[2024] KETAT 1202 (KLR)

China Communications Construction Company Limited v Commissioner of Intelligence Strategic Operations, Investifations and Enforcement (Appeal E267 of 2023) [2024] KETAT 1202 (KLR) (9 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1202 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal E267 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, T Vikiru & AK Kiprotich, Members

August 9, 2024

Between

China Communications Construction Company Limited

Appellant

and

The Commissioner of Intelligence Strategic Operations, Investifations and Enforcement

Respondent

Judgment

Background 1. The Appellant is a majority state-owned, publicly traded, multi-national engineering and construction Company founded in the Republic of China and primarily engaged in the design, construction and operation of infrastructure assets including highways, bridges, tunnels, railways, roads, airports, marine ports and oil platforms.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue, and the administration and enforcement of all tax laws set out in Parts 1& 2 of the First Schedule to the Act, for purposes of assessing, collecting, and accounting for all tax revenues in accordance with those laws.

3. The issue in dispute in this Appeal arose when the Respondent carried out an audit of the Appellant‟s affairs and issued it with an assessment dated 3rd February 2023 for VAT and income tax amounting to Kshs 1,168,119,341. 00.

4. The Appellant objected to this assessment vide its letter dated 2nd May 2023 and the Respondent issued its objection decision varying the assessment to Kshs 1,047,557,661. 00.

5. Dissatisfied with the Respondent‟s objection decision the Appellant lodged its Notice of Appeal on 25th May 2023.

The Appeal 6. The Appellant in its Memorandum of Appeal dated 2nd June 2023 and filed on the same date has set out the following grounds of appeal: -a.That the Respondent fell into a serious error of fact and law in the finding that the documents provided by the Appellant were at face value in compliance with the provisions of Section 17 of the VAT Act, No. 35 of 2013 but the same could not be relied on to prove a commercial transaction, despite the Appellant having provided the Respondent with proof of purchases from various suppliers in conformity with Section 17 of the VAT Act, No. 35 of 2013 for purposes of claiming input Value Added Tax (“VAT”).b.That the Respondent erred and misdirected itself in finding that there was no supply and services and rejected the delivery notes supplied by the Appellant as proof of purchases on the basis that the delivery notes were incomplete and could not be relied on because the mode of delivery, persons receiving the goods and place of delivery were not indicated in the said delivery notes provided by the Appellant. This was inspite of the fact that the Appellant had produced valid delivery notes which proved the supply and delivery of taxable goods and services.c.That the Respondent further erred and misdirected itself by concluding that the entities for which the Appellant claimed purchases had no physical addresses from which they traded or stored the huge materials purchased by the Appellant, contrary to the evidence supplied to it by the Appellant. In doing so, the Respondent effectively placed an onerous and non-existent legal obligation upon the Appellant to not only provide proof of purchases, but also to provide proof of the physical addresses, importation or local purchase of the goods supplied to the Appellant which are not contemplated either under Section 15 of the Income Tax Act or Section 17 of the VAT Act, or any other law of Kenya.d.That Commissioner fell into error in concluding that the documents provided by the Appellant as proof of its claim for purchases were prepared for purposes of compliance with the requirement under Section 17 of the VAT Act and the same were not authentic.e.That the Respondent erred in fact and law in concluding that the Appellant's purchases could not have been deemed to be wholly and exclusively incurred by the Appellant for the production of the income for Corporation tax as envisaged under Section 15 of the Income Tax Act.f.That the Respondent erred in fact in concluding that there were overstated purchases amounting to Kshs. 10,655,000. 00 from Dial an Errand Limited. Kshs. 11,002,074. 00 From Hantu Limited in the year 2020 and Kshs 12,832,638. 00 from Najifos Limited in the year 2021. g.That the Respondent fell into error and misdirected itself in fact and law in failing to consider the fact that the Appellant is a withholding VAT agent in accordance with Section 42A of the Tax Procedures Act, No. 29 of 2015 and had consistently withheld VAT at the time of paying its suppliers on account of the purchases procured from the suppliers. The Respondent ignored the fact that the supplier companies in question had declared the output VAT in their VAT returns and their annual corporation tax returns and the Respondent as the operator of iTax could easily verify this position.h.That the Respondent therefore fell into error by disallowing the Appellant's input VAT when they could easily confirm and verify the same from the supplier's corresponding output VAT in line with Section 17(1) of the VAT Act No. 35 of 2013. i.That the Respondent erred and misdirected itself in confirming its assessment of principal taxes in the sum of Kshs 1,047,557,661. 00. j.That the Respondent‟s Objection decision appealed against herein is therefore wrong in law and fact and thus in violation of the Appellant‟s Constitutional right to fair administrative action guaranteed under Article 47 of the Constitution and Section 4(1) of the Fair Administrative Action Act, No. 4 of 2015.

Appellant‟s Case 7. The Appellant set out its case in its Statement of Facts dated and filed on 2nd June 2023 and the written submissions dated 10th April 2024.

8. The Appellant stated that it purchases a lot of materials in its line of business which allows it to claim input VAT from those transactions.

9. That it had been reliably informed that its suppliers had declared output VAT and annual Corporation tax returns which could be verified by the Respondent who is in Control of the iTax system.

10. The Appellant stated that it was averse to the allegations that its suppliers were used for purposes of remitting funds out of the country because it was not its business to dictate how its suppliers spend their money.

11. It contended that the Respondent‟s reasons for disallowing the claimed purchases on grounds that the suppliers did not actually supply any goods or services to the Appellant‟s business between 2019 and 2021, that the suppliers were created for the sole purpose of transferring money to China and other overseas destinations and that the Appellant had not furnished the Commissioner with delivery notes that bore comprehensive details regarding the delivery of the goods and the suppliers themselves was frivolous and not anchored in law.

12. It was its view that the Respondent‟s decision and approach was based on a flawed premise and were inconsistent with the law since it did not consider the provision of Section 17 (3)(a) of the VAT Act No. 35 of 2013, which states that an original tax invoice shall be deemed to be sufficient proof for purposes of claiming a deduction of input tax.

13. That it was guided by Section 17(3)(a) of the VAT Act when it furnished the Respondent with documents, including original tax invoices, delivery notes, electronic tax receipts (ETR), and proof of payments to the respective suppliers in support of the claim for the purchase and input VAT.

14. The Appellant asserted that in standard accounting practice, expenses would be deemed to be allowable if they are supported by documents such as invoices, delivery notes and proof of payments. That since the Appellant had provided these documents it follows that it had discharged its evidential burden under Section 17(3) of the VAT Act and Section 15(1) of the Income Tax Act. As such the Respondent had no legal basis for disallowing the purchases which met the legal threshold.

15. The Appellant was of the view that the Respondent‟s justification for disallowing its valid and supported purchases was based on misguided arguments that the delivery notes provided allegedly lacked information on the mode of delivery of the goods, the identity of the recipients of the goods, and the place of receipt of the goods was baseless since there is no legal provision in Kenyan law which requires a delivery note to contain such information.

16. That it was thus unfair, unjust, unlawful and unreasonable for the Respondent to disallow the Appellant‟s valid and supported purchases based on whim and non-existent law when the contract between it and the suppliers was valid.

17. That the Respondent's justification for disqualifying the Appellant‟s input claim for the reason that its suppliers did not have a physical address from where they traded or stored the building materials that were purchased is ridiculous and devoid of rational reason since the suppliers are autonomous entities and are legally distinct from the Appellant. That it was unjust, unreasonable, unfair and unlawful to disallow its purchases based on the deeds or misdeeds of separate legal entities contrary to the well-settled doctrine that differentiates it from those other legal entities.

18. The Appellant further stated that the Respondent‟s decision to disallow its purchases on grounds that its suppliers neither imported nor purchased any goods locally for purposes of supplying the same is also based on a fatally flawed premise, since it did not take into account the fact that some of the Appellant‟s suppliers may have been supplying services and not goods, which could not be reflected as „goods imported‟ in the documents examined by the Commissioner.

19. That the Respondent also misguided itself and exceeded the scope of its mandate by disallowing the Appellant‟s purchases on the grounds that the documents prepared by the Appellant‟s suppliers were created merely to comply with the requirement of Section 17 of the VAT Act, 2013.

20. The Appellant averred that the Respondent demanded additional taxes from the Appellant after adjusting the VAT and Corporation tax for the years 2016 and 2017 contrary to Section 31(4)(b) of the Tax Procedures Act which prohibits assessments beyond 5 years.

21. That the Respondent's Objection decision contravened the principle of fair administrative action as set out in Article 47 of the Constitution of Kenya 2010, Section 7 (2) of the Fair Administrative Action Act No. 4 of 2015 and its legitimate expectation of being subjected to a fair, just and reasonable tax administration process.

22. The Appellant identified the following issues for determination in its submissions.a.Whether the Appellant‟s purchases claimed as allowable Corporate tax deductions and input tax are valid in law and constitute prima facie evidence of transactions between itself and its suppliers.b.Whether the Commissioner discharged the burden of proving that the Appellant‟s supporting documents were authentic.c.Whether the Commissioner‟s objection decision breached the Appellant‟s Constitutional right to fair administrative action guaranteed under Article 47 of the Constitutional and Section 4(1) of the Fair Administrative Action No. 4 of 2015, andd.Whether the Appellant should pay the costs of the Appeal.

23. The Appellant urged these issues as follows:

a. Whether the Appellant‟s purchases claimed as allowable corporate tax deductions and input tax are valid in law and constitute prima facie evidence of transactions between itself and its suppliers. 24. The Appellant submitted that Section 15(1) of the ITA implies that an entity is allowed to deduct expenses that are incurred exclusively in the generation of income unless such expenses are precluded by Section 16 of the ITA. That this means that only the net income of a person or a business is subject to income tax. It supported this position with the case of Income Tax v Kencell Communications Limited (Now Airtel Kenya Limited) [2016] eKLR.

25. That Section 17 (3) of the VAT Act further provides that the documentation for the purposes of deduction of input tax under subsection (2) of Section 17 of the VAT Act shall be an original tax invoice issued for the supply or a certified copy. It supported this position with the case of Karshan Limited Vs Commissioner of Domestic Taxes (Tax Appeal No. 123 of 2018).

26. That when read together it follows that Section 15(1) of the ITA permitted it to deduct the amounts it expended in purchasing construction materials from the suppliers because the said purchases were wholly and exclusively used in the production of the income from the Projects. On the other hand, Section 17 of the VAT Act permitted it to claim a credit for input VAT on vatable supplies or otherwise make such deductions of vatable supplies on its returns from the suppliers for as long as the Appellant provided the Commissioner with an original tax invoice issued for the supply or a certified copy.

27. That it satisfied both the criteria under Section 17(1) and (2) of the VAT Act by furnishing the Respondent with not only the certified copies of the tax invoices issued by the suppliers, but also a complete set of documentation to support the deductible purchases from the suppliers and input VAT including, material supply schedules, duly acknowledged delivery notes, electronic tax receipts (ETR) and proof of payment to the respective Suppliers.

b. Whether the Commissioner discharged the burden of proving that the Appellant‟s supporting Documents were not authentic and could not be relied on to prove the supply of goods and services: 29. The Appellant submitted under this issue, that it satisfied the criteria under Section 17 of the VAT Act when it provided the required documents to support its transactions. That the Respondent acted in error when it ignored its supporting documents on grounds that they were not authentic and could not be relied on to prove the supply of goods and services because:a.The delivery notes were incomplete as they did not indicate the mode of delivery, persons receiving the goods and the place of receipt of the goods delivered;b.The suppliers had no physical addresses from where they either traded or stored the materials purchased by the Appellant; andc.The Commissioner's records showed that the suppliers never imported or purchased goods locally to supply the Appellant.

30. It submitted that the Respondent‟s stated grounds for rejecting its VAT input claim were arbitrary, unreasonable, and not in conformity with the legislation and the dictum in the case of Shreeji Enterprises (K)Limited vs Commissioner of Investigations & Enforcement TAT No. 58 and 189 of 2019.

31. It stated that whereas the Respondent specifically challenged the delivery notes relied on by the Appellant, it failed to take into account the fact that the Appellant was not the originator of the delivery notes it received from its suppliers.

32. That the Respondent also failed to consider the Appellant‟s explanation that it had no locus to dictate to the suppliers the format or the content of the suppliers delivery notes when the same was presented to it for acknowledgement as long as the goods requested were delivered.

33. That the Respondent also failed to consider that there is no law in Kenya which requires delivery notes to indicate the mode of delivery, persons receiving the goods and the place of receipt of the goods delivered. That it could thus not be required to ensure that the delivery notes adhered to a non-existent standard or to prove the physical address of the suppliers.

34. That once the Appellant had received the goods supplied then it was not required to investigate and ascertain the physical addresses of the suppliers, or storage for their goods or where the suppliers imported or purchased goods locally for purposes of supplying the Appellant.

35. The Appellant submitted that the Respondent never alleged that any of the suppliers had failed to remit the taxes from the income they received from making supplies to the Appellant. That the Respondent's witness confirmed on cross-examination that the suppliers had paid all the taxes and he also did not challenge the authenticity of the ETR receipts which were provided by the Appellant.

36. The Appellant averred that it produced unchallenged and uncontroverted evidence and that the Respondent failed to rebut the prima facie supporting documents evidencing commercial transactions between it and its suppliers.

37. The Appellant stated that the Respondent was required to prove that the right to deduct input tax and purchases was exercised fraudulently by the Appellant or that it was participating in transactions connected with fraudulent evasion of VAT.

38. It supported its Appeal with the following cases:a.Kenya Revenue Authority v man Diesel & Turbo Se, Kenya [2021] eKLR,b.Trical and Hard Limited vs. Commissioner of Domestic Taxes (Tax Appeal No. 320 of 2018)c.Karshan Limited Vs Commissioner of Domestic Taxes (Supra), held:d.Pankajkumar Hemraj Shah & Another v Abbas Lali Ahmed & 5 others [2019] eKLR .e.Elizabeth Kameme Ndolo v George matata Ndolo [1996] eKLRf.Mobilx vs. HMRC [2010] EWCA civ 517,g.Calltell Telecom Ltd v HMRC [2007] UKVAT V202666

c. Whether the Commissioner‟s Objection decision breached the Appellant‟s constitutional right to far administrative action guaranteed under Article 47 of the Constitution and the Fair Administrative Action Act. 39. The Appellant submitted that the Respondent breached Article 47(1) of the Constitution and Sections 3(1), 4(3)(g) and 7(2) of the Fair Administration Act when it relied on irrelevant documents instead of the information that had been submitted to it. That no statute ever allows any public officer to exercise statutory power to arbitrarily or capriciously exercise power in disregard of the law. It relied on Republic vs. Commissioner of Cooperatives ex-parte Kirinyaga tea Growers Co-operative Savings and Credit Society Ltd (1999) IEA 245 (CAK) to support this argument.

40. That the Respondent's decision in disallowing its expenses was whimsical, irrelevant, based on a fatally flawed premise and unsupported by evidence.

d. Whether the Appellant should pay the costs of the Appeal: 41. The Appellant prayed for costs to deter the Respondent from making future baseless claims against taxpayers and to encourage the Commissioner to adopt a more careful approach in making assessments against taxpayers.

Appellant‟s prayer 42. The Appellant‟s prayer to the Tribunal was for:a.A declaration upholding the Appellant purchases claimed as input VAT as being valid and proper in law and an order directing the Respondent to recognize and allow the Appellant to claim the said purchase as input VAT:b.A declaration upholding the Appellant's claimed as allowed deduction incurred wholly and exclusively in the production of its Corporation Tax as being valid and proper in law and an order directing the Respondent to recognize and allow the Appellant‟s purchase as allowable deductions:c.An order setting aside the Respondent's Objection decision dated 1st May 2023 and the tax assessment of Kshs 1,047,557,660. 000 contained therein.d.An order upholding or affirming that Appellant‟s notice of objection dated 3rd May 20023. e.An order for cost as appropriate; andf.Any other or further relief as this Tribunal would deem just and reasonable to grant.

Respondent's Case 43. The Respondent has relied on the following documents to defend this Appeal:a.Statement of Facts dated 19th June 2023 and filed on 20th June 2023b.Submissions dated 3rd April 2024. c.Witness statement by John Ekadah dated 12th February 2024, filed on the same day and admitted in court as evidence on 26th March, 2024.

44. The Appellant presented its defence to this Appeal under the following itemised issues for determination.

a) Whether the Respondent erred in fact and law in its finding that documents provided by the Appellant were in face value in compliance with provisions of Section 17 of VAT Act No 35 of 2013 but the same could not be relied on to prove a commercial transaction for purposes of claiming input Value Added Tax. 45. The Respondent averred that the documents provided were not relied on because the Appellant had failed to show that there was a supply of goods and services. That it did not also provide delivery notes indicating the mode of delivery, persons receiving the goods and place of receipt of goods delivered.

46. The Respondent averred that the said entities had no physical address from where they could either trade or store the huge materials allegedly purchased by the Appellant.

47. That the documents that were presented by the Appellant were prepared for purposes of compliance with the requirements under Section 17 of the VAT Act and the same were not authentic.

b) Whether the Respondent erred and misdirected itself in finding that there was no supply of goods and services by rejecting the delivery notes supplied by the Appellant as proof of purchases. 48. The Respondent stated that the Appellant failed to provide delivery notes as to prove that there was a supply of goods and services, the mode of delivery, persons receiving the goods and the place of receipt of goods delivered. That it thus relied on its best judgment in accordance with provisions of Section 31 of the Tax Procedure Act of 2015 and thereby shifted the evidential burden to the Appellant.

c) Whether the Respondent erred and misdirected itself by concluding that the entities for which the Appellants claimed purchases had no physical address from which they traded or stored huge materials purchased by the Appellant. 49. The Respondent stated that the Appellant had the evidential burden to prove that the said entities had a physical address from where they either traded or stored the huge materials allegedly purchased by the Appellant. That this was not proved contrary to Section 56(1) of the Tax Procedures Act:

d) Whether the Respondent erred in concluding that the documents provided by the Appellant as proof of its claim for purchases were prepared for purposes of compliance with requirements under Section 17 of the VAT Act and were not authentic. 50. The Respondent stated that it reviewed the documents that were provided by the Appellant and found that they were not authentic for the following reasons: -i.The entities mentioned had no physical addresses from where they traded or stored the huge materials allegedly purchased by the Appellant.ii.There were no delivery notes to prove purchases that there was a supply of goods and services indicating the mode of delivery, persons receiving the goods and place of receipt of goods delivered.iii.From the Respondent‟s records, the suppliers who were mentioned never manufactured, imported or purchased locally any goods for purposes of supplying to the Company.

e) Whether the Respondent erred in fact by concluding that there were overstated purchases amounting to Kshs. 10,655,000. 00 from Dial an Errand Limited, Kshs. 11,002,074. 00 from Haru Limited in the year 2020 and Kshs. 12,832,638. 00 from Njafos Limited in the year 2021. 51. The Respondent averred that it reviewed the analysis of the purchases in contention and noted that there were computational errors in the computation at the assessment stage of Kshs. 10,655,000. 00 from Dial an Errand Limited, Kshs. 11,002,074. 00 from Haru Limited in the year 2020 and Kshs. 12,832,638. 00 from Njafos Limited in the year 2021.

52. That it rectified the errors to reflect the correct purchases as shown below:a.Adjusted VATYear Disallowed Purchases Unsupported Purchases Fullshine Unsupported Purchases Complus Total VAT-16% & 14%

2016 - - 3,448,206 3,448,206 551,713

2017 - 210,409,138 65,704,492 276,113,630 44,178,181

2018 - 121,136,698 19,586,974 140,723,672 22,515,788

2019 - 362,159,542 79,478,479 441,638,021 70,662,083

2020 221,270,376 75,657,330 - 296,927,706 41,569,879

2021 1,127,434,617 - - 1,127,43,617 180,389,539

2022 236,396,436 - - 236,396,436 37,823,430

Total 1,585,101,429 769,362,708 168,218,151 2,522,682,288 397,690,612

f) Whether the Respondent erred and misdirected itself in fact and law in failing to consider that the Appellant is a withholding VAT agent in accordance with Section 42A of the Tax Procedure Act No. 29 of 2015 and consistently withheld VAT at the time of paying its suppliers on account of purchase procured from suppliers and whether the Respondent ignored the fact that the supplier companies in question had declared the output VAT in the VAT returns and their annual Corporation tax returns and that the Respondent as the operator of iTax could easily verify the position. 53. The Respondent stated that it considered the Appellant as a withholding VAT agent and hence the reason why the unsupported purchases were disallowed because no goods were supplied.

g) Whether the Respondent erred in disallowing the Appellant‟s input VAT when they could easily confirm and verify the same from the supplier‟s corresponding output VAT in line with Section 17 of the VAT Act. 54. The Respondent stated that it disallowed input VAT since investigations revealed that supplier entities did not have physical addresses from the places the Appellant either traded or stored huge materials, which the Appellant alleged to have purchased.

55. That it is not bound by the Appellant‟s assessment under Section 24(2) of the TPA and hence the reason why it issued the assessment based on the available information considering that documents provided by the Appellant were not sufficient.

h) Whether the Respondent violated the Appellant's Constitutional right to fair administrative action under Article 47 of the Constitution and Section 4(1) of Fair Administrative Actions Act No. 4 of 2015. 56. The Respondent stated that it did not violate the Appellant‟s Constitutional right to a fair administrative action since parties have consistently been engaging through correspondences.

57. That administrative procedures were followed and the Appellant was allowed to file an objection and present documents to support the objection which it failed to do, hence the objection decision.

Testimony by the Respondent‟s Witness, John Ekadah 58. The Respondent witness, John Ekadah who is the Chief manager at the Investigations & Enforcement Department of the Respondent stated as follows:

i. Regarding Njafos Holdings Limited 59. He stated that the analysis of the purchases claimed by the Appellant established that:a.It had claimed inputs amounting to Kshs. 256,932,293 from Njafos Holdings Limited.b.Njafos Holdings Limited had in turn claimed inputs amounting to Kshs. 214,383,861. 00 from suspected missing traders namely; Hao Yuan International Company Limited, Benlaz Company Limited, Colila Limited, Crystal Touch Company Limited, and Akubi Limited.c.The missing traders in turn claimed inputs from two entities, namely Papaya Company Limited and Hilalium and Sons ltd.

60. That after analysing the data on the iTax filings, he requested bank statements of Njafos Holdings Limited held at Stanbic Bank and he observed that the account opening signatory, George Makuthi Nderitu, was different from the director indicated by the registrar of companies, Simon Musyimi Musyoki. That he carried out a site visit to the registered location of the Njafos Holding Limited and established it had no known physical location.

61. That Njafos Holdings Limited had claimed input from companies namely Benlaz Company Limited, Hao Yuan International Company Limited, Colila Limited, Crystal Touch Company Limited and Akubi Limited amounting to kshs. 214,383,861. 00. That he summoned the directors of these companies who recorded statements and he established the following:a.The registered director for Benlaz Company, Suleiman Odhiambo oganga, stated that his identity had been used fraudulently to register the company and was unaware of any transactions between Benlaz Company and Njafos Holding Limited.b.The registered director for Akubi Limited, Suleiman Mutua Ngela, stated that he is a student doing casual jobs in Nyeri and that his identity had been used fraudulently to register the Company and was unaware of any transactions between Akubi Limited and Njafos Holding Limited.c.The registered director for, Colila Limited, Lassina Coulibaly, arrived in Kenya and departed in 2006 based on the travel history from the Department of Immigration.d.Crystal Touch Limited was struck out from the Register of Companies records as per details obtained from the Registrar of Companies.

62. He testified that whilst the bank transfers from the Appellant and transfer from Njafos Holding Limited indicated payment for the supply of construction material, he noted that the subsequent recipients of the monies also immediately transferred the funds to USD account and monies sent to China. Therefore, there was no evidence of payments to local suppliers.

63. It was his testimony that Njafos Holding Limited was a shell paper company, with no “meat” or substance, which was used by the Appellant to transfer funds to unknown individuals and therefore there was no sale to the Appellant.

64. That the fictitious invoices generated in the whole scheme were used to legitimize the transfers and to reduce tax liability on the significant income received by the Appellant.

ii. Regarding Masaviru Investment Limited 65. The witness testified that he analysed the purchases claimed by the Appellant and established that it had claimed inputs amounting to Kshs. 157,035,000. 00 from Masaviru Investments Limited.

66. That Masaviru Investments Limited had in turn claimed inputs amounting to Kshs. 102,223,151. 00 from suspected missing traders namely; Homematt Limited, Hao Yuan International Company Limited, Benlaz Company Limited, Colila Limited, Crystal Touch Company Limited and Akubi Limited.

67. That these missing traders in turn claimed inputs from two entities, namely Papaya Company Limited and Hilalium and Sons Ltd.

68. It was his testimony that while the bank transfers from the Appellant to Masaiviru Investment indicated payment for the supply of construction material, he noted that the subsequent recipients of the monies were not the missing traders that were identified in this transaction.

69. That Masaviru Investments Limited immediately transferred funds from the Appellant to the Kenya Shilling accounts held by Mohaaznoor Hardware, Anaas Hardware Limited and Jarso General Trading Company amounting to Kshs. 121,253,115.

70. He stated that the recipients of these funds/money immediately transferred the funds from the KES account to their respective USD accounts and money was sent out of the Country, mainly to companies in China with no corresponding imports in the business names. That further there were no corresponding imports from the Masaiviru Investments Limited to support the bank transfers.

71. He averred that Masaiviru Investments Limited had claimed input from companies namely Homematt Limited, hao Yuan International Company Limited, Benlaz Company Limited, Colila Limited, Crystal Touch Company Limited and Akubi Limited amounting to Kshs. 102,223,151. 00. That he summoned the directors of these companies and established the following;a.The registered directors for Homematt Limited, Patrick Muriithi Mwati and Jackson Gitahi Wachira, recorded statements stating that the company shut down all operations in 2014 and tasked the company consultant to wind up the company, hence they were unaware of any transactions between Homematt Limited and Masaiviru Investments Limited.b.The registered email was also changed without their authorization.c.The registered director for Benlaz Company, Suleiman Odhiambo Oganga, stated that his identity had been used fraudulently to register the company and that was he unaware of any transactions between Benlaz Company and Masaviru Investments Limited.d.The registered directors for Hao Yuan International Company Limited, Li Long, ma Xu and Zhuo Longcai could not be traced and they failed to appear despite being invited for a meeting severally.That a departure prohibition order was subsequently issued against the directors.e.The registered director for Akubi Limited, Suleiman mutua Ngela, stated that he is a student doing casual jobs in Nyeri and that his identity had been used fraudulently to open the Company and he was unaware of any transactions between Akubi Limited and Masaviru Investments Limited.f.The registered director for Colila Limited, Lassina Coulibaly, arrived in Kenya and departed in 2006 based on the travel history from the Department of Immigration.g.Crystal Touch Company Limited was struck out from the Register of Companies records as per records held by the Registrar of Companies.

72. He testified that while bank transfers from the Appellant and Masaviru Investments Limited indicated payment for the supply of construction material, the subsequent recipients of the monies also immediately transferred funds to USD accounts and monies sent to China.

73. He stated that Masaviru Investments Limited was a shell paper company, with no “meat” or substance, which was used by the Appellant to transfer funds to unknown individuals and therefore there was no sale to the Appellant by Masaviru Investments Limited. That the fictitious invoices generated in the whole scheme were used to legitimize the transfers and to reduce tax liability on the significant income received by the Appellant.

iii. Regarding Math and Kith Investment Company Limited 74. The Witness stated that his analysis of the purchases claimed by the Appellant established that it had claimed inputs amounting to Kshs. 213,448,586. 00 from Math and Kith Investments Company Limited. That Math and Kith Investments Company Limited in turn claimed inputs amounting to Kshs. 156,404,931. 00 from suspected missing traders namely; Homematt Limited, Hao Yuan International Company Limited, Benlaz Company Limited, Ujenzi Suppliers Limited, Colila Limited, Crystal Touch Company Limited and Akubi Limited.

75. That the missing traders in turn claimed inputs from two entities, namely Papaya Company Limited and Hilalium and Sons Ltd.

76. It was his testimony that the recipients of these funds/money immediately transferred the funds from the KES account to their respective USD accounts and money was sent out of the Country, mainly to companies in China with no corresponding imports in the business names. That further, there were no corresponding imports from Math and Kith Investments Company Limited to support the bank transfers.

77. That Homematt Limited, Hao Yuan International Company Limited, Benlaz Company Limited, Ujenxi Suppliers Limited, Colila Limited, Crystal Touch Company Limited and Akubi Limited had claimed inputs from Papaya Company Limited and Hilalium and Sons Limited.That he summoned the directors of the latter companies who recorded their statements and he established the following:a.Hilalium and Sons Limited stated that they did not supply any materials to any of the tier 3 companies;b.The registered director of Papaya Company Limited stated that he was unaware of Papaya Company Limited and that his identity had been used fraudulently to register the company and that he was unaware of any transactions between Papaya Company Limited and tier 3 companies.

78. It was its view that both the directors and account signatory, Zena Seenoi Siameto, were observed to be fronts to conceal the real decision-makers and beneficiaries of the scheme. That this was evidenced by the movement of funds where the account signatories received small amounts which he believed to be commissions whilst the huge amounts were transacted out. He stated that this account remains closed and no other transactions have been carried out on it thereafter.

79. He testified that Math and Kith Investment Company Limited was observed to be a shell paper company, with no "meat" or substance, which was used by the Appellant to transfer funds to unknown individuals and therefore there was no sale by Math and Kith Investments Company Limited. That the fictitious invoices generated in the whole scheme were used to legitimize the transfers and to reduce tax liability on the significant income received by China Communications Construction Company Limited.

iv.Regarding Lunza Solutions Limited 80. The witness stated that his analysis of the purchases claimed by the Appellant established that it had claimed inputs amounting to Kshs. 221,061,000 from Lunza Solutions Limited. That Lunza Solutions Limited had in turn claimed inputs amounting to Kshs. 250,365,718 from known missing traders namely; Hoo Yuan International, Benlaz Company Limited, Colila Limited, Crystal Touch Company Limited and Akubi Limited and that the missing traders in turn claimed inputs from two entities, namely Papaya Company Limited and Hilalium and Sons Ltd.

81. The Respondent averred that companies namely; Benlaz Company Limited, Hao Yuan International Company Limited, Colila Limited, Crystal Touch Company Limited and Akubi Limited had claimed inputs from 2 companies, namely Papaya Company Limited and Hilalium and Sons Limited. That he summoned the directors of the tier 4 companies, who recorded statements and he established the following:a.Hilalium and Sons Limited stated that it did not supply any materials to any of the companies.b.The registered director of Papaya Company Limited stated that he was unaware of Papaya Company Limited and that his identity had been used fraudulently to register the company and that he was unaware of any transactions between Papaya Company Limited and the 3 companies.

82. He testified that Lunza Solutions Ltd is a shell paper company, with no “meat” or substance, which was used by Appellant to transfer funds to unknown individuals and therefore there was no sale to Appellant. That the fictitious invoices generated in the whole scheme were used to legitimize the transfers and to reduce tax liability on the significant income received by the Appellant.

v. Regarding Dial an Errand Limited 83. The witness testified that the Appellant had claimed inputs amounting to Kshs. 638,251,386. 00 from Dial an Errand Limited who in turn claimed inputs amounting to Kshs. 325,775,254. 00 from suspected missing traders namely; Hao Yuan International, Benlaz Company Limited, Colila Limited, Crystal Touch Company Limited, Ujenzi Suppliers Limited and Akubi Limited. That the missing traders in turn claimed inputs from two entities, namely Papaya Company Limited and Hilalium and Sons Ltd.

84. That the companies namely; Benlaz Company Limited, Hao Yuan International Company Limited, Colila Limited, Crystal Touch Company Limited and Akubi Limited had claimed inputs from 2 companies, namely Papaya Company Limited and Hilalium and Sons Limited. That he summoned the directors of the companies, who recorded statements and he established the following:a.Hilalium and Sons Limited stated that indeed they did not supply any materials to any of the 3 listed companies;b.The registered director of Papaya Company Limited stated that he was unaware of Papaya Company Limited and that his identity had been used fraudulently to register the company and that he was unaware of any transactions between Papaya Company Limited and 3 companies.

85. He testified that he had summoned the director of Dial an Errand Company but he failed to present himself and a Departure Prohibition Order (DPO) was put in place for both the director and account signatories who were observed to be fronts to conceal the real decision makers and beneficiaries of the scheme. That this was evidenced by the movement of funds where the account signatories received commissions while the huge amounts were transferred out the accounts remained closed and no other transaction took place thereafter.

vi. Regarding Haru Company Limited 86. The witness testified that its analysis of the purchases claimed by the Appellant established that it had claimed inputs amounting to Kshs. 156,532,074. 00 from Haru Company Limited. Haru Company Limited had in turn claimed inputs amounting to Kshs. 130,834,034. 00 from known missing traders (Tier 3) namely; Hao Yuan International, Benlaz Company Limited, Crystal Touch Company Limited, and Homematt Limited. The missing traders in turn claimed inputs from two entities, namely Papaya Company Limited and Hilalium and Sons Ltd (Tier 4).

87. That the tier 3 companies namely; Benlaz Company Limited, Hao Yuan International Company Limited, Colila Limited, Crystal Touch Company Limited and Akubi Limited had claimed inputs from 4 companies, namely Papaya Company Limited and Hilalium and Sons Limited and he summoned the directors of these tier 4 companies from whom he established the following:a.Hilalium and Sons Limited stated that indeed they did not supply any materials to any of the 3 companies;b.The registered director of Papaya Company Limited stated that he was unaware of Papaya Company Limited and that his identity had been used fraudulently to register the company and that he was unaware of any transactions between Papaya Company Limited and the 3 companies.

88. The witness averred that the director of Haru Company; Simon Musyimi, was summoned but he failed to present himself and this necessitated the issuance of a Departure Prohibition Order against him.

89. His observation was that Haru Company was shell paper company, with no “meat” or substance, which was used by China Communications Construction Company Limited to transfer funds to unknown individuals and therefore there was no sale to the Appellant. That the fictitious invoices generated in the whole scheme were used to legitimize the transfers and to reduce tax liability on the significant income received by the Appellant.

90. Arising from its witness testimony, the Respondent asserted that it disallowed the Appellant‟s purchases for the following reasons;a.A review of the documents established that the companies did not sell, or supply goods or services to the Appellant between 2019 and 2021. b.The companies were created solely to transfer money to China and other overseas destinations. That there was no evidence for the supply of any goods or services but „payment‟ was made to create a notion of costs of goods sold.c.The bank transfers from the Appellant to the listed companies were immediately transferred to other registered business names who thereafter transferred the funds to overseas countries. That there was no evidence of payments to local suppliers or importation to justify that there was a supply of construction materials as alleged.d.That there was no supply of goods and services as evidenced by the fact that the Appellant did not provide delivery notes that indicated the date of delivery, mode of delivery, persons receiving the goods and place of receipt of goods delivered.e.That from the investigations conducted, it was established that the alleged suppliers do not manufacture, import or supply goods or services.f.It was noted that the alleged purchases were not wholly and exclusively incurred by the Appellant in the production of income as expressly stated in Section 15 of the Income Tax Act.g.The demand concerning VAT and Corporation tax are Kshs. 453,556,563. 00 and Kshs. 714,562,778. 00, respectively, totalling Kshs. 1,168,119,341.

91. The Respondent asserted that this was a missing trader scheme because it involved the sale of fictitious invoices because the traders did not buy the goods, they had purported to have supplied to minimise their tax liability.

92. The Respondent stated that it was not enough for the original invoices to be provided but that it was important for the invoices and ETR to be related to an actual supply that was acquired by the trader to make a taxable supply. That this list was not exhaustive. It supported this position with the case of Osho Drapers Ltd vs Commissioner of Domestic Taxes and HCCOMMITA/E084/2021: Baitul Investment Ltd v Kenya Revenue Authority.

Respondent‟s Prayer 93. The Respondent prayed that the Tribunal:i.Upholds the Objection decision dated 2nd May 2023. ii.Dismisses the Appeal for lack of merit.

Issues for Determination 94. Having gleaned through the parties‟ pleadings, submissions and all the documents attached to the Appeal and having considered the testimony of the Respondent‟s witness the Tribunal is of the view that the issues falling for determination in this Appeal are:i.Whether the Appellant effected a transaction to avoid taxii.Whether the Respondent was justified in its tax assessment.

Analysis and Finding 95. The Tribunal having identified the issues falling for its determination proceeds to analyze the issues separately as follows:-

i. Whether the Appellant effected a transaction to avoid tax 96. The Appellant took the position that it had furnished the Respondent with invoices, ETR and delivery notes as proof of purchase as is required of it under Section 17 of the VAT Act. It stated that it had thus furnished all the documents that were needed to support its claim for input VAT.

97. The Respondent on the other hand asserted through its witness, John Ekadah, that the Appellant‟s business transaction was packaged to avoid tax by using fictitious invoices and creating fictitious transactions through third parties to enable it avoid its tax liability by transferring its income outside Kenya and beyond the reach of the Commissioner.

98. The Tribunal is thus enjoined to decide whether the Appellant‟s activities and actions in identified transactions were effected in a manner that falls within the remit of Section 23 of the Income Tax Act which provides that:“23. (1)Where the Commissioner is of the opinion that the main purpose or one of the main purposes for which a transaction was effected (whether before or after the passing of this Act) was the avoidance or reduction of liability to tax for a year of income or that the main benefit which might have been expected to accrue from the transaction in the three years immediately following the completion thereof was the avoidance or reduction of liability to tax, he may, if he determines it to be just and reasonable, direct that such adjustments shall be made as respect liability to tax as he considers appropriate to counteract the avoidance or reduction of liability to tax which could otherwise be effected by the transaction.(2)Without prejudice to the generality of the powers conferred by subsection (1), those powers shall extend -(a)to the charging to tax of persons who, but for the adjustments, would not be charged to the same extent;(b)to the charging of a greater amount of tax than would be charged but for the adjustments.(3)A direction of the Commissioner under this section shall specify the transaction or transactions giving rise to the direction and the adjustments as respects liability to tax which the Commissioner considers appropriate.”

99. The sworn testimony by John Ekadah regarding the extensive steps taken by the Appellant to limit its tax liability which included but was not limited to the following has not been rebutted by the Appellant:a.That the Appellant was trading with companies that did not have registered physical locations.b.The companies trading with the Appellant converted the funds received in their accounts From Kshs to USD and thereafter transferred these monies out of the Country and mainly to companies based in China.c.That there was no document provided to support exports for the imports received by these companies as consideration for the USD received.d.Some of the directors of these companies that the Appellant traded with were unaware that they were directors in these companies. In which case they affirmed that their identities had been used fraudulently to register the companies.e.The directors of these companies also affirmed that they were not aware of the transactions between them and the Appellant.

100. The above assertions by the Respondent that the Appellant was involved in an elaborate tax avoidance scheme was proved considering that the said assertions were not shaken during cross-examination nor did the Appellant provide any evidence or proof to show that the Respondent‟s assertions were wrong or erroneous.

101. Section 30 of the TAT Act places the burden of proof on the Appellant at all times. Accordingly, once these assertions were made by the Respondent, the Appellant was in turn obligated to provide evidence that these assertions were not true. Failure to provide evidence to rebut the Respondent‟s assertions meant that the assessment was justified as was held by the Tribunal in Judgment – TAT 1296 Of 2022 James Finlay (Kenya) Limited Vs. Commissioner Legal Services & Board Coordination, where the Tribunal stated thus:“From the above decision of the superior court, it is apparent that once the Appellant is served with an assessment, the Appellant ought to push back and show that the assessment was incorrect by providing positive evidence.”

102. The Appellant failed to address the issues of fraud and tax avoidance schemes raised by the Respondent‟s witness. The moment the said witness completed its testimony asserting that the Appellant had been involved in an elaborate tax avoidance scheme the burden of proof shifted to the Appellant to provide evidence by way of affidavit, witness statement or otherwise to rebut this assertions. This was not done in this case.

103. The Tribunal is guided in this finding by the decision of the superior courts in Commissioner of Domestic Services v Galaxy Tools Limited [2021] eKLR , where the court stated thus:“With greatest respect, the Tribunal got it wrong. What the respondent had done in producing the invoices, the delivery notes and payment schedules was only prima facie evidence of purchase. On producing the said documents, the evidentiary burden of proof shifted to the appellant. The appellant in answer not only queried the said documents but informed the Tribunal that; he had carried investigations on the alleged suppliers and concluded that they never existed, that there was no supply of any goods at all. That the documents produced did not contain critical details to support any reasonable commercial transaction. All this was laid bare before the Tribunal.On the foregoing, the evidentiary burden of proof shifted back to the respondent to show that its documentation was legitimate. This would have been by production of other transactional documentation to support the legitimacy of the alleged transactions. It is at that juncture that sections 59 of the Tax Procedures Act and section 43 of the VAT Act kicks in.”

104. Guided by the Galaxy decision, the Tribunal finds that the Respondent‟s testimony showed that the totality of the Appelant's transactions did not support a reasonable commercial transaction. It was instead an elaborate scheme to avoid payment of tax in Kenya. The Appelant's failure to discharge the burden of proof that had shifted back to it to show that it was not involved in a tax avoidance scheme was not discharged. The testimony of the Respondent‟s witness, Mr. John Ekadah, regarding the elaborate tax evasion scheme on the part of the Appellant thus stood proved.

105. The conclusion herein and the basis of the burden of proof that has been applied by the Tribunal in this case was made bare in the South African case of Metcash Trading Limited -vs- Commissioner for the South African Revenue Service and Another Case CCT 3/2000 where it was held that: -“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.”

106. Moreover, it is also not possible or common in a typical arms-length transaction that all the traders and entities who were doing business with the Appellant could have adopted the same modus operandi of lacking documents, converting its Kshs to USD, and transferring its monies to China. That all these 3rd party companies were unaware of these transactions and also lacked the documents to support their transactions with the Appellant or the imports that they may have received from China to support the incoming USD transfers.

107. The only reasonable conclusion that the Tribunal is persuaded to arrive at under the circumstances and based on the proven facts of this case is that the main purpose or one of the main purposes for which the Appellant restructured its business operations to deal with non-existent third parties who were not aware that they were even trading with the Appellant was for purpose of avoidance or reduction of tax liability.

108. Based on the foregoing the Tribunal finds and holds that the Appellant was involved in an elaborate scheme to avoid tax and its transaction thus fall within the ambit of Section 23 of the ITA as asserted by the Respondent‟s sole witness John Ekadah.

ii. Whether the Respondent was justified in its tax assessment. 109. Having held that the Appellant was involved in an elaborate scheme to avoid tax, Section 21(3) of the ITA which justifies and upholds any assessments or adjustments made by the Commissioner regarding a transaction carried out to avoid tax liability would kick in. The Commissioner was thus justified in its tax assessments of the Appellant.

Final Decision 110. The upshot of the foregoing analysis is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent's objection decision dated 2nd May 2023 be and is hereby upheld.c.Each party is to bear its own costs

111. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF AUGUST, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERDR. TIMOTHY B. VIKIRU - MEMBERABRAHAM K. KIPROTICH - MEMBER