[2024] KETAT 111 (KLR)

Arcon Works Limited v Commissioner of Domestic Taxes (Tax Appeal 1033 of 2022) [2024] KETAT 111 (KLR) (2 February 2024) (Judgment)

Neutral citation: [2024] KETAT 111 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1033 of 2022

E.N Wafula, Chair, E Ng'ang'a, RO Oluoch, Cynthia B. Mayaka, AK Kiprotich & B Gitari, Members

February 2, 2024

Between

Arcon Works Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited company incorporated in Kenya that deals in construction of buildings located in Karen in Nairobi County.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority (the Authority) is an agency of the Government for the collection and receipt of all tax revenue.

3. The Appellant was issued with an Assessment order dated 9th December 2019 for various months (March 2018, April 2018 & May 2018) for amount of Kshs. 37,666,450. 56.

4. The dispute arose from inconsistencies detected between the invoices declared by the Appellant and those declared by its suppliers when the Appellant made an application through the iTax platform claiming input VAT for the period March, April and May 2018.

5. The Appellant lodged notices of objection to the entire assessment on 9th December 2019.

6. The Appellant being dissatisfied with the decision made by the Respondent on 24th May 2022, filed a Notice of Appeal dated 7th August 2022.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 7th August 2022 and filed on 21st September 2022:a.That the Respondent erred in law by failing to allow some of the claimable purchases as stipulated under Section 17 of the VAT Act 2013. b.That the Respondent erred in demanding tax on the claimed input tax credits under Section 17 of the VAT Act 2013.

Appellant’s Case 8. The Appellant’s case is supported with the following documents:a.The Appellant’s Statement of Facts dated 7th August 2022 together with the documents attached thereto.

9. That the Appellant was issued with an assessment order dated 9th December 2019 for various months (March 2018, April 2018 & May 2018) for amount of Kshs. 37,666,450. 56 which was objected via iTax and all supporting documents were provided on demand.

10. That the Respondent on same day of VAT auto assessment also debited its KRA VAT input account which was reduced by Kshs. 37,666,450. 56 which means that the Respondent already recovered this amount from its account by reducing its claimable amount which it could have utilized for the future liabilities to pay VAT.

11. That the objection decision dated 24th May 2022 confirmed the assessment from the Respondent where it stated the basis of coming up with the decision on objection for the Value Added Tax additional assessments.

12. That the Appellant’s claim of input VAT under Section 17 of the VAT Act that relates to credits for input tax against output tax are legitimate and conform to Section 17 (3) of the same Act.

13. That the Respondent proceeded to disallow some input VAT claims duly insured by the Appellant despite being provided with the purchase invoices and bank statements as proof of purchase during the objection review process.

14. That in light of the above, it is the Appellant’s case that the decision made by the Respondent to pay a total incremental liability of Kshs. 37,666,450. 56 is improper, unfair and unjust.

Appellant’s Prayers 15. That the Appellant prayed for orders, that:a.The Respondent be and is hereby compelled to vacate the disallowed amount and allow the purchase claimed by the Appellant in fullb.The Respondent be compelled to revise any penalties and interest payable and,c.The cost of this Appeal is borne by the Respondent

Respondent’s Case 16. That the Respondent’s case is premised on the hereunder filed documents: -i.The Respondent’s Statement of Facts dated 18th October 2022 and filed on 19th October, 2022 together with the documents attached thereto.ii.The Respondent’s written submissions dated 28th March 2023 and filed on 30th March, 2023.

17. That the Appellant was issued with Assessment Orders on 15th November 2019 for the following periods and principal amounts;a.VAT assessment for the period 1st March, 2018 – 31st March, 2018 for Kshs. 27,099,062. 88b.VAT assessment for the period 1st April, 2018 – 30th April, 2018 for Kshs.4,261,997. 60c.VAT assessment for the period 1st May,2018 – 31st May, 2018 for Kshs.6,305,390. 08

18. That subsequently, the Appellant lodged notices of objection to the entire batch of assessments on 9th December 2019.

19. That despite several reminders through email correspondences, the Appellant failed to provide the requisite documents to support the objection and sufficient proof to authenticate the input tax claimed.

20. That vide an email dated 2nd March 2022, the Appellant was asked to give written explanations for the invoice inconsistencies which it responded to the following day. An email dated 2nd May, 2022 was then again sent to the Appellant informing it that the Objection was under review and proof of payment was required so as to allow the claim. The same went unanswered. This notwithstanding, that the Respondent sent a follow up email on 12th May, 2022 asking the Appellant to produce supporting documentation on or before 19th May, 2022 failure to which the input tax would be disallowed and the additional assessments confirmed.

21. That subsequently, the Respondent fully rejected the objection application as summarized below:Tax Period Amount Objected Tax Allowed under objection Tax not allowed under objection

March 2018 27,099,062. 88 0 27,099,062. 88

April 2018 4,261,997. 60 0 4,261,997. 60

May 2018 6,305,390. 08 0 6,305,390. 08

Total 37,666,450. 56 0 37,666,450. 56

22. That upon reviewing the Appellant's records and iTax returns as well as those of its suppliers, the following discrepancies were noted:-a.Some of the suppliers who traded with the Appellant for the period under review such as Megha Marketing, ASL Lusaka, central auto, Tata Holdings Ltd,Afro industries, Bamburi Special Products, KEMA Ltd, Mabati Rolling Mills, Metsec cable, Watchdog alert, SGA Security had lumped sales under customers not registered for VAT which caused the inconsistency.b.There were non- compliant suppliers, that is those that filed nil returns and those that failed to file returns at all (nil and non-filers). Suppliers such as Kimuyu Hardware of "PIN" A006281038G and Rooftech of “PIN”P000600811Z filed nil return for the period under review.c.Some suppliers did not declare the sale to the Appellant e.g. Transafric Nakuru of “PIN” P051152531K and Lavington Security of “PIN” P051116679J did not declare sales.

23. That subsequently, the Respondent issued an objection decision dated 24th May 2022, fully rejecting the Objection by disallowing input tax that was not fully supported.

24. That the Appellant being dissatisfied with the Respondent's objection decision instituted the Appeal herein seeking prayers that the Respondent be compelled to vacate the disallowed amount and allow the purchases claimed by the Appellant.

25. That the Respondent averred that the Appellant failed to discharge its burden of proof as demonstrated below;a.The Appellant did not avail all the supporting documents required upon request hence the input VAT claims were disallowed;b.The Appellant did not provide its suppliers statements or written confirmation to ascertain that the supplies took place; andc.The Appellant failed to prove that the supplies took place by not providing adequate proof of payment, supplier statements and confirmation from some suppliers despite an intention to disallow and several reminders done through email.

26. That further, the Respondent sent several reminders to the Appellant via email showing an intention to allow the input VAT claimed but the Appellant failed to support the input tax claimed. The Appellant failed to provide the required documents and failed to issue sufficient proof to authenticate the input tax claimed.

27. That by so doing, the Appellant failed to meet the prerequisites of Section 17 of the VAT Act. In order to claim input VAT, the Appellant was required to comply with the said Section which provides as follows;“(2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1), the person does not hold the documentation referred to in subsection (3), 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.”

28. That specifically, Section 17(3) of the VAT Act provides for documents necessary to support the input VAT claim. The documents include an original tax invoice issued for the supply or a certified copy thereof.

29. That the Respondent is of the position that input tax can only be claimed where one has provided proper invoices in support of its claim. Contrary to the provisions of Section 17(3), the Appellant failed to support its input tax claim with valid documentation. Therefore, the claim was rightfully disallowed.

30. That the Respondent reiterated that the invoices relied upon by the Appellant did not meet the legal threshold of a proper invoice as encapsulated in Regulation 9 of the VAT Regulations, 2017. Those invoices differed from the ones issued by its suppliers. The Regulation thus provides;“(1)A registered person who makes a taxable supply shall, at the time of supply, furnish the purchaser with a tax invoice containing-a.the words “Tax Invoice" in a prominent place;b.the name, address and PIN of the supplier;c.the name, address and PIN, if any,of the recipient;d.the individualized serial number of the tax invoice;e.the date on which the tax invoice is issued and the date on which the supply was made, if different from the date of issue of the tax invoice;f.the description of the goods supplied including quantity or volume or services provided;g.the details of any discount allowed at the time of supply; andh.the consideration for the supply and the amount of tax charged.”

31. That in light of the above stated, the Respondent contended that the invoices disallowed did not qualify for claim as stipulated under Regulation 9 and were therefore not allowable under Section 17 of the VAT Act.

32. That for purposes of ascertaining the authenticity of the claim, the invoices had to be matched to a particular proper corresponding invoice which the Appellant failed to do.

33. That further to the foregoing, Section 59(1) of the TPA allows the Respondent to seek additional documents in support of the input tax claimed. That the Appellant was mandated by law to produce for examination any documents in its custody relating to the tax claimed.

34. That the Respondent further averred that the burden of proving that the email address used by the Respondent in communicating the objection decision was wrong falls on the Appellant. At all material time, communications were made through the Appellant's email which it used in accessing the itax portal. The burden therefore falls on it to prove which of its emails was the official email.

35. That being guided by Section 24(2) of the TPA, the Respondent averred that the VAT assessments were issued pursuant to the law. The said Section reads as follows:-“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

31. That the assessments issued, were assessed on grounds that the Respondent was not bound by the tax returns filed by the Appellant and thus issued assessments for the tax periods using the information availed.

32. That therefore, the Respondent at this point prayed that the Appeal be dismissed on grounds that;i.The invoices provided had no correlation with the sales declared by the suppliers both in form of the values and the invoice references used by the suppliers. For instance, invoices from Megha Marketing, the reference on the face of the invoice was different from the sequence used by the supplier.ii.The assertion that the Appellant used inventory identification references is incorrect since the invoice reference used in claiming input VAT is not the same reference indicated in the physical invoices provided.iii.The Appellant failed to provide supplier confirmation and supplier statements to authenticate the input claim and invoices provided thus failed to discharge its burden of proof.

38. That the Appellant did not meet the legal threshold of a proper invoice as provided by Regulation 9 of the VAT Regulations.

39. That the input VAT claim was rightfully disallowed since it was not supported by valid documentation as required by Section 17(3) of the VAT Act.

40. That further, Section 24(2) of the Tax Procedures Act allows the Respondent to assess the Appellant's tax liability using the information available to him. Therefore, the VAT assessments were rightfully issued.

Respondent’s Prayers 38. The Respondent’s prayers to this Tribunal were for orders that:-a.The instant Appeal be declared as lacking in merit pursuant to the provisions of the Value Added Tax Act and Tax Procedures Act, to the effect that the Appellant has not provided any supporting documentation with regard to the input VAT claimed, and in the alternative;b.The Appeal herein be dismissed with costs to the Respondent as the same is devoid of merit

Issues for Determination 42. The Tribunal having evaluated the pleadings and submissions of the parties is of the view that there is a single issue that calls for its determination;Whether the Respondent was justified in disallowing the Appellant’s input tax

Analysis and Findings 42. The Tribunal having determined the issue falling for its determination proceeded to analyse it as hereunder.

43. The Respondent averred that the Appellant lodged notices of objection to the entire batch of assessments on 9th December 2019. That despite several reminders through email correspondences, the Appellant failed to provide the requisite documents to support the objection and sufficient proof to authenticate the input tax claimed.

44. Vide an email dated 2nd March 2022, the Respondent wrote to the Appellant to provide the Respondent with the following documents within Seven (7) days in order to authenticate the claim for input VAT:-a.Proof of payment for each invoice;b.Supplier statement;c.Supplier confirmation for the disallowed invoices for January 2018- May 2018

46. The Responded averred that the Appellant responded stating that it did not have an internal management inventory on all the fiscal transactions for the Appellant or any information which would enable the Respondent determine/ascertain its tax liability.

47. That consequently, the Respondent sent a follow up email on 12th May 2022 asking the Appellant to produce supporting documentation on or before 19th May, 2022 failure to which the input tax would be disallowed and the additional assessment confirmed.

48. The Respondent posited that despite multiple reminders to the Appellant via email showing an intention to allow the input VAT claimed, the Appellant failed to support the input tax claimed. The Appellant failed to provide the required documents and failed to issue sufficient proof to authenticate the input tax claimed.

49. The Respondent placed reliance on the provisions of Section 17(1) & (2) of the Value Added Tax Act, 2013 which provides as follows:“Subject to the provisions of this Act and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person in a return for the period, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.”

46. The Tribunal notes Section 17(2) of the VAT Act which provides that:“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.”

51. The Tribunal is also guided by Section 17(3) of the VAT Act which provides for documents necessary to support the input VAT claim. The documents include an original tax invoice issued for the supply or a certified copy thereof.

52. The Respondent asserted its position that input tax can only be claimed where one has provided proper invoices in support of its claim. Contrary to the provisions of Section 17(3) of the VAT Act, the Respondent averred that the Appellant failed to support its input tax claim with valid documentation.

53. The Tribunal observes that Section 59(1) of the TPA allows the Respondent to seek additional documents in support of the input tax claimed. The Appellant was therefore mandated by law to produce for examination any documents in its custody relating to the tax claimed.

54. Further, Section 56(1) of the TPA provides as follows regarding burden of proof;“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

51. The Tribunal is guided by the decision in Commissioner Of Domestic Services V Galaxy Tools Limited [2021]eKLR the Court quoted the case of Metcash Trading Limited -Vs-Commissioner For The South African Revenue Service and Another Case Cct 3/2000 and stated the following on the burden of proof;“But the burden of proving the Commissioner wrong then rests on the vendor under Section 37. Because VAT is inherently a system of self-assessment based on a vendor's own records, It is obvious that the incidence of this onus can have a decisive effect on the outcome of an objection or appeal. Unlike Income tax, where assessments can elicit genuine differences of opinion about accounting practice, legal interpretations or the like, in the case of a VAT assessment there must invariably have been an adverse credibility finding by the Commissioner and by like token such a finding would usually have entailed a rejection of the truth of the vendor's records, returns and averments relating thereto. Consequently, the discharge of the onus is a most formidable hurdle facing a VAT vendor who is aggrieved by an assessment unless the Commissioner's precipitating credibility finding can be shown to be wrong, the consequential assessment must stand.”

51. In this case, the Appellant was granted sufficient time to produce documents that would address the issues raised in the assessment. The copies of the correspondences between the Appellant and the Respondent produced before the Tribunal were sufficient evidence.

52. Pursuant to Section 23 (1) of the Tax Procedures Act and Section 43(1) of the VAT Act the Appellant is required to maintain any document and is also expected to keep the said documents in its possession as required under a tax law so as to enable its tax liability to be readily ascertained.

53. The Tribunal noted that the Appellant only provided a document titled ‘objection review analysis’ which is not one of the documents decreed under Section 17 (3) of the VAT Act. The Tribunal therefore finds that the Appellant failed to produce original tax invoices as required by Section 17(2)(3) of the Value Added Tax Act. Proof of payment was not provided and neither was satisfactory explanation given for the identified inconsistencies.

54. Based on the above the Tribunal is persuaded that the failure to provide complete records as requested, cripples the Appellant's objection. The Appellant had been granted sufficient time to ensure that it provided all the necessary documents to support its objection fully but it failed to comply therefore, the Tribunals finds that the Appellant did not discharged its burden of proof as provide by law.

Final Decision 51. In view of the foregoing, the Tribunal finds that the Appeal is unmeritorious and accordingly makes the following Orders:-a.That the Appeal is hereby dismissed.b.That the Objection decision dated 24th May 2022 be and is hereby upheld.c)Each Party to bear its own costs.

60. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF FEBRUARY, 2024. ERIC NYONGESA WAFULA - CHAIRMANEUNICE NG’ANG’A - MEMBERDR RODNEY O. OLUOCH - MEMBERCYNTHIA B. MAYAKA - MEMBERABRAHAM K. KIPROTICH - MEMBERBERNADETTE GITARI - MEMBER