[2024] KETAT 340 (KLR)

Abno Softwares International Limited v Commissioner of Investigations and Enforcement (Tax Appeal 946 of 2022) [2024] KETAT 340 (KLR) (8 March 2024) (Judgment)

Neutral citation: [2024] KETAT 340 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 946 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi & AM Diriye, Members

March 8, 2024

Between

Abno Softwares International Limited

Appellant

and

Commissioner Of Investigations And Enforcement

Respondent

Judgment

Background 1. The Appellant herein is an established software development company registered in Kenya and whose principal business activity is providing premium custom software solutions.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of the laws of Kenya. Under Section 5(1) of the Act, the Respondent is an agency of the Government for the collection and receipt of all tax revenue. Further under Section 5 (2) of the Act with respect to the performance of its functions under subsection (1), the Respondent is mandated to administer and enforce all the provisions of the written laws as set out in Parts 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenue in accordance with those laws.

3. The Respondent placed the Appellant under investigation for non-compliance with its Income tax, Value Added tax (VAT) and Withholding tax obligations for the period between 2015 and 2019.

4. On 22nd of September 2020, the Respondent issued the Appellant with a notice of intention to verify tax declarations.

5. On the 14th of December 2020, the Respondent issued the Appellant with a notice of investigation under Section 59 of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’) in which the Respondent informed the Appellant that it had commenced investigations on the Appellant’s operations as well as those of its directors.

6. The investigative audit covered the Income tax, VAT and Withholding tax for the years 2015 to 2019, both years inclusive and required the Appellant to offer records for the said investigations to be undertaken.

7. On 4th January 2021, the Appellant replied to the Respondent’s notice of investigation vide a letter on the same date informing the Respondent that the Respondent’s intended investigations under Section 59 of the TPA for the period of 2015 to 2019 coincided with an already ongoing investigation by the Respondent’s office.

8. The Appellant therefore requested the Respondent to close its subsequent investigation in favour of the initial audit exercise that was already in place.

9. On 20th December 2021, the Respondent issued the Appellant with a notice of assessments for the years 2014 to 2020 arising from the tax investigations conducted. Through the notice it informed the Appellant that the taxes arising from the assessment inclusive of interest and penalties were Corporation tax amounting to Kshs. 12,220,812. 00, Withholding tax amounting to Kshs. 10,9870,311. 00 and VAT amounting to Kshs. 70,015,542. 00; giving rise to a total of Kshs. 93,206,666. 00

10. On 5th August 2022, the Respondent issued a confirmation of assessment in response to an objection letter by the Appellant dated 15th December 2021. In the said confirmation of assessment letter, the Respondent informed the Appellant first, that despite several reminders, the Appellant failed to provide the requested documents required to validate the objection, Secondly, the Respondent declared that the Appellant’s objection was invalid and that the principal tax liability of Kshs. 66,288,632. 00 together with resultant penalty and interest remained due.

11. Aggrieved by the confirmed assessments, the Appellant filed a Notice of Appeal dated 2nd September 2022 on even date.

The Appeal 12. In the Appellant’s Memorandum of Appeal dated 2nd September 2022, the grounds of appeal were first that the revenues assessed were neither correct nor realistic and secondly that the appropriate VAT input tax has not been considered.

The Appellant’s Case 13. The Appellant in its Statement of Facts relied on several documents, inter alia, the reconciled annual revenue; claimable input tax; contracts on exempt sales; list of taxes disputed; and the spreadsheet of the total tax under dispute and the objection decision.

14. The Appellant stated that on the 22nd of September 2020, the Respondent issued it with a notice of intention to verify tax declarations as reported in the Appellant’s tax returns for the period between January 2015 to December 2019.

15. The notice arose out of a variance in the income tax returns and VAT returns income declarations. The notice also stated that salaries and wages claimed in the income tax returns did not match the declared amounts for Pay As You Earn (PAYE) and that the company has foreign and unsecured loans.

16. The Appellant was requested by the Respondent to submit supporting documents to support the review. The Appellant averred in its Statement of Facts that it provided all the requisite supporting documents.

17. The Appellant however stated that all the taxes arising from the audit had since been paid except for VAT which formed the basis of this Appeal.

18. The Appellant also averred that appropriate VAT input tax was not considered by the Respondent. This was after the Respondent issued its own independent assessment. The Appellant stated that the revenues assessed from the Respondent’s independent assessment are neither correct nor realistic.

Appellant’s Prayers 19. In line with the above grounds, the Appellant sought prayers that the Tribunal would set aside the confirmation of assessment and direct the Respondent to amend the assessment in accordance with its rental schedules which it attached to its pleadings.

The Respondent’s Case 20. In response to the grounds of appeal as contained in the Memorandum of Appeal, the Respondent filed a Statement of Facts dated 6th October, 2022.

21. The Respondent stated that Section 5(2) of the Kenya Revenue Authority Act, CAP 469 of laws of Kenya compels the Respondent to enforce tax laws. VAT is charged pursuant to Section 5(1) (a) and 5(2) of the Value Added Tax Act, No. 35 of 2013 (hereinafter ‘VAT Act’) which tax is charged on taxable supplies made by a registered person in Kenya and the rates charged are also provided under the Act.

22. That Section 2 of the VAT Act defines the meaning of taxable supply as a supply other than an exempt supply made in Kenya by a person in the course or furtherance of a business carried on by the person, including a supply made in connection with the commencement or termination of a business.

23. The Respondent stated that Section 17(2) as read with Section 17(3) of the VAT Act provides that input VAT is disallowed where there is no production of original invoices or certified copies.

24. The Respondent further averred that the Appellant did not avail the originals or certified copies of invoices and therefore the Respondent disallowed the input VAT for non-compliance.

25. The Respondent stated that it is empowered by Section 59 of the TPA to request documents to verify the tax liability of the Appellant. Based on this power, the Respondent requested the Appellant to provide supporting documents via the notice of investigation dated 14th December 2020, the Appellant was requested to provide the additional documents before the 8th of January 2021.

26. That the documents requested by the Respondent included the Appellant’s audited accounts, detailed purchase ledgers, sales ledgers, cashbooks in soft copy, detailed listings of creditors and debtors of each year under review and detailed assets schedule.

27. The Respondent argued that the Appellant received the request letter but did not provide the requested documents. Although the Appellant objected on 15th December 2021, it failed to provide the supporting documents despite multiple reminders from the Respondent.

28. That the documents required were critical in the determination of the correct amounts of revenue subject to the VAT and for the Respondent to determine whether the input VAT claimed complied with Section 17 of the VAT Act.

29. According to the Respondent , it was the duty of the Appellant to provide documents whenever required by the Respondent pursuant to Section 23(1) of the TPA which places the onus on the taxpayer to keep documents or records in a manner that the taxpayer’s liability can be readily ascertained.

30. That when such documents are not provided the Respondent has the power to use alternative means to determine the taxes due. In this case, the Respondent used the banking method to determine the amount of revenue subject to VAT.

31. The Respondent stated that this method entails the use of records from third parties, for example ,bank records; where the Appellant does not avail other documentation to support its assessment. Its assessment was based on these bank records.

32. The Respondent submitted that it is not bound by the tax returns filed by the Appellant as the Respondent may assess a taxpayer’s tax liability using any information available to the Commissioner, this is supported by Section 24(2) of the TPA.

33. The Respondent averred that it is empowered to amend returns under Section 31(b) of the TPA based on available information and to the best of the its judgment.

34. That the Appellant was required to object to the assessments in accordance with the provisions of Section 51(3) of the TPA and a notice of objection is treated as validly lodged where all the relevant documents relating to the objection have been submitted. The Section provides that:“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—(a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;(b)in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1); and(c)all the relevant documents relating to the objection have been submitted.”

35. The Respondent stated that the Appellant did not comply with this provision as the Appellant did not provide the relevant documents to support its objection. Due to this failure, the Respondent confirmed the assessments and notified the Appellant that the assessments were raised within the tax laws and the amount determined was within the tax laws.

36. The Respondent stated that the VAT input was disallowed for non-compliance with Section 17(2) and (3) of the VAT Act which states as follows:“(2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1)—(a)the person does not hold the documentation referred to in subsection (3), or(b)the registered supplier has not declared the sales invoice in a return, the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation:Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.(3)The documentation for the purposes of subsection (2) shall be—(a)an original tax invoice issued for the supply or a certified copy;(b)a customs entry duly certified by the proper officer and a receipt for the payment of tax;(c)a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction; and(d)a credit note in the case of input tax deducted under section 16(2);(e)a debit note in the case of input tax deducted under section 16(5); or……”

37. The Respondent also relied on the case of Ngurumani Traders Ltd v Commissioner of Investigations and Enforcement TAT Appeal No. 125 of 2017, where it was stated:“This Tribunal need not belabor this issue. It would be an exercise in futility to direct the Respondent to consider the Appellant’s cost of sales, operating cost and not to charge VAT keeping in mind that in the foregoing analysis it was established that the Appellant failed in its duty to avail its records. In the Tribunal’s view, it is quite impossible to come to an objective assessment or consideration of the Appellant’s prayers there being no physical records to ascertain whether the information submitted in the self-assessment was accurate.”

38. The Respondent also relied on the case of Dryer & Dryer Limited v Commissioner of Domestic Taxes TAT No. 139 of 2020 [2021] eKLR, where the Tribunal held that:-“in the context of the appeal before us, the Appellant herein has failed to provide documents in support of its objection notice despite repeated time extensions granted to it by the Commissioner. We note that an objection notice without the supporting documents therefore significantly impedes the Commissioner’s ability to consider an objection notice as he will be unable to verify the veracity of the grounds of objection therein…therefore we cannot fault the Respondent for confirming the assessment after all the indulgence extended to the Appellant herein.”

39. It was the Respondent’s argument that the burden was on the Appellant to prove that the decision of the Respondent was wrong, pursuant to the provisions of Section 56(1) of the TPA.

Respondent’s Prayers 40. The Respondent prayed that the Appeal would be dismissed with costs for lack of merit and the Tribunal upholds its decision dated 5th August 2022.

Issues For Determination 41. Neither party filed written submissions as directed by the Tribunal on 3rd April, 2023. The Tribunal therefore directed, on 2nd May ,2023 that the Appeal would proceed on the basis of the pleadings as filed by either party.

42. The Tribunal having carefully considered the parties’ pleadings and documentation notes that a singular issue calls for its determination as follows;Whether the invalidation of the objection was lawful.

Analysis And Findings Whether the invalidation of the objection was lawful 43. The Tribunal’s finding is that this Appeal arose out of the Respondent’s decision to invalidate the Appellant’s objection. Neither of the parties filed submissions. The Tribunal can however determine that from the Statement of Facts of the Respondent, Appellant was issued with a notice of tax assessments on 20th December 2021 confirming that the additional taxes arising from the assessment for the period between 2014 and 2020 amounted to Kshs. 93,206,666. 00. More particularly, it is notable that in paragraph 4 of the notice of tax assessment the Respondent advised the Appellant that it could object to the assessment within 30 days if it wished to dispute the same.

44. The Tribunal further finds that the fact that the Appellant objected to the assessment is not in dispute. However, neither the Appellant nor the Respondent produced the letter of objection on which the objection decision is premised. The objection decision dated 5th August 2022 was produced in the record of appeal.

45. In the said objection decision, the Tribunal observes that the Respondent refers to an objection by the Appellant dated 15th December 2021. As aforestated, the jurisdiction of the Tribunal in cases where the Respondent has invalidated an objection is to determine whether the invalidation was lawful.

46. In order for the Tribunal to make that determination, the Tribunal needs to be shown the objection and in addition the objection decision.

47. The Appellant did not adduce the objection as part of the record of Appeal. Looking at the objection decision alone without the benefit of seeing the Appellant’s objection does not help the Tribunal to reach that determination.

48. It is trite that in Appeals before us, the burden lies on the Appellant to demonstrate that an assessment or a decision made by the Respondent is excessive or erroneous.

49. In this case, the Appellant has not discharged that burden and failure to adduce the objection renders the Appeal incompetent.

50. In such cases, the Tribunal does not go into the merits of the assessment. The Tribunal’s jurisdiction extends only to determining whether or not the invalidation of the objection is lawful.

Final Decision 51. In light of the foregoing analysis, the Tribunal finds the Appeal herein is incompetent and accordingly proceeds to make the following final Orders:a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

52. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF MARCH, 2024. ERIC NYONGESA WAFULA - CHAIRMANDELILAH K. NGALA - MEMBERCHRISTINE A. MUGA- MEMBERGEORGE KASHINDI - MEMBERMOHAMED A. DIRIYE - MEMBER