[2024] KETAT 1148 (KLR)

Gobol Engineering International Limited v Commissioner of Domestic Taxes (Tax Appeal E467 of 2023) [2024] KETAT 1148 (KLR) (1 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1148 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E467 of 2023

RM Mutuma, Chair, B Gitari, EN Njeru, M Makau & AM Diriye, Members

August 1, 2024

Between

Gobol Engineering International Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a Limited Liability Company duly incorporated in Kenya under the Companies Act. Its main business is in washing and dry-cleaning textiles and fur products.

2. The Respondent is established under the Kenya Revenue Authority Act, Cap 469 Laws of Kenya. The Kenya Revenue Authority (“KRA”) is an agency of the Government of Kenya for assessing, collecting, and accounting for all revenue.

3. The Respondent issued a pre-assessment notice to the Appellant on 27th March 2023 undeclared VAT for services rendered to the Kenya National Highways Authority for the periods August 2022, January, and February 2023.

4. The Respondent sent Notices of Additional Assessments to the Appellant for VAT totaling Kshs. 9,760,313. 00 followed by Assessment Orders dated 4th May 2023.

5. The Appellant raised an Objection to the assessments vide a letter dated 12th May 2023 and followed it up with additional information dated 26th May 2023 which was received by the Respondent on 29th May 2023.

6. The Respondent confirmed the assessment for August 2022 and January 2023 in but amended the Assessment for February 2023 through an Objection Decision dated 30th June 2023 wherein the Appellant’s Objection tax was found to be Kshs. 7,003,409. 36 with penalties and interest.

7. Dissatisfied with the Objection Decision, the Appellant filed a Notice of Appeal on 28th July 2023.

The Appeal 8. The Appeal is premised on the following grounds listed in the Memorandum of Appeal dated and filed on 11th August 2023: -a.The Respondent’s Decision on the Appellant’s Objection is in error for the month of August 2022 since the Respondent did not allow filing of the amended and or late filing a return to correct the input VAT, as is the case of Section 17 (2) of the VAT Act as determined in the case of Highland Mineral Water Limited (taxpayer) vs. Commissioner of Domestic Taxes (KRA) Tax Appeals Tribunal No. E026 of 2020 by the High Court.b.The Respondent is in error as to law and fact in the interpretation and Application of Section 17 (2) of the VAT Act by not allowing the Appellant’s input tax for the month of August 2022 of Income due to late 6 months period, which the Appellant’s Kenya Revenue Authority - iTax Portal cannot allow and therefore resulting in a tax liability of Kshs. 6,104,525. 00 inclusive of interest and penalties.c.Further, the Respondent did not consider the VAT withholding taxes in respect to the month of August 2022 (663,537. 00) as per the Assessment Demand and Objection Decision issued.d.The Respondent’s confirmation of assessment for the month of August 2022 and stance violates the Appellant’s constitutional right to fair hearing and administrative action on the matter due to the decision passed on the VAT input on non-admittance.e.That the Respondent is in error as to application of law by misinterpreting Section 17 (2) of the VAT Act to suggest that where the VAT return is filed or amended late then the input cannot be claimed noting the Appellant is entitled to input tax arising from 6 months prior to the date of submission of the late return, as was provided to the Respondent for the month of August 2022. f.The Respondent once again is in error in law by misinterpreting Section 17 (2) to imply that a VAT return which is submitted late should not reflect the actual transactions that would have been reflected had the return been submitted on time.g.As regards the Respondent’s Objection Decision in relation to the two other months (January and February 2023) assessment and Objection for VAT tax demanded amounts is not supported by the Respondent’s workings on how they were arrived at. They are as below;i.January 2023 – Kshs. 555,828. 64 inclusive of penalties and interest; and,ii.February 2023 343,048. 60 inclusive of penalties and interest.h.The Appellant’s position in relation to VAT tax filings for the months of January 2023 and February 2023 are supposed to be effected as:Credit B/FW of Kshs. 1,307,059. 82 (August 2022 Kshs 937,317. 45 and December 2022 Kshs. 369,742. 37) the resultant VAT credits will be as follows:i.January 2023- Kshs. 891,810. 82;ii.February 2023 Kshs. 410,592. 16.

The Appellant’s Case 9. The Appellant’s case was premised on its;a.Statement of Facts dated and filed on 11th August 2023 together with the documents attached thereto; and,b.Written submissions dated and filed on 19th February 2024.

10. It stated that the Respondent disallowed Input VAT for the month of August 2022 amounting to Kshs. 5,580,689. 45 citing the 6 months’ rule that the input tax could not be allowed as it was time barred and cited Section 17 of the VAT Act, 2013.

11. It contended that the Respondent did not consider the credit balance which would have been the resultant amount from amending the August 2022 VAT return amounting to Kshs. 935,937. 65 (Output Tax VAT Kshs 5,308,288. 8 less Input VAT 5,580,689. 45 less withholding taxes Kshs. 663,537. 00).

12. It averred that ace Respondent did not consider the VAT withholding taxes in respect to the month of August 2022 (663,537. 00) as per the assessment demand and Objection Decision According to Section 17 of the VAT Act.

13. It averred that the Respondent did not consider the VAT withholding taxes in respect to the month of August 2022 (663,537. 00) as per the assessment demand and Objection Decision.

14. It averred that the VAT filings for January and February 2023 are supposed to be affected by a credit balance brought forward which consists of credit arising from August 2022 tax calculations as submitted of Kshs. 937,317. 45 and iTax accumulated VAT Credit balance between September 2022 and December 2022 of Kshs. 369,742. 37 totaling Kshs. 1,307,059. 82.

15. It contended that for January 2023, Output VAT 3,663. 416 less input VAT, 2,790,109. 2 less WHT 458,057. 00 less credit balance Kshs. 1,307,059. 82 resulting to a credit of Kshs. 891,810. 02 being carried forward to February 2023.

16. It stated that for February 2023, Output VAT Kshs. 793,408. 00 less Input VAT Kshs. 213,551. 14 less WHT Kshs. 98,576. 00 less Credit balance Kshs. 891,810. 02 resulting to a credit of Kshs. 410,529. 16 being carried forward to March 2023.

17. It averred that the Appellant erred in law and fact in its interpretation and application of Section 17 of the VAT Act by disallowing the Appellant’s Input Tax for the month of August 2022 amounting to Kshs. 34,887,632. 83 due to the 6 months rule by ruling that Input Tax for August 2022 could not be allowed for being time barred and demanding taxes for Kshs. 6,104,532. 12 inclusive of interest and penalties despite the Appellant providing an analysis of all the supporting documents and providing proof that the Input Tax belonged to the month of August 2022 only that the return had not been filed in time.

18. It stated that the Respondent failed to consider VAT withholding taxes for August 2022 for Kshs. 663,537. 00.

19. It contended that the Respondent was wrong by not considering the credit balance arising from the submitted VAT of August 2022 calculations of Kshs. 937,317. 45, in calculating the demanded VAT Tax Assessments for January 2023 and the subsequent carried forward balance to February 2023 on the Objection Decision availed to the Appellant.

20. The Appellant submitted that it consented to the Principal VAT tax arrears for January and February 2023 subject to deductions withheld VAT for each month which the Respondent has not factored and a Debt Adjustment Voucher amount to Kshs. 508,257. 00 appearing in the return for January 2023 at the final amount payable, before interest and penalties, therefore for January 2023, Kshs. 505,298. 76 less Withheld VAT of Kshs. 457,927. 00 and Debt Adjustment Voucher of Kshs. 508,257. 00 = Kshs. 460,886. 76 as VAT Credit Tax.

21. It asserted that for February 2023 Kshs. 314,723. 49 less Withheld VAT of Kshs. 98,576. 00 less January credit of Kshs. 508,257. 00 thus Kshs. 244,739. 27 is VAT Tax Credit.

22. It relied on the case of Highlands Mineral Water Ltd vs. Commissioner of Domestic Taxes Tax Appeal No. 026 of 2020 reiterated that the Respondent denied being supplied with authentic purchases and business expenses invoices and receipts of Utilized as VAT claim without 6 months prior to August 2022 thereby denied the Appellant what is rightful VAT Input Tax claim and the Appellant’s claim or utilization of the VAT Input that is authentic and incurred by the Appellant.

23. It argued that the Respondent’s contention is but mere ruse and or trick to deny the Appellant what is owed to him by the Respondent whose refusal to allow the appellant’s Input Tax claim against a court decision is a denial of its right.

24. It asserted that input VAT tax as provided for in the documents provided are valid and ought to be allowed because the Input VAT purchases and Expenses have not been utilized by anybody else as VAT Input tax as they rightfully are the Appellant’s.

Appellant’s prayers. 25. The Appellant prayed for orders that:a.This Appeal be allowed;b.The Respondent’s decision dated 30th June 2023 be set aside in its entirety;c.The Appellant’s VAT amended return for the month of August 2022 to be allowed to be filed and amended with input VAT being allowed to be awarded into the iTax system by the Respondent;d.Correct VAT Tax Credit for the month of August be allowed as provided for in the Statement of Facts and carried forward in the following months;e.The Objection Decision by the Respondent on the months of January and February 2023 be supported with workings and effect the Appellant’s August 2022 resultant VAT Tax credit; and,f.Any other orders that the Tax Appeals Tribunal may deem fit.

The Respondent’s Case 26. The Respondent’s case is premised on its;a.Statement of Facts dated 13th September 2023 and filed on 14th September 2023; and,b.Written submissions dated 11th March 2024 and filed on 12th March 2024.

27. It cited Section 17 (2) of the VAT Act and stated that the purchase invoices provided by the Appellant to be allowed for Input deduction were for the periods February 2022 to August 2022 as the assessments were raised in August 2022 when the 6 months had already elapsed and therefore the Input Tax could not be heard.

28. It contended that upon the configuration of the iTax, the withholding Tax would automatically reduce the Appellant’s tax due at the time of implementation of the decision on iTax.

29. It averred that the VAT Tax demanded amounts for January 2023 was confirmed therefore there were no workings required and further, for the period of February 2023, the Objection Decision indicated that Kshs. 473,884. 52 had been allowed from the Input Tax supported and therefore the difference from the tax assessed and the tax allowed would bring the tax payable.

30. It relied on Sections 51 (8), (9), and (10), 29, and 31 of the Tax Procedures Act and stated that it followed the provisions of the Tax Procedures Act to the letter in issuing the Objection Decision and the same should be found proper in law.

31. It cited Section 56 (1) of the Tax Procedures Act and contended that the burden of proof is on the Appellant to produce the evidence challenging the Respondent’s decision to confirm the assessments which the Appellant has failed to discharge.

32. The Respondent filed its submissions with the Tribunal, wherein it reiterated verbatim its assertions in the Statement of Facts.

Respondent’s prayers 33. The Respondent prayed for the Tribunal to find that:a.The Objection Decision dated 30th June 2023 confirming the Assessments of August 2022, January 2023 and partially amending the assessment for February 2023 is valid and proper in law;b.The Appeal herein lacks merit and ought to be dismissed with costs to the Respondent.

Issues For Determination 34. After perusing the Memorandum of Appeal and parties’ Statements of Facts, and the submissions and gleaning through the documentation attached therewith, the Tribunal finds the following to be the issues for determination:i.Whether the Appellant’s claim for input VAT for August 2022 and January 2023 were time-barred; and,ii.Whether the Respondent erred in failing to furnish it workings resulting to its Decision for the amendment of the February 2023 assessment.

Analysis And Findings 35. The Tribunal wishes to analyse the issue as hereunder.i.Whether the Appellant’s claim for input VAT for August 2022 and January 2023 were time-barred;

36. The Appellant submitted that the Respondent’s decision to disallow input VAT it claimed was erroneous as the Respondent’s iTax system did not allow it to file late return for the period August 2022.

37. For the January 2023 returns, the Appellant argued that it accounts for input VAT when receipt of payment is done and not when tax is withheld and the withholding tax certificate is issued.

38. The Respondent contended that the Appellant had under-declared its VAT returns and also that the Appellant’s claim was time barred as well for the period January 2023.

39. It averred that it gave the Appellant the opportunity to reconcile its VAT sales in accordance with the interim payment certificates and the withholding certificates issued but the Appellant failed to do so.

40. It further asserted that the Respondent did not provide the workings neither did it consider its documentation for the claims for the period January 2023.

41. It asserted that the Respondent failed to interpret the 6-month rule properly, citing the High Court decision of Highlands Mineral Water Ltd vs. Commissioner of Domestic Taxes Tax Appeal No. 026 of 2020.

42. The Respondent averred that the Appellant’s input VAT claim could not be allowed as, given the time limit of 6 months under the VAT Act, the Appellant’s claim was time barred.

43. Section 44 of the VAT Act provides the following“44. Submission of returns1. Every registered person shall submit a return, in the prescribed form and manner, in respect of each tax period not later than the twentieth day after the end of that period”

44. Section 17 of the VAT Act provides:(1)Subject to the provisions of this Act and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person in a return for the period, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.(2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1)—a.the person does not hold the documentation referred to in subsection (3), orb.the registered supplier has not declared the sales invoice in a return, the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation:Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

45. In the instant case, the Tribunal observes that the Appellant did not file its returns for the period August 2022 and January 2023 contrary to Section 44 of the VAT Act. The Appellant then sort to file late returns but this was since the Respondents system was inaccessible to the Appellant for the periods. The Respondent went on to issue an assessment for the periods in which it disallowed the input VAT for being late, that is beyond six months as stipulated under Section 17 of the VAT act.

46. The Appellant’s case is that, according to the Highlands Mineral Water Case, the Respondent ought to allow it to access the system to file its late returns where it would then claim the input VAT.

47. The Highlands Mineral Water Ltd (supra) case relied on Section 17 (2) of the VAT Act in which it was observed as follows: -“Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

48. A strict rule applicable to taxation statutes to give clear and plain meaning to the words of a statute and relied on the case of Mount Kenya Bottlers Limited vs. The Honourable Attorney General & 3 Others [2019] eKLR where the court quoted Cape Brandy Syndicate v. I.R Commissioners [1921] 1KB in holding: -“The accepted principle in construing a tax statute is that the court is guided by the statutory words themselves and that there is no room for intendment or adopting a purposive approach when the words of the statute are clear and unambiguous.”

49. The provisions of Section 17 of the VAT Act are clear with regard to the timeline for claim of input tax, that for a registered person to claim input tax, the same must be ‘within six months after the end of the tax period in which the supply or importation occurred’. In the Instant case, the Appellant’s purports to claim input VAT for supplies beyond the six months and therefore fails the test for claim of the input VAT.

50. The Tribunal therefore finds that the claim for Input VAT for August 2022 and January 2023 was time barred and that the Respondent was justified in disallowing it.ii.Whether the Respondent erred in failing to furnish it workings resulting to its Decision for the amendment of the February 2023 assessment.

51. The Appellant averred that the assessment and Objection for VAT tax demanded is not supported by the Respondent’s workings on how it arrived at the February 2023 amended assessment amounting to Kshs. 343,048. 60 inclusive of penalties and interest.

52. The Respondent averred that for the period of February 2023, the Objection Decision indicated that Kshs. 473,884. 52 had been allowed from the Input Tax supported and therefore the difference from the tax assessed and the tax allowed would bring the tax payable.

53. Section 49 of the Tax Procedures Act provides:“Where the Commissioner has refused an application under a tax law, the notice of refusal shall include a statement of reasons for the refusal”

54. Section 51 (9) and (10) of the Tax Procedures Act provides the following:(9)The Commissioner shall notify in writing the taxpayer of the objection decision and shall take all necessary steps to give effect to the decision, including, in the case of an objection to an assessment, making an amended assessment.(10)An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

55. The Respondent in its Objection Decision, provided its reasoning for amending the assessment for February 2023 as follows;“In a meeting held on 29th June 2023 you agreed to the Output VAT but requested the Commissioner to allow your Input tax claim for the periods August 2022 and February 2023 where you had not filed any returns. Taking into consideration the 6 months rule, Input tax for August 2022 could not be allowed as it was time barred. However, the Commissioner has allowed input Tax for February 2023 amounting to Kshs. 473,884. 52 to the extent supported and where the same meets the requirements of Section 17 (2) of the VAT Act.”

56. From a reading of the Respondent’s decision above, the Tribunal observes, that the parties engaged in a meeting where discussions were held on what would be allowed as input VAT, consequently resulting in the amendment of the February 2023 assessment by allowing input VAT that was supported and met the threshold as stipulated under Section 17 (2) of the VAT Act.

57. The Responding having made its decision, it behooved upon the Appellant to appeal the decision to this Tribunal demonstrating why the Respondent’s decision was erroneous or ought to have been made differently.

58. The Tribunal has reviewed the Appellant’s Statement of Facts and bundle of documents and noted that the Appellant did not demonstrate that the decision by the Respondent to only allow Input tax that was supported and that met the threshold set out under Section 17 (2) of the VAT Act, was erroneous or ought to have been made differently.

59. Consequently, the Tribunal finds that the Respondent did not err in failing to furnish the Appellant with its workings resulting to its decision for the amendment of the February 2023 assessment.

Final Determination 60. The upshot to the foregoing is that the Appeal has no merit and the Tribunal consequently makes the following orders; -a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection Decision dated 23rd August 2023 be and is hereby upheld.c.No orders as to costs.

61. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 1ST DAY OF AUGUST 2024ROBERT M. MUTUMACHAIRPERSONABDULLAHI DIRIYE BERNADETTE GITARIMEMBER MEMBERELISHAH N. NJERU MUTISO MAKAUMEMBER MEMBER