013, the exemption is not automatic and is conditional upon an approval from the CS to the National Treasury and that for the supplies to be exempt under the above provision it must meet two conditions: first, the taxable services must be for direct use in implementation of official aid funded projects and second there must be approval by the CS to the National Treasury. That failure to meet the two-tier criteria makes a supply made, chargeable for VAT under section 5(1) of the VAT Act, 2013. The Commissioner submits that in as much as the Appellant provided correspondence between the Appellant and the CS, National Treasury, the documents did not specifically refer to the Appellant as an exempted supplier or amounted to an approval by the CS, National Treasury. The in fact, the Appellant did not obtain approval for VAT exemption from the CS to the National Treasury as required by the law. The Commissioner submits that the Appellant relied on an approval granted to a third party in a contract between third parties and that Appellant cannot rely on an exemption granted to another party and that in the absence of such an exemption, the supplies made by the Appellant were therefore chargeable to VAT.
20. It is common ground that by a letter dated 09.09.2016, the National Treasury wrote to the Commissioner under the subject ‘ZERO RATING OF SERVICES: CONSULTANCY SERVICES FOR ROAD INVENTORY AND CONSITION SURVEY UNDER KENYA TRANSPORT SECTOR SUPPORT PROJECT(KSTSSP)’. For ease of reference and to appreciate the context of this letter, I will reproduce its contents below as follows:
This is to confirm that the Road Inventory and Condition Survey under Kenya Transport Sector Support Project (KSTSSP) financed by the International Development Association, services to the project, therefore, qualify for zero rating. The funding agreement was signed on 23rd May, 2011. Services to the project, therefore, qualify for zero rating as provided for under the provisions of Section 68(4A) of the VAT Act. The expiry date of the project is 31st October, 2017.
By a copy of this letter, the Principal Secretary, State Department for Infrastructure, Ministry of Transport, Infrastructure, Housing and urban Development is advised to provide you with the relevant documents to facilitate any request for zero rating of the services without coming back to the National Treasury. However, this letter does not include the exemption of goods. A Separate application for the exemption of goods for use in the project must be made in accordance with the “Procedure for, Processing Exemption from Duties and VAT for Official Aid Funded Projects)
Please note that withholding tax on income is payable
Please be advised that this is NOT an exemption letter.
21. From the above letter, the National Treasury confirms that the Kenya Transport Sector Support Project, on which the contracts between SMEC in association with the Appellant and KRB are grounded, is an official aid-funded project and that the services to it qualify for zero-rating. The National Treasury also states that it is the PS, State Department for Infrastructure, Ministry of Transport, Infrastructure, Housing and Urban Development that is to provide the Commissioner with the relevant documents to facilitate any request for zero rating of the services without coming back to the National Treasury.
22. It is not in dispute that pursuant to this letter, the PS State Department for Infrastructure, Ministry of Transport, Infrastructure, Housing and urban Development wrote to the Commissioner on 02.06.2017 informing it about the Contracts with SMEC and the Appellant and requesting for the zero rating of the services covered by invoices submitted to the Ministry. In its letter dated 10.07.2017, the Commissioner addressed SMEC only informing it that it was authorized to supply the services free of VAT. The Appellant then wrote to KRB informing it that the aforementioned letter also needed to apply to it for VAT remission purposes and was to be addressed to, ‘SMEC International Pty Limited in association with Kiri Consult Limited’ and also indicate full amounts of the main contract and sub consultancy invoiced. KRB wrote to the Commissioner on 13.01.2021 seeking the Commissioner’s amendment of the letter to include both SMEC and the Appellant. In its response, the Commissioner, through its letter of 16.04.2021 advised that for it to review KRB’s request, the same had to be channelled through the PS Ministry of Transport, Infrastructure, Housing and urban Development and Public Works and that the request should be in line with Section 16(1) of the VAT Act, 2013 which limits the time within which a credit note can be issued to 6 months from the date of the invoice unless there is a commercial dispute in court.
23. KRB, acting on this advice addressed a letter dated 28.04.2021 to the PS State Department for Infrastructure, Ministry of Transport, Infrastructure, Housing and Urban Development and Public Works urging him to seek an amendment of the VAT remission letter on behalf of the Appellant. Pursuant to this request, the PS State Department for Infrastructure, Ministry of Transport, Infrastructure, Housing and Urban Development made a request to the Commissioner through its letter dated 11.05.2021 seeking the amendment of the VAT remission letter to include the Appellant. This letter was not responded to as what followed was the Commissioner’s verification exercise and findings through the letter of 22.06.2021 where as stated in the introductory part, the Commissioner stated that it had declined the Appellant’s explanation for the variance as it had not provided any exemption certificates to supply SMEC at zero rate.
24. Based on the evidence, I am unable to agree with the conclusion and finding by the Tribunal that the Appellant was not entitled to tax remission on the basis that it did not have any exemption certificates and that its request had not be been approved by the CS National Treasury for the Commissioner to act on and issue it with the exemption certificates for several reasons. First, whereas the Tribunal observed that from the letter of KRB dated 13.01.2021, the Contract dated 01.08.2016 was between SMEC and KRB and that the Commissioner was right in interpreting the exemption from the CS National Treasury as only applicable to this contract between SMEC and KRB and none other, the contents of the said letter reveal otherwise. KRB states that “The projects…….were awarded to SMEC International PTY Limited (Lead consultant) in association with KIRI Consult Limited(Sub Consultant)”. A reading of the actual contracts also expressly indicates that they are between KENYA ROADS BOARD and SMEC International PTY Ltd. of Australia in association with KIRI Consult Ltd.(Kenya) as sub consultants. In its letter dated 02.06.2017 seeking VAT remission for the consultants in the approved project, the PS State Department for Infrastructure, Ministry of Transport, Infrastructure, Housing and Urban Development also refers to the consultants in the subject contracts as “M/S SMEC/KIRI” and not SMEC only. The Tribunal therefore misapprehended the evidence by concluding that the Contract was between KRB and SMEC only.
25. Second, whereas the Tribunal took the view that this request for exemption by KRB ought to have been obtained from the CS National Treasury in line with Para. 20 of Part II of the First Schedule of the VAT Act, 2013 and that attempts to bring it within the tax bracket through any other way would have been illegal, I note that the letter by the National Treasury dated 09.09.2016 reproduced above, expressly stated that all requests for zero-rating were to be made through the PS State Department for Infrastructure, Ministry of Transport, Infrastructure, Housing and Urban Development “without coming back to the National Treasury”. With this communication, it was therefore not expected for any request to be directed back to the National Treasury or seek such approval from it before an exemption certificate is issued. I note that KRB indeed acted on the advice of the Commissioner to channel the request for amendment of the exemption through the PS State Department for Infrastructure, Ministry of Transport, Infrastructure, Housing and Urban Development and Public Works who in turn made the request to the Commissioner. This was in line with the direction of the National Treasury that all such requests be channelled through the PS. The Tribunal therefore erred in holding that such approval ought to have been obtained from the CS National Treasury when the National Treasury did not expect such requests and left it to the Commissioner and the PS State Department for Infrastructure, Ministry of Transport, Infrastructure, Housing and Urban Development.
26. Finally, I agree with the Appellant that in its letter dated 09.09.2016, the National Treasury confirmed and approved that the subject projects were officially aid-funded projects and that services to it qualified for zero rating which satisfies Para. 20 of Part II of the First Schedule of the VAT Act,2013. No further approval was necessary from the CS National Treasury once this was confirmed in its letter of 09.09.2016 hence the Tribunal erred in holding otherwise.
27. My findings above affirmatively dispose of the other issues for determination raised by the Appellant. The Commissioner and the Tribunal indeed erred in concluding that the VAT exemption certificate under the Project only applied to SMEC when all documents and correspondences on record referred to SMEC and the Appellant as being part of the subject contracts and the projects.
28. As I have already found, once the CS National Treasury confirmed that the project was an official aid funded project, that the services to it were zero-rated and that all such zero-rating requests were to be made through the line ministry without returning to the National Treasury, no further or fresh approvals were required to be sought from the National Treasury. I further agree with the Appellant that the Commissioner acted unreasonably and discriminatively by granting exemptions to one supplier while excluding the Appellant, who was listed as a joint supplier in the requests and that it had a legitimate expectation to be issued with an exemption certificate as the Commissioner did for the other project supplier, SMEC after following all the relevant procedures (see Commissioner of Domestic Taxes v H. P. Gauff Ingenieure GMBH Company Limited (Tax Appeal E057 of 2020) [2021] KEHC 206 (KLR) (Commercial and Tax) (3 November 2021) (Judgment) ].
29. The issue raised in this appeal is not novel. In Commissioner of Domestic Taxes v Dominion Petroleum Kenya Limited (Tax Appeal E093 of 2020) [2021] KEHC 283 (KLR), the National Treasury had granted an exemption, yet the Commissioner refused to accept remission of VAT on the ground that the Ministry of Energy had failed to notify it of the goods and services exempted despite the taxpayer having complied with all the procedures. The court held as follows:
[20] ………. I also hold that imposing a reverse VAT liability on the Respondent based on non-performance of an administrative function would be going against the very spirit of Article 210 of the Constitution as the Respondent has complied with the terms of the statute granting the remission.
[21] In addition, such a holding would violate and undermine the Respondent’s right to fair administrative action which is protected by Article 47(1) of the Constitution which provides that, “Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair.” This burden to ensure that the administrative processes comply with the constitutional mandate lie on the State and its agencies. Where a person, such as the Respondent has taken advantage of clear statutory provisions, the Commissioner cannot impose procedural impediments particularly where such procedures are not part of the statutory scheme conferring the benefit.
30. Guided by the provisions of Article 47(1) of the Constitution, I hold that the Appellant complied with all the procedures prescribed by the authority granting the exemption. It cannot be blamed for the failure of state offices and officers for failing to comply with their constitutional obligations by failing to issue the requisite certificate of exemption when the evidence is clear that it was qualified and had complied with all the procedures prescribed by the granting authority.
Disposition
31. For the reasons I have set out above, I allow the appeal, set aside the Tribunal’s judgment dated 10.02.2023 and substitute it with an order allowing the Appellant’s objection dated 09.07.2021.
DATED and DELIVERED at NAIROBI this 17th day of AUGUST 2023.
D. S. MAJANJA
JUDGE