[2023] KETAT 578 (KLR)

Excellent Transporters Limited v Commissioner of Legal Services & Board Coordination (Appeal 378 of 2022) [2023] KETAT 578 (KLR) (Commercial and Tax) (29 June 2023) (Judgment)

Neutral citation: [2023] KETAT 578 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Appeal 378 of 2022

RM Mutuma, Chair

June 29, 2023

Between

Excellent Transporters Limited

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a private limited company whose principal activity is commodity trade of rice, pasta, cooking oil, tomato paste and related products to local wholesalers.

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 dispute in this Appeal rose when the Respondent conducted a desk review of the Appellant’s affairs for the period between 2017 and 2019 and issued the Appellant with its findings on the 15th January 2021 and subsequently demanded for tax via Assessment Orders dated 16th February 2021.

4. The Appellant objected to these assessments vide its notice of objection dated 8th March 2021.

5. The Respondent consequently issued its objection decision on 16th February 2022 where it amended the VAT assessment from Kshs 97,763,676. 16 to Kshs 52,915,859. 66.

6. The Appellant was aggrieved by this decision and it filed a Notice of Appeal to the Tribunal on the 13th April 2022.

The Appeal 7. The Appellant’s Memorandum of Appeal filed on the 13th April 2022 was premised on the following grounds(sic):a.That the Respondent erred in law and fact by charging Value Added Tax on the exempted supplies made by the Appellant for the tax periods under assessment. The variance that was established by the Respondent was as a result of exempted local purchases that were made by the Appellant but were not declared in the VAT monthly returns. The Respondent made a wrong assumption that all the purchases that were in variance were vatable purchases and that they were supposed to be subjected to VAT. The variance established by the Respondent was merely a comparison between turnover declared in the income tax returns and the customs import value for the affected tax periods. Such an analysis could not guarantee a watertight evidence of subjecting the variance to VAT without performing an inspection on the Appellant’s books and verification of records in relation to exempted supplies in variance. The Respondent, therefore, should have performed an inspection on the Appellant’s records instead of making an overreliance on the customs data in performing a variance analysis. The Respondent’s decision to charge VAT was both wrong and illegal.

Appelant’s Case 8. The Appellant filed a Statement of Facts dated 5th April 2022 and filed on 13th April, 2022 where it stated that the following happened after it filed its objection on the 12th March 2021:a.The Respondent requested for further documents and the Appellant supplied the sales ledgers on the 16th April 2021. b.The requested documents included sales invoices, import documents, proof of payments, financial statements and analysis of the difference between turnover in income tax and VAT. The Appellant delivered some of the documents to the Respondent and its receipt was acknowledged by the Respondent on the 13th of May, 2021. c.The Respondent, thereafter, requested for a meeting with the Appellant on 19th May 2021 at 11:00am.d.More documents were requested on the 12th July 2021 and the parties held a meeting on the 30th November 2021 where the Appellant delivered its reconciliation.

9. The Appellant affirmed that it had imported a portion of its goods and that of other taxpayers under its PIN. The goods it imported for itself were worth Kshs. 9,209,848. 56 in 2016, Kshs. 7,401,082. 33 in 2017 and Kshs. 136,695,953. 74 in 2018 before tax.

10. It was also its argument that the Respondent had failed to consider the fact that some of its imports had been declared in the year following the year of importation. For instance, in the year 2015, the value of importation before taxes of Kshs. 21,659,350. 80 was declared in the year 2016 financial statements. It was also its position that the value of importation before taxes in 2016 was Kshs. 6,576,011. 46 which figure was not considered by the Respondent in the objection decision.

11. The Appellant stated that adjusted assessments made by the Respondent were made without considering the fact that the Appellant had made significant exempted local purchases during the years in question worth Kshs. 196,159,682. 36 in the year 2017 and Kshs. 408,557,743. 18 in 2018 which was not factored in the impugned objection decision.

12. The Appellant also filed its Written Submissions on 15th February 2023 where it submitted as follows on the issue of whether the Respondent contravened the provisions of the Second Schedule of VATAct, 2013 by charging VAT on rice, that:a.The Respondent contravened the legal provisions of the Second Schedule of the VAT Act, 2013 by charging VAT on rice.b.The variance in sales worth Kshs 38,007,908. 74 between its declared sales and Income Tax was due to the value of imports that had not been captured in the books for year 2015 which if adjusted would have resulted in a vatable variance of only Kshs 2,975,533. 74. c.The Respondent did not factor in the concept of profit margin on the imports while adjusting for the importation of rice on the variance. It asserted that the resultant net variance of Kshs 33,729,048. 30 related to balance of sale of local rice for year 2017 which should not have been subjected to VAT.d.The Respondent failed to consider that its sales included both local and imported rice and the profit margin for imported rice was not factored in the adjustments.e.The Respondent did not factor in the concept of profit margin on imported rice while adjusting for the variance.f.The Respondent had left out significant amount of information that was necessary for adjustment before arriving at the final tax decision.

13. The Appellant submitted as follows in regard to the issue of whether the Respondent erred by failing to consider the Appellant’s objection in light of the material evidence that it had submitted to it, that:a.It had availed the documents that had been requested by the Respondent.b.Section 59 of the Tax Procedures Actrequired the Respondent to issue a notice in writing specifying the information required.c.The Respondent did not provide it with a notice in writing to provide documents. In its view this implied that the it had provided all the documentation that it was required to provide. The Appellant supported this assertion with the case of TAT Appeal No 81 of 2016; Maisha Steels (E.A) Limited (sic) .

14. The Appellant prayed to the Tribunal for the following orders, that:a.The Tribunal be pleased to dismiss the Respondent’s objection decision.b.The Tribunal allow its Appeal and dismiss the Respondent’s demand for taxes.c.It be awarded costs of the Appeal.

Respondent’s Case 15. The Respondent has set out its response to the Appellant ‘s case in the Statement of Facts filed on 12th May 2022 and Written Submissions filed on 15th December 2022.

16. The Respondent averred that it conducted a desk return review on the Appellant for the period January 2017 to December 2019 and noted variances between its turnovers, purchases and imports whereupon it issued it with tax assessment of Kshs 97,763,676. 16 on 15th January 2021. This figure was later reviewed to Kshs 52,915,859. 99 in the objection decision dated 16th February 2022.

17. The basis of the assessment was that there was a variance between income tax and VAT turnovers.

18. The Respondent stated that:a.Customs data revealed that the taxpayer had imported vatable supplies such as cooking oil, pasta and sugar in the years under review but it omitted substantial supplies in its VAT returns.b.The declarations made in the VAT returns revealed a substantial omission of the supplies in regard to vatable and exempt supplies.c.The Appellant failed to provide proof of the sales which were vatable or exempt.d.The Police Abstract on loss and theft dated 10th April 2019 was not conclusive proof of stock loss for the period 2019. e.The Appellant ought to have provided loss of its stock through documentary evidence to corroborate what is in the Police Abstract.

19. The Respondent asserted that:a.It applied its best judgment under Section 73 of the 16 Income Tax Act to issue the impugned assessment because it had reasonable cause to believe that the Appellant’s returns were not accurate. It therefore, relied on exports data extracted from the Customs System which showed that the Appellant had made higher sales than what was declared in its tax returns.b.Section 24 of the Tax Procedure Act allows the Commissioner to assess a taxpayer’s tax liability using any information available to it.c.The Appellant had failed to discharge the burden of proof that is imposed on it under Section 56(1) of the TPA to show that the Respondent had erred in its assessment and eventual Objection Decision. It relied on the case of Mechai International Vs Commissioner of Domestic taxes TAT Appeal no. 38 of 2021 and several other authorities to support this assertion.

20. The Respondent’s prayer to the Tribunal was for orders that:i.The objection decision dated 16th February 2022 be upheld.ii.The Appellant’s Appeal lacks merit and should thus be dismissed with costs.

Issues For Determination 21. The Tribunal having carefully considered the pleadings and submissions made by the parties is of the considered view that the Appeal herein distils into one issue for determination;i.Whether the Respondent was justified in confirming its assessments against the Appellant.

Analysis And Detrmination 22. The Respondent has stated that it arrived at its present assessment upon review of its custom data. The Appellant has not contested the fact that its data was indeed reviewed by the Respondent. Its main contention was that it had provided the documents that the Respondent had asked of it to help it in review of its assessment. It stated that the Respondent had either ignored its documents or proceeded on misguided analysis of its documents and thereby arriving at an erroneous assessment.

23. The contention in this matter therefore is whether the Appellant had provided sufficient documents to persuade a reasonable person that the Respondent had erred in assessment of the Appellant’s tax liabilities; and whether there was proof of a taxable supply for which the Respondent could base its claim for input tax.

24. Section 56(1) of TPAprovides that:“56(1) In any proceedings under this part , the burden shall be on the taxpayer to prove that the tax decision is incorrect.”

25. Section 30 of the Tax Appeals Tribunal Act provides that ;“In proceedings before the Tribunal , the appellant has the burden of proving that ;a.where an appeal relates to an assessment, the assessment is excessive; orb.In any other case, that the tax decision should not have been made or should have been made differently.”

26. The application of Section 56(1) was discussed by the High Court in the case of Commissioner of Domestic Taxes -vs- Metoxide Ltd (2021) eKLR where Justice Mabeya stated as thus:“Section 56(1) of theTax Procedures Act provides that; a taxpayer has the burden of proving that a tax decision is incorrect. It is common knowledge that, the Kenyan system of taxation is based on self-assessment. The taxpayer assesses self and remits what he/it considers to be the tax due to the tax authorities. In this regard, the tax laws mandate the appellant to later on assess the taxpayer in order to ascertain whether the tax remitted was proper or not. Ordinarily, the assessment is made years after the tax has fallen due and been paid on the economic activity or commercial transaction for which the tax arisen had been undertaken. It is for this reason that the tax laws in this country shoulder the taxpayer with the burden of disproving the correctness of the appellant’s tax decision .”

27. The wording of the above citations makes it clear that, it was upon the Appellant to prove that it had provided all the documents that had been requested by the Respondent. Alternatively, it was also up to the Appellant to prove that it had provided sufficient documents to prove to the Respondent and or any other reasonable person looking at its tax affairs that the assessed tax as contained in the objection decision dated 16th February 2022 was either wrong or erroneous. Since the instant case dealt with input tax deduction.

28. It is apparent on the face of the impugned objection decision that the documents provided by the Appellant were considered by the Respondent in reviewing the VAT assessment from Kshs 97,763,676. 16 to Kshs 52,915,859. 66. The Respondent also stated that it affirmed the remainder of the assessment because it was:“unable to link the transactions to the payments in the bank statement and could therefore not collaborate the reconciliation to the supporting documents “

29. The evidence on record therefore does not support the assertion that the documents provided by the Appellant were never looked at and or considered by the Respondent. Indeed, the only reason why the Respondent adjusted the assessment downwards was because it had considered and factored the documents that supported this adjustment.

30. Having succeeded in persuading the Appellant to adjust the VAT assessment downwards, the Appellant was thus obliged to table documents or evidence before the Tribunal to prove that the Respondent erred and or was wrong in retaining its VAT assessment at Kshs 52,915,859. 66.

31. The onus was now on the Appellant to prove that it had presented all the required documents and addressed the issue of variances between its payments and the bank statements. The latter issue was main reason why the Respondent issued a VAT assessment of Kshs 52,915,859. 66 against the Appellant.

32. The Tribunal has looked at the evidence presented before it by the Appellant and it did not find any document addressing the issue of variances between the Appellant’s bank statements and its payments. Indeed, the said bank statement which formed the stratum of the impugned objection decision and the alleged payments were not even presented in evidence in this case. In other words, the Appellant has not explained itself sufficiently and or provided documents to prove that the Respondent has erred, was wrong and or had considered irrelevant issues in arriving at its Objection Decision.

33. The Police Abstract provided confirming loss of stock did not indicate that the documents supporting the purchase and or sale of these lost stock was also lost. The Tribunal is of the considered view that the production of sales and purchases related to these lost stock totaling Kshs 475,087,500. 00 could have helped the Respondent to reconcile the Police reports with the actual value of the goods as presented to it, which may have in turn affected its objection decision depending on the veracity of the said documents.

34. Based on the above analysis, the Tribunal has arrived at the conclusion the Appellant’s failure to provide all the requisite records, documents, and information that was required of it meant that it had failed to discharge its evidentiary burden as espoused in Section 56(1) of the TPAand Section 30 of the TATAct.

Final Decision 35. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal proceeds to make the following Orders: -a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 16th February, 2022 be and is hereby upheld.c.Each party to bear its own costs.

36. Orders accordingly.

DATED AND DELIVERED AT NAIROBI THIS 29TH DAY OF JUNE 2023. ……………………………ROBERT M. MUTUMACHAIRPERSON……………………………RODNEY O. OLUOCHMEMBER.................ELISHAH N. NJERUMEMBER…………………………DELILAH K. NGALAMEMBER