[2022] KEHC 18120 (KLR)

Commissioner of Domestic Taxes v Jackys Kenya Limited (Income Tax Appeal E008 of 2021) [2022] KEHC 18120 (KLR) (Commercial and Tax) (3 June 2022) (Judgment)

Neutral citation: [2022] KEHC 18120 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Income Tax Appeal E008 of 2021

EC Mwita, J

June 3, 2022

Between

Commissioner of Domestic Taxes

Appellant

and

Jackys Kenya Limited

Respondent

(Appeal from the decision the Tax Appeals Tribunal dated 11th December 2020 in Tax Appeal No. 157 of 2018, Jackys Kenya Limited v Commissioner of Domestic Taxes)

Judgment

Introduction 1. This is an appeal by the Commissioner of Domestic Taxes, (the commissioner), against the judgment of the Tax Appeals Tribunal (TAT) dated December 11, 2020 in Tax Appeal No 157 of 2018, through the memorandum of appeal dated January 20, 2021.

2. The commissioner rejected Jacky Kenya Limited’s (Jackys Kenya) claim for input tax of {{abbr{title Kenya shillings} Kshs}. 9,882,671. Instead, the Commissioner demanded taxe arrears of Kshs 27, 745, 029 for the period 2015 and 2016 and issued a notice of assessment dated April 18, 2018 to that effect, treating Jackys Kenya as a missing trader.

3. Jackys Kenya objected to the assessment and the Commissioner issued an objection decisions dated July 13, 2018 and July 23, 2018, confirming the assessment. Jackys Kenya appealed against the objection decisions to the TAT. The TAT made a decision on December 11, 2020, allowing the appeal and setting aside the objection decisions.

Present Appeal 4. The commissioner was aggrieved by the decision of the TAT and lodged a memorandum of appeal dated January 20, 2021, raising 9 grounds of appeal, namely:1. That the honourable tribunal erred in fact and in law in failing to appreciate that the dispute before it was based on section 59 of the Tax Procedures Act 2015 which expressly gives power to the respondent to request the production of records and additional information which can fully satisfy the respondent where he is of the view that the information given is insufficient;

2. That the honourable tribunal failed to appreciate and/ or give due regard to the provisions of section 43 of theVATAct 2013, section 54A of the Income Tax Act cap 470 Laws of Kenya applicable to the dispute which requires the taxpayer to keep transactional records for a period of five years.

3. That the honourable tribunal erred in both law and fact in failing to take into account and/ or disregarding evidence of fraud adduced by the appellant in particular that the respondent claimed local purchases in the sum of Kshs 59,882,671 and the supplier statements, invoices, delivery notes, payment vouchers and ETR receipts for the claimed purchases were not availed by the appellant.

4. That the honourable tribunal erred in both law and fact in failing to adopt the reasoning in the English case of Edgeskill Limited v The Commissioner for her Majesty’s Revenue and Customs[2014] UKUT 0038 (TCC) where the Hon Mr Justice Hildyard reiterated the test applied by the FTT (which is a specialist tax tribunal) in considering whether the commissioners were justified in refusing a claim of input tax.

5. That the tribunal erred in law in shifting the burden of proof to the appellant contrary to the express provisions of section 30 of the Tax Appeals Tribunal Act.

6. That the tribunal considered irrelevant factors and failed to consider relevant material evidence placed before it thus arrived at a wrong conclusion.

7. That the tribunal erred when it framed the wrong issues for determination, thus asked itself the wrong questions and in so doing, arrived at a wrong conclusion.

8. That the tribunal erred in fact by failing to appreciate that in this case there was revenue loss because there was no exchange of goods or services in respect of which VAT input was claimed by the respondent.

9. The tribunal erred both in law and fact in ignoring all material placed before it and based its judgment on a biased approach without due regard to the balance of the scales of justice.

5. The commissioner prayed that the appeal be allowed with costs and that the decision of the TAT be set aside.

6. Jackys Kenya filed a statement of facts dated February 26, 2021, opposing this appeal. The appeal was disposed of by way of written submissions with oral highlights.

The Commissioner’s submissions 7. The commissioner filed written submissions dated September 28, 2021, arguing that Jackys Kenya was not entitled to input VAT refund claimed. According to the Commissioner, the TAT erred by failing to consider that the dispute was based on section 59 of the Tax Procedures Act, which empowers the commissioner to request production of records and additional information.

8. The commissioner further argued that the TAT failed to pay regard to section 43 of theVATAct, and section 54A of the Income Tax Act that a tax payer is required to keep documents. The commissioner relied on Africa Cash & Carry Ltd v Commissioner SARS (2019) ZASCA 148 on the mandate and functions of the tax court.

9. It was the commissioner’s case that section 20 of the Tax Appeals Tribunal Act, places the burden of proof on the tax payer and, therefore, the TAT erred in shifting the burden of proof. In this respect, the commissioner asserted that Jackys Kenya failed to provide documents on the series of transactions making up the circular chain of supply as required by law, to support the claim to be entitled to a credit refund for those transactions.

10. The commissioner asserted that Jackys Kenya had stated that it maintained a nil stock policy and there was letter from the suppliers confirming the purchases. The stock movement register provided by Jackys Kenya was an afterthought as investigations revealed that Jackys Kenya had not received any goods.

11. The commissioner again relied on section 56 (1) of the Tax Procedures Act to argue that the burden of proof is on the taxpayer to prove that a tax decision is incorrect. According to the commissioner, although Jackys Kenya furnished invoices and ETR receipts from suppliers which had all the requirements of a tax invoice under the Tax Procedures Act, there was insufficient proof that the goods were actually delivered.

12. The commissioner argued that after raising the assessments, Jackys Kenya supplied copies of invoices, payment documents, including ETR receipts from suppliers and bank statements as well as a copy of stock movement schedule. Investigations, however revealed that Jackys Kenya did not actually receive the goods. As to payments, the commissioner claimed that these were designed in such a way that although the money was paid into the bank accounts of the suppliers, the money made its way back to Jackys Kenya.

13. The commissioner stated that under the VAT tax regime, businesses pay tax on the value they add to the goods and services they purchase from other businesses. VAT liability is then calculated using the credit invoice method. Businesses apply the VAT rate to their sales but claim a credit for VAT paid on purchases of inputs from other businesses (shown on the purchase invoices). The difference between VAT collected on sales and the credit for VAT paid on input purchases is then remitted to the government. The Commissioner cited the case ofABC (Pty) Ltd v Commissioner for South African Revenue Services (1626) (2020) ZATC 9 on the dressing up of transactions so as to appear as something for purposes of tax avoidance.

14. The commissioner maintained that the transactions between Jackys Kenya and the missing traders were disguised transactions. In this respect, the commissioner relied on several decisions on the meaning and implications of disguised transactions. These were; Commissioner of Customs and Excise v Randals Brothers and Hudson Ltd (1941) AD 369; Commissioner for South African Revenue Service v NWK Ltd [2010] ZASCA 168; Sasol Oil v CSARS (923/2017) [2018] ZASCA 153 (9 November 2018) andEnsign Tankers (Leasing) Ltd v Stokes (Inspector of Taxes [1992] 2 All ER 275 (HL) at 295.

15. The commissioner further relied on C-255/02 Halifax & others v Commissioner of Customs & Excise C-255/02 (2006) ECR for the proposition that where an abusive practice is found to exist, the transactions ought to be redefined to determine the situation that would have prevailed in their absence.

16. The commissioner urged the court to allow the appeal, disregard the claim for input tax, uphold the objection decision and order Jackys Kenya to pay the assessed tax.

Submissions by Jackys Kenya 17. Jackys Kenya submitted highlighting written submissions dated November 22, 2021, that necessary documents (about 20,000 pages) were provided to both the commissioner and the TAT to prove the claim for input VAT. Relying on section 56 of the Tax Procedures Act, Jackys Kenya argued that the grounds of appeal are on matters of fact and the commissioner was inviting this court to make determinations on matters of fact which is outside the court’s jurisdiction. Jackys Kenya relied on the Supreme Court decision in Gatirau Peter Munya v Dickson Mwenda Kithinji & 3 others [2014] eKLR on what matters of law entail.

18. Jackys Kenya argued that where the taxman alleges fraud against the taxpayer, the burden of proof lies on the taxman and relied on section 93 of the Tax Procedures Act. Jackys Kenya contended that the TAT was right in holding that the commissioner was wrong in disallowing the input VAT claim on allegations of engaging in fraudulent deals. Jackys Kenya pointed out that although the commissioner had raised allegations that no purchases were made and fraud through use of fake invoices, the commissioner failed to prove those allegations.

19. Jackys Kenya relied on section 107 of the Evidence Act, to argue that the commissioner neither presented evidence nor document examiner’s report to prove that the documents produced were fake. Jackys Kenya relied onKinyanjui Kamau v George Kamau [2015] eKLR and Evans Kidero v Speaker of Nairobi City County Assembly & another [2018] eKLR, for the proposition that allegations of fraud must be particularized and strictly proved.

20. Jackys Kenya further relied on Taylors Service Centres v Revenue & Customs [2018] UKFTT 474 (TC) (August 13, 2018) (para 54 and 56) where the First Tier Tax Tribunal of the United Kingdom found that the burden of proving whether transactions are connected to tax evasion and whether the appellant knew or should have known, rests with Her Majesty’s Revenue & Customs (HMRC) (the tax authority of the UK).

21. Jackys Kenya maintained that there were bona fide purchases for value and could not know or suspect that some of the suppliers engaged in fraud. Jackys Kenya argued, therefore, that the TAT was correct that the law in existence then did not impose any obligations on purchasers to investigate the conduct of their suppliers.

22. Jackys Kenya cited the TAT decision in Shereeji Enterprises (K) Limited v Commissioner for Domestic Taxes (tax appeal No 58 and 186 of 2019(para 45 and 46), to support the position that the law at the time of the disputed transactions only obligated the taxpayer to confirm whether the supplier had a valid PIN; was registered with the Kenya Revenue Authority for VAT and had a valid ETR.

23. According to Jackys Kenya, the only reason the commissioner gave in the objection decision was that it was an accomplice to an alleged missing trader scheme but not because of failure to produce documents. Jackys Kenya relied on the correspondence exchanged between the parties and the proceedings before the TAT. According to Jackys Kenya, the allegation that requisite documents were produced was introducing a new issue through submissions. Jackys Kenya relied on Clips Limited v Brands Imports (Africa) Limited (formerly Brand Imports Limited) [2015] eKLR for the proposition that new issues cannot be raised in submissions. Jackys Kenya urged the court to dismiss the appeal with costs.

Determinations 24. I have considered this appeal, submissions and the decisions relied on by parties. I have also perused the record and the impugned decision. The commissioner rejected Jacky Kenya’s input VAT input claim on the basis that there was no evidence of purchases, and labelled Jackys Kenya as a “missing trader”. The commissioner went on to demand taxes instead and issued assessment notice for tax arrears. Jackys Kenya objection to the assessment was dismissed in an objection decisions dated July 13, 2018 and July 23, 2013. Jackys Kenya then filed an appeal before the TAT which was allowed on December 11, 2020, prompting.

25. In this appeal, the commissioner raised 9 grounds of appeal, faulting the TAT on its decision. From those grounds, three issues arise for determination, namely; whether the TAT failed to appreciate the law which require a tax payer to keep record of transactions and allowing the commissioner to request further documents; whether the TAT disregarded evidence of fraud and whether the TAT shifted the burden of proof to the commissioner.

Whether the TAT ignored the law 26. The commissioner’s argument was that the TAT failed to appreciate the law, in particular, section 59 of the Tax Procedures Act which gives power to the commissioner to request a tax payer to produce further documents, section 43 of the VAT Act and section 54A of the Income Tax Act which require a tax payer to keep documents as proof of compliance with tax obligations. According to the commissioner, although Jackys Kenya furnished invoices and ETR payment receipts from suppliers which had all the requirements of a tax invoice under the Tax Procedures Act, there was insufficient proof that the goods had actually been delivered.

27. Jackys Kenya argued that all documents were given to the commissioner and were also produced before the TAT, and therefore, the commissioner’s argument that the TAT failed to appreciate the law is unfounded.

28. I have considered the arguments by both sides on this issue. Section 59 of the Tax Procedures Act provides that the commissioner or an authorized officer may require any person by notice in writing, to produce documents identified in the notice for purposes of obtaining full information in respect of the tax liability of the person or class of persons. Section 43 of the VAT Act, 2013, stated that “A person to shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili, of every transaction he makes and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein.” The section goes on to identify the documents that a tax payer has to keep. Section 54A (1) of the Income Tax Act provides that:A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the commissioner, are adequate for the purpose of computing tax.

29. There is no doubt that the law requires a tax payer to keep documents, and the commissioner may request a tax payer to produce certain documents or full information in respect of tax liability. From the arguments by parties, the commissioner’s case is that Jackys Kenya did not provide sufficient documents, and that it had stated that it maintained a nil stock policy. The commissioner also argued that no letter was received from the suppliers to confirm the purchases and the stock movement register Jackys Kenya provided was an afterthought as investigations revealed that no goods had been received.

30. The commissioner admits that Jackys Kenya produced documents but that they were insufficient. Although the commissioner argued that Jackys Kenya had stated that it maintained a nil stock policy, Jackys Kenya nonetheless produced a stock movement register which the commissioner acknowledges, but contends that it was an afterthought. The commissioner also argued that investigations revealed that no goods had been received. This was informed by the fact that the suppliers did not respond to letters from the commissioner.

31. There is express admission by the commissioner that Jackys produced documents. The commissioner’s argument that since Jackys Kenya had stated that it maintained a nil stock policy, the stock movement produced was an afterthought, cannot be a reason to believe that there were no purchases or supplies. Similarly, the fact that letters from the commissioner to the suppliers were not answered or responded to, cannot be the basis for concluding that the suppliers did not exist. Taking such a route would amount to deciding a case on presumptions as opposed to evidence.

32. Moreover, the commissioner seems to contradict himself on whether or not the suppliers existed. In the submissions, the commissioner argued that Jackys Kenya supplied copies of invoices, payment documents, including ETR receipts, from suppliers; bank statements and a copy of stock movement schedule. According to the commissioner, payments were designed in such a way that although the money was paid into the bank accounts of the suppliers, the money made its way back to Jackys Kenya. This is a clear admission that there were suppliers to whom Jackeys Kenya paid money for goods supplied.

33. If money was paid and to suppliers and paid back to Jackeys was a question of fact that the commissioner should have proved before the TAT, how it was possible to pay money and get it back, if there was such a scheme. The commissioner did not attempt to show this court that this fact was proved before the TAT. There was no explanation to this court either, that such a scheme existed and how money was paid to suppliers and later returned to Jackys Kenya to amount to a “missing trader” scheme.

34. On this issue, the TAT stated:"(48)in order not to depart from the established precedent on the “missing trader” fraud, this tribunal finds that no evidence has been tendered by the respondent to demonstrate that the appellant was an accomplice in the fraud. The respondent was required to provide proof of this in order to discharge the heavy burden brought about by the allegation of fraud. As it is, the appellant and its directors were neither charged nor convicted in respect of the alleged fraud."

35. As the TAT correctly observed, the law as it stood then did not place on a tax payer the obligation the commissioner purported to place on Jackys Kenya. The legislature appreciated the problem and amended the VAT Act through the Finance Act 2020, to require that a person claiming input tax will only be able to do so if the registered supplier has made a corresponding declaration of the output tax in their return effective June 30, 2020.

36. I respectfully agree with the TAT that the commissioner erred in stating that Jackeys Kenya did not make any purchases. The law as it stood, did not place an obligation on a tax payer to keep a tab on the suppliers’ obligation on tax compliance. For that reason, this court is unable to agree with the commissioner that the TAT failed to appreciate the law.

Whether the TAT disregarded evidence of fraud 37. The argument by the commissioner was that Jackys Kenya was involved in a fraudulent scheme known as “missing trader” because the documents in support of input VAT claim were not availed. As already alluded to, Jackys Kenya stated that a horde of about 20,000 pages of documents were given to the commissioner and also produced before the TAT to back the input VAT claim. The fact that documents were availed to the commissioner is admitted in the commissioner’s submissions.

38. The fact of the matter is that Jackys Kenya produced documents in support of the input VAT claim. The commissioner did not show which evidence the TAT ignored in arriving at the conclusion it did. I have perused the record of the TAT and I am satisfied that the TAT considered the evidence before it in arriving at its conclusion. I find no reason to fault the TAT.

Whether burden of proof was shifted 39. The commissioner again argued that the burden of proof is on the taxpayer to prove that a tax decision is incorrect. According to the commissioner, although Jackys Kenya furnished invoices and ETR receipts from suppliers which had all the requirements of a tax invoice under the Tax Procedures Act, there was insufficient proof that the goods were actually delivered.

40. Jackys Kenya contended that where the taxman alleges fraud against the taxpayer, the burden of proof lies with the taxman. Jackys Kenya further contended that the TAT was right in holding that the commissioner was in error in disallowing the input VAT claim on allegations fraudulent deals. Jackys Kenya pointed out that although the commissioner had raised these allegations, including that no purchases were made and use of fake invoices, the commissioner failed to prove those allegations.

41. The commissioner’s case was that there was fraud and that Jackys Kenya was party to the fraud. Whether or not Jackys Kenya participated in fraudulent activities was a question of fact and it was up to the commissioner to lead evidence to that effect. This fact was captured at paragraph 48 of the TAT decision already referred to elsewhere in this judgment. It cannot be the case that all the commissioner would do is allege fraud and leave the taxpayer to disprove that fact. I do not think that is the of the law. The slaw places the burden on a tax payer to prove that he has met his tax obligations, but not to disprove that he participated in fraud alleged by the commissioner. If that was to be allowed, all tax payers would be branded fraudsters and left to dispel that notion.

Conclusion 42. Having considered the appeal, submissions and the law, I respectfully agree with the TAT’s decision that the commissioner erred in finding that Jackys Kenya had not made purchases. There was also no evidence to show that Jackys Kenya was an accomplice in the alleged “missing trader” fraud. The commissioner could not place an obligation on a tax payer that the law did not place on him.

43. Consequently, this appeal is declined and dismissed. No order as to costs.

DATED, SIGNED AND DELIVERED AT NAIROBI THIS 3RD DAY OF JUNE 2022. E C MWITAJUDGE