Nigeria: The Tax Appeal Tribunal Rules That The Federal Inland Revenue Service Must Always Prove Why The Payment Of Security Deposit Is Required From A Taxpayer

Background

In a recent decision that was handed down on the 13th of May 2022, the Tax Appeal Tribunal, South East Zone ("the TAT or the Tribunal") ruled that the provisions of Order 3 Rule 6(a) of the Tax Appeal Tribunal (Procedure) Rules, 2021 ("TAT Rules") are in conflict with the provisions of Paragraph 15 (7)(c) of the Fifth Schedule to the Federal Inland Revenue (Establishment) Act 2007 (as amended) ("the FIRS Act") and on this basis, refused to mandate the appellant in that case, Emenite Limited ("Emenite"), to pay 50% of the disputed tax assessment into a designated account of the TAT before the hearing of its appeal as security deposit for prosecuting the appeal.

The Tribunal also held that it is the provisions of Paragraph 15 (7)(c) of the Fifth Schedule to the FIRS Act that are relevant for purposes of determining whether an appellant should be mandated by the Tribunal to pay security deposit for prosecuting an appeal. In this case, however, the Tribunal found that the tax authority, the Federal Inland Revenue Service ("the FIRS/ "the Service") failed to establish any of the conditions stipulated under Paragraph 15(7) (c) of the FIRS Act, and accordingly, refused to mandate the appellant to pay a security deposit to the FIRS, as requested by the latter pursuant to Paragraph 15 (7) of the FIRS Act.

The Tribunal made the decision sequel to an application¹ brought by the FIRS in appeal No. TAT/SEZ/012/2021: Emenite Limited vs. FIRS seeking an order of the Tribunal mandating Emenite (or "the appellant") to either pay 50% of the disputed tax assessment into a designated account of the Tribunal before hearing as security for prosecuting the appeal against the assessment, or deposit with the FIRS an amount equal to the tax charged on the appellant for the preceding year of assessment, or one half of the tax charged by the assessment under appeal, plus a sum equal to 10% (ten percent) of the said deposit.

Udo Udoma & Belo-Osagie is representing the appellant in the matter.

Facts of the Case

Emenite filed an appeal to challenge certain assessments made against it by the FIRS regarding the 2014-2020 Years of Assessment for the sum of N4,253,518,285. Upon being served with the Notice of Appeal, the FIRS filed an application seeking an order mandating Emenite to comply with the provisions of Order 3 Rule 6(a) of the TAT Rules by paying 50% of the disputed tax assessment into a designated account of the Tribunal before hearing, as security for prosecuting the appeal against the assessment or, in the alternative, an order pursuant to Paragraph 15 of the Fifth Schedule to the FIRS Act mandating Emenite to deposit with the FIRS an amount equal to the tax charged on it for the preceding year of assessment or one half of the tax charged by the assessment under appeal, plus a sum equal to ten percent of the said deposit.

Order 3 Rule 6(a) of the TAT Rules provides as follows:

On the other hand, Paragraph 15(7)(c) of the Fifth Schedule to the FIRS Act provides as follows:

Submissions of the Parties:

FIRS' Submissions:

The FIRS argued that an appellant is bound under Order 3 Rules 6(a) of the TAT Rules to make a mandatory deposit of 50% of the disputed amount into the designated account of the TAT at the time a Notice of Appeal is filed, and that payment of the deposit constituted a condition precedent to the hearing of the appeal. The FIRS also contended that, in addition to the provisions of Order 3 Rule 6 (a) of the TAT Rules, Emenite was required by the provisions of Paragraph 15(7)(c) of the Fifth Schedule to the FIRS Act to make a mandatory deposit into the designated account of the FIRS before the TAT could assume jurisdiction to entertain the appeal and that it was expedient to require Emenite to deposit an amount equal to the tax charged upon it for the preceding year of assessment or one half of the tax charged by the assessment under appeal plus a sum equal to 10% (ten percent) of the said deposit.

In support of its submissions, the FIRS placed reliance on an earlier decision of the Lagos Division of the TAT in the case of Multichoice Nigeria Limited v. FIRS² where the Lagos Zone of the TAT held that payment of the security deposit required under Paragraph 15 (7) (c) of the Fifth Schedule to the FIRS Act constituted a condition precedent to the hearing of an appeal and directed Multichoice Nigeria Limited to make the required deposit before its appeal could be heard.

Emenite's Submissions

In response to the application by FIRS, Emenite contended that while the security deposit required under Paragraph 15 (7) (c) of the Fifth Schedule to the FIRS Act is subject to the FIRS or the tax authority proving or establishing the existence of any of the 3 (three) conditions stipulated therein, the deposit required under Order 3 Rule 6 (a) of the TAT Rules is not subject to the same or similar conditions as are required under paragraph 15 (7) of the Fifth Schedule to the FIRS Act. Emenite contended on the basis of this observation that the provisions of Order 3 Rule 6 (a) of the TAT Rules are in conflict with the provisions of Paragraph 15(7)(c) of the Fifth Schedule to the FIRS Act in so far as both provisions relate to the payment of deposit by an appellant as security for prosecuting an appeal; that the FIRS Act is a valid and subsisting Act of the National Assembly while the TAT Rules is a subsidiary legislation made by the Minister of Finance, purportedly pursuant to powers derived from the FIRS Act; that since a subsidiary legislation derives its force from the principal or substantive legislation, it (a subsidiary legislation, such as the TAT Rules) cannot contradict or override the principal legislation; that where there is any inconsistency or conflict between the provisions of the principal and subsidiary legislations, the provisions of the principal legislation must prevail over the subsidiary legislation. Consequently, Emenite urged the Tribunal to declare the provisions of Order 3 Rule 6(a) of the TAT Rules to be null and void to the extent of its inconsistency with the provisions of Paragraph 15 (7) (c) of the FIRS Act.

Furthermore, and in relation to the FIRS' argument that Emenite was also required to pay the security deposit required under Paragraph 15 (7) (c) of the FIRS Act, Emenite contended that the FIRS failed to prove the existence of any of the 3 (three) conditions required to be established under Paragraph 15(7)(c) of the Fifth Schedule to the FIRS Act. Specifically, Emenite contended that the FIRS' argument that it was expedient to order Emenite to pay the deposit required under Paragraph 15(7)(c) of the Fifth Schedule to the FIRS Act was a bare assertion that was not supported by any piece of evidence.

The Decision of the Tax Appeal Tribunal:

On the issue of whether Order 3 Rule 6(a) of the TAT Rules conflicts with Paragraph 15(7)(c) of the Fifth Schedule to the FIRS Act and therefore null and void to the extent of its inconsistency, the TAT held that Order 3 Rule 6(a) of the TAT Rules should derive its validity from Paragraph 15(7)(c) of the Fifth Schedule to the FIRS Act, and noted that while Order 3 Rule 6(a) of the TAT Rules creates a condition before an appeal can be entertained by the Tribunal, Paragraph 15(7)(c) of the Fifth Schedule to the FIRS Act provides certain conditions on the bases of which the Tribunal may, at its discretion, order an appellant to make payment of security deposit before an appeal can be heard. The TAT further noted that the provisions of the TAT Rules are different from and not complementary to the statutory provisions contained in Paragraph 15(7) of the FIRS Act, contrary to the contention of the FIRS that both provisions are not inconsistent but complement each other. On this basis, the TAT agreed with Emenite that Order 3 Rule 6(a) of the TAT Rules cannot override the provisions of Paragraph 15(7)(c) of the Fifth Schedule to the FIRS Act, as rules of procedure cannot override statutory provisions of the law. The TAT relied on section 68(1) of the FIRS Act which provides that where the provisions of any other law, including the enactments in the First Schedule to the FIRS Act, are inconsistent with the provisions of the FIRS Act, the provisions of the FIRS Act shall prevail. Finally, the TAT held that it is the provisions contained in Paragraph 15(7)(c) of the Fifth Schedule to the FIRS Act that are relevant to the question of whether an appellant shall be required or ordered to pay a deposit as security for prosecuting an appeal.

In relation to the question of whether the FIRS satisfied the conditions stipulated under Paragraph 15 (7) (c) of the Fifth Schedule to the FIRS Act for the grant of an order mandating Emenite to pay a security deposit, the Tribunal held as follows:

1. Paragraph 15(7)(c) of the Fifth Schedule to the FIRS Act does not make the payment of security deposit a condition precedent to the prosecuting of an appeal by a taxpayer.
2. A taxpayer would only be ordered by the TAT to pay the security deposit required under Paragraph 15(7)(c) of the Fifth Schedule to the FIRS Act where the FIRS is able to establish to the satisfaction of the TAT any of the 3 (three) conditions stipulated in Paragraph 15 (7) (c) of Fifth Schedule to the FIRS Act, namely, that:
   
   1. the appellant has for the year of assessment concerned, failed to prepare and deliver to the Service returns required to be furnished under the relevant provisions of the tax laws
   2. the appeal is frivolous or vexatious or is an abuse of the appeal process
   3. it is expedient to require the appellant to pay an amount as security for prosecuting the appeal.
3. In the instant case, the FIRS failed to satisfy any of the requirements prescribed under Paragraph 15(7) (c) of the FIRS Act to invoke the TAT's powers to order Emenite to provide security deposit for prosecuting the appeal.

Comments

In our view, the Tribunal reached the right decision. The TAT Rules were made by the Minister of Finance pursuant to the powers granted to her under Paragraph 21 of Fifth Schedule to the FIRS Act. Being a subsidiary legislation, the TAT Rules cannot prescribe conditions for the grant of an application for the payment of security deposit that are inconsistent with those stipulated in Paragraph 15(7) (c) of the FIRS Act. As noted by the TAT, while Paragraph 15(7) (c) of the FIRS Act sets out certain conditions on the bases of which the TAT may, at its discretion, order an appellant to make a deposit as security for prosecuting an appeal, Order 3 Rule 6 (a) purportedly made the payment of 50% of the disputed tax a condition precedent to the filing and prosecution of an appeal by a taxpayer.

The Tribunal's decision in this case on the effect of Paragraph 15 (7) of the Fifth Schedule to the FIRS Act marks a departure from and blunts the effect of the earlier decision of the Lagos Zone of the TAT in the Multichoice case where it was held that payment of the security deposit required under Paragraph 15 (7) of the Fifth Schedule to the FIRS Act constitutes a condition precedent to the hearing of an appeal.

The provisions of Order 3 Rule 6(a) of the TAT Rules, as well as the decision of the Tribunal in the Multichoice case understandably caused some concern among taxpayers and practitioners, given their draconian effect on the right of taxpayers to file and prosecute an appeal regardless of whether any of the conditions stipulated under Paragraph 15(7) (c) of the FIRS Act is present or established in any case. The Tribunal's decision, in this case, has addressed the concern of taxpayers in this regard.

The implication of this decision is that going forward, a taxpayer who intends to challenge a tax assessment imposed by the FIRS would no longer have to worry about the burdensome requirement of payment of 50% of the disputed tax under Order 3 Rule 6 (a) of the TAT Rules. Furthermore, where the FIRS or any taxing authority wishes to rely on Paragraph 15(7)(c) of the Fifth Schedule to the FIRS Act to urge the TAT to mandate an aggrieved taxpayer to pay deposit as security for prosecuting the appeal, such order can no longer be made by the TAT as a matter of course as suggested by the decision in the Multichoice case. FIRS must prove the existence of the conditions stipulated in Paragraph 15(7)(c) of the Fifth Schedule to the FIRS Act before an appellant can be ordered to pay a deposit as security for prosecuting an appeal.

Footnotes

1. In Appeal No. TAT/SEZ/012/2021: Emenite Limited vs. Federal Inland Revenue Service. Udo Udoma & Belo-Osagie acted for Emenite Limited.

2. Unreported decision of the TAT, Lagos Zone in Appeal No. TAT/LZ/CIT/062/2021: Multichoice Nigeria Limited v. FIRS delivered on 24th August 2021

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