[2023] KETAT 536 (KLR)

Drescoll Limited v Commissioner of Domestic Taxes (Tribunal Appeal 859 of 2022) [2023] KETAT 536 (KLR) (18 August 2023) (Judgment)

Neutral citation: [2023] KETAT 536 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 859 of 2022

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

August 18, 2023

Between

Drescoll Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a registered business and taxpayer dealing in general supplies mostly supply of dry cereals to the County Government of Isiolo.

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 is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent states that the Appellant failed to properly declare and/or undeclared income for income tax and VAT purposes. This was obtained by the Respondent from third party data sourced from the Integrated Financial Management Information System (IFMIS), Water Services Trust Fund,National Cereals and Produce Board, Kenya Meat Commission and other County Governments.

4. This data was compared with the Appellant’s income tax and VAT declarations resulting in the Respondent’s first notice of assessment for income tax and VAT of Ksh 56,588,984. 00 on 9th July 2020. This was later revised upwards in another notice of assessment on 26th October 2020 to Ksh. 91,401,888. 00. Both assessments were for the years 2016, 2017, 2018 and 2019.

5. The Appellant filed a notice of objection dated 27th January 2021; whereupon the Respondent reviewed it and issued an objection decision on 8th June 2022 against the Appellant for Ksh. 103,970,735. 00 encompassing income tax of Ksh 58,189,950. 00 and VAT of KSh. 45,780,785. 00 for the Years 2016, 2017, 2018 and 2019. The Amount is inclusive of penalties and interest.

6. The Appellant being aggrieved with the Respondent’s objection decision filed the Appeal herein.

The Appeal 7. The Appellant’s Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 18th August, 2022 and filed on the even date.a.The Respondent erred in failing to take into consideration the declared income in the iTax and the VAT returns made by the Appellant.b.The Respondent erred in law by failing to appreciate that most of the income earned by the Appellant were from supplies that were not vatable.c.The Respondent based its assessment of Withholding tax without taking cognizance as to when the payments are done and declaration made; most specifically on split invoices.d.That the profit margin of 60% do not reflect the correct industry margin.

Appellant’s Case 8. The Appellant stated as follows in its Statement of Facts dated 18th August 2022 and filed on even date;a.That the Appellant is in supplies business and trades mostly by supplying dry cereals to the County of Isiolo.b.That the Appellant was assessed by the Respondent for Ksh 103,970,735/= being income tax and VAT for years 2016 to 2019 an amount that the Appellant objected and availed documents to support the supply of exempt goods.c.The Appellant avers that the Respondent disregarded invoices, delivery notes, LPOs and contract documents supplied but proceeded to partially allow the Appellant’s objection which culminated in the Respondent’s unjustified, hefty and unsupported objection decision.d.The Appellant avers that the Respondent did not take into consideration the Appellant’s declared income in the ITA and VAT returns; and that the Respondent did not appreciate that most of the income earned by the Appellant were from supplies that were not vatable.e.The Appellant submits that the Respondent based its assessment of withholding tax without taking cognizance as to when the payments are done and declaration made most specifically on split invoices.

9. The Appellant avers that the profit margin of 60% does not reflect the correct industry margin.

The Appellant’s Prayer 10. The Appellant prays that the Tribunal do set aside the Respondent’s Objection decision dated 8th June 2022 with costs.

The Respondent’s Case 11. The Respondent has replied to the Appellant’s Appeal through its Statement of Facts dated 16th September 2022 and filed on even date where the Respondent averred as follows;i.That the Appellant was assessed based on undeclared sales for supplies to Isiolo County Government, Marsabit County Government, State Department for Irrigation, Water Services Trust Fund, National Cereals and Produce Board.ii.That the Appellant did not avail information detailing what constituted the income that had been declared.iii.That the documents availed to support exempt supplies included Local Purchase Orders and delivery notes for supplies made to County Government of Marsabit and Contract Agreement and Notification of Award for supplies to County Government of Isiolo.iv.The Respondent avers that it vacated an amount charged for VAT of Ksh 4,402,680/= after the Appellant availed LPOs from County Government of Marsabit that showed supply of maize which is an exempt product.

12. The Respondent avers that the Appellant neither provided invoices nor delivery notes for supplies made to the Isiolo County Government and that as a result, the Respondent was unable to determine from the Contract Agreement and Notification of Award, whether or not the supply and delivery made was for a fire engine which is zero rated under Paragraph 9 of Part B of the Second Schedule to the VAT Act.

13. To further buttress its position, the Respondent relied on Section 17(3) of the VAT Act which was firmed up in the case of Osho Drappers Limited vs Commissioner of Domestic Taxes Appeal No. 159 of 2018 at Paragraph 57 where it was stated that:-….It is not enough to have the documentation listed in Section 17 of the VAT Act. The documentation must be supported by an underlying transaction and the taxpayer must furnish proof that there was an actual purchase..‖

14. The Respondent avers that the Appellant failed to avail information reconciling the timing differences of the withholding certificates.

15. The Respondent states that it was not in a position to determine the actual profits and thus allowed a 40% expense since the Appellant did not provide information detailing the profits arising from its transactions.

Respondent’s Submissions 16. The Tribunal notes that the Appellant did not file written submissions and therefore proceeds to analyze the Respondent’s Written Submissions dated 4th April 2023 and filed on even date whereby the Respondent raised a single issue for determination:Whether the assessment and subsequent Objection Decision dated 8th June 2022 was valid.

17. The Respondent reiterated its position as held in its Statement of Facts and annexures thereto.

18. The Respondent holds that the Appellant failed to avail information detailing what constituted income that had been declared and had been assessed by the Respondent. Therefore, the Respondent was not in a position to determine which supplies were already declared. The Respondent further avers that it is not bound by information provided by the Appellant’s tax returns.

19. The Respondent relies on Section 24(1) & (2) of the TPA that allows a taxpayer to file returns but further provides that the Commissioner is not bound by the information provided therein and can assess tax liability based on other available information.

20. It is the Respondent’s submission that based on Section 24 of TPA it went ahead to obtain and use third party data obtained from IFMIS, Water Service Trust Fund, NCPB, Kenya Meat Commission, and various County Governments and compared the same with Income tax and VAT declarations whereby the variance was subjected to charge at the standard rate of 30% and 16% for Income tax and VAT, respectively.

21. It is the Respondent’s submission the Appellant did not avail information detailing what constituted income that had been declared and had been assessed by the Respondent. Thus, in the circumstance, the Respondent was not in a position to determine which supplies were already declared.

22. The Respondent further avers that while reviewing the Appellant’s Objection application, it took note of the LPO’s from the County Government of Marsabit that showed that supplies that were exempt (maize) and vacated the assessed VAT amount. However, in the supplies for Isiolo County Government, the Appellant neither provided invoices nor delivery notes therefore the Respondent was not able to determine that the supply was a fire engine from the Contract Agreement and Notification of Award.

23. Regarding the proper support and documentation in support of a tax dispute, the Respondent relied on Section 17(3) of the VAT Act and paragraph 57 in the case of Osho Drappers Limited vs Commissioner of Domestic Taxes Appeal No. 159 of 2018;―....the documentation must be supported by an underlying transaction and the taxpayer must furnish proof that there was an actual purchase.‖

24. The Respondent avers that the Appellant failed to avail information reconciling the timing difference of the withholding certificates; as a result, the Respondent was not in a position to determine whether all the withholding certificates had been properly accounted for.

25. The Respondent submits that it was not in a position to determine the nature of intercompany transactions specifically the Director’s deposits as not all documentation was availed.

26. To Further buttress its position, the Respondent relied on Sections 31 and Section 56(1) of the TPA regarding the Appellant’s lawful obligation regarding tax filing and burden of proof in a tax dispute. The Respondent firmed up its position by quoting Section 107(1) of the Evidence Act. As regards the taxpayer’s burden of proof in a tax dispute, the Respondent relied on the findings of the Tribunal in Joycott General Contractors Limited vs Kenya Revenue Authority TAT No. 28 of 2018 and Primarosa Flowers Limited vs Commissioner of Domestic Taxes(2019) eKLR.

27. The Respondent avers that it allowed a 40% expense in calculations for profits because the Appellant did not avail any information detailing any profits for its transactions and based the same on the average industry profit margins.

Issue for Determination 28. The Tribunal having carefully considered and gleaned over the parties’ pleadings, documentation and Submissions notes that the issue that calls for its determination is; Whether the tax assessment is proper.

Analysis and Determination 29. Having established that there is a single issue for determination, the Tribunal proceeds to analyse the facts of the Appeal as follows:

Whether the tax assessment is proper. 30. The Tribunal is guided by Section 28 of TPA which confers to a taxpayer the manner and form of self-assessment. The Appellant in the instant Appeal appears to have complied with self-assessment.

31. Further, the Tribunal is procedurally directed by the provisions of Section 43 1. of VAT Act to the effect that:-―…Every registered person 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.‖

32. The Tribunal further relies on Section 17 (1) that empowers a taxpayer to deduct input taxes against output taxes. Section 17 (2) & (3) further clarifies instances when such deductions are to be incurred and the nature of documentation required to support such an input claim. The Section 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.3. The documentation for the purposes of subsection (2) shall be—a.an original tax invoice issued for the supply or a certified copy;b.a customs entry duly certified by the proper officer and a receipt for the payment of tax;c.a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction;d.a credit note in the case of input tax deducted under section16(2); ore.a debit note in the case of input tax deducted under section 16(5).‖

33. The Tribunal has gleaned through the Appellant’s record of Appeal and it has not been able to see any evidence of supportive documentary trail indicative of the Appellant disapproving the Respondent’s assertions in the instant Appeal. The Tribunal borrows from Section 24(2) of the TPA which stipulates that:―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.‖

34. The Tribunal is guided by Section 56 (1) of the TPA which states as follows with regard to the burden of proof to be discharged by the Appellant:-..In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.‖

35. Further, the Tribunal reiterates its holding in the Afya Xray Limited vs Commissioner of Domestic Taxes TAT Appeal No. 70 of 2017 to the effect that:-... that the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents. Moreover, the Appellant had an opportunity to counter the Respondent’s finding after the preliminary finding and after the confirmation of the assessment. Both are instances, where the Appellant could have produced its books of accounts to counter the Respondent’s assessment after all the Appellant by law bears the burden of proof‖.

36. The Tribunal is satisfied that the Appellant did not discharge its burden of proof to successfully challenge the tax assessments issued. The Appellant could have done this by adducing evidence which demonstrates the taxable income on which tax ought to have been levied. The Appellant did not meet the threshold of Section 30 of the Tax Appeals Tribunal Act (CAP No. 40 of 2013) regarding its legal burden of proof.

37. In view of the foregoing, the Tribunal finds that the tax assessment raised by the Respondent is proper in law.

Final Decision 38. The upshot of the foregoing 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 the 8th June, 2022 be and is hereby set aside.c.Each party to bear its own costs.

39. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 18TH DAY OF AUGUST, 2023. ERIC NYONGESA WAFULACHAIRMAN...................DELILAH K. NGALAMEMBER...................CHRISTINE A. MUGAMEMBER...................GEORGE KASHINDI DIRIYEMEMBER...................ABDULLAHI M.MEMBER...................SPENCER S. OLOLCHIKEMEMBER