[2023] KETAT 116 (KLR)

Hijaz Technologies Limited v Commissioner of Legal Services & Board Coordination (Tribunal Appeal 324 of 2022) [2023] KETAT 116 (KLR) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 116 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 324 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, A.K Kiprotich & Jephthah Njagi, Members

March 17, 2023

Between

Hijaz Technologies Limited

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya and is a registered taxpayer.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 of the laws of Kenya. The Authority is an agency established for the purposes of assessing, collecting and accounting for tax revenues.

3. The Appellant lodged two applications to amend its Value Added Tax (VAT) returns for the periods September 2012 and October 2012 which were acknowledged by the Respondent on April 29, 2019. The two applications were rejected by the Respondent vide Rejection Notice for Amended Return dated April 30, 2021

4. The Respondent issued two tax assessments vide assessment orders dated May 4, 2021. The Appellant lodged a notice of objection on May 6, 2021. The parties engaged and subsequently, the Respondent issued its objection decision vide a letter dated January 26, 2022,

5. Being aggrieved by the Respondent’s objection decision, the Appellant filed a Notice of Appeal on March 30, 2022.

The Appeal 6. The Appellant in its Memorandum of Appeal dated February 22, 2022 and filed on March 30, 2022 cited the following grounds for Appeal;a.That the Respondent erred in law and fact by making an erroneous assumption about the variance between sales declared in the VAT, those in Income Tax Company and the imports’ Customs value. The Respondent performed a variance analysis by comparing sales as declared in the VAT against those declared in the Income Tax Company and thereafter performed a comparison against the import’s custom value for the years 2017, 2018, 2019 and 2020; establishing variance of Kshs 31,056,856. 00, Kshs 50,560,921. 00, Kshs 51,747,336. 00 and Kshs 32,081,189. 00 respectively. The Respondent erroneously subjected the entire resultant variance to VAT at a general rate of 16% in arriving at the total VAT assessed of Kshs 26,471,408. The Respondent failed in his duty to consider sales as per the VAT returns as declared in the amended returns for the years 2018 and 2019; though he rejected the VAT amendment applications and went ahead to issue additional assessments. In contravention of Section 31(2) of the Tax Procedures Act, 2015 (TPA), the Respondent inordinately delayed in issuing his decision in regards to VAT amendment applications which had been lodged in September, 2019 but the rejection notice issued on April 30, 2021, three days before issuing assessment orders. This shows how prejudice and casual the Respondent’s assessment was in subjecting the Appellant to both discriminative and excessive tax procedures.b.The Respondent also erred in law and fact by subjecting the variance established after performing a comparison between turnovers as declared in the income tax returns against imports customs value for the years 2017 and 2017. In so doing, the Respondent failed to put into consideration the true fact that the Appellant is a private limited liability company that buys and sells goods subject to prevailing market/industry variables. The Respondent assumed that all goods purchased were wholly disposed within a year of purchase and that there was no possibility of closing stock. Furthermore, the Respondent, in his assessment, failed to consider other direct and indirect costs incurred by the Appellant in the course of its operations in generating revenue. Costs ranging from imports customs duty, shipping charges, port charges, transport charges, labor charges and other indirect costs are some of the costs that the Respondent should have put into consideration while carrying out his assessment. Considering the legality of the financial transactions as reported by the Appellant via the audited financial accounts (which were used in filing the annual returns), the Appellant was clear, in his reporting, by clearly distinguishing imports customs value (purchases) and the customs duty and other taxes for the two years in question. The Respondent erred by assuming that turnovers resulting from importation for the years in question were equivalent to total customs value and total duties and taxes. The Respondent’s assumption lacked practicability and can’t be verified before law as they do not reflect the correct financial position of the Appellant’s operations.c.The law dictates that every taxpayer must be subject to both fair and just tax administration, by considering both the taxpayer’s financial and tax positions that reflect his or her operations for a given period. The Appellant, therefore was not subjected to a fair and just tax administration procedures as the Respondent failed in duty to perform due examination of his records and operations in determining the correctness of his sales, despite provision of necessary documents including bank statements, sales invoices and ledger accounts as requested by the Respondents. If the Respondent is not guided by the law in exercising his powers, then significant number of innocent taxpayers will suffer in his hands as a result of such unfair and discriminatory tax administrative process, which may (in the long run) derail any effort to enhance both economic and social wellbeing of this country and its citizens.

Appellant’s Case** 7. The Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal;i.The Appellant’s Statement of Facts dated February 22, 2022 and filed on March 30, 2022 together with the documents attached thereto.ii.The Appellant’s written submissions dated December 6, 2022 filed on December 15, 2022.

8. The Appellant averred that the Respondent carried out the additional assessments as a result of return review exercise on declared sales in both VAT and Income Tax Company returns for the tax periods from 2017 to 2020. That according to the Respondent, the established variance in sales between those declared in income tax company returns and the imports Customs value was subjected to corporation tax at the rate of 30% and VAT at the rate of 16% without considering costs associated with those estimated sales. That the Respondent made an erroneous assumption that all imported goods were wholly sold out within the same year of importation, without putting in consideration other factors such as direct costs incurred, value in stock at the end of each financial year and any other limiting factor that could have contributed to the variance in declaration of sales.

9. The Appellant averred that the Respondent only considered declared sales in the income tax returns and those declared in the VAT and performed comparison against the imports’ custom value to arrive at the sales variance. To arrive at the sales variance, the Respondent assumed that all the goods that had been imported in each year had been sold out with no stock left. That this was not always the case in the operations of limited liability companies as there is always the concept of going concern and high possibility of closing stock at the end of the year.

10. The Appellant submitted that the Respondent failed to recognize the true fact that the Appellant had lodged several VAT return amendments for the years 2018 and 2018 two years earlier in accordance with Section 31(2) of the TPA. That in view of the aforementioned Section of the law, the Respondent contravened the provisions of Section 31 subsection 3(a & b) by failing to issue the decision within the period specified in this Section.

11. That the Respondent in the process of reviewing the returns, came to realize that he had inordinately delayed in issuing the decision regarding the amended VAT returns and issued rejection notices on April 30, 2021 after the Appellant had made return amendment application on September 25, 2019. It stated that it was unthinkable for the Respondent to now try to distance himself from the inordinate delay in issuing his decision regarding the VAT amendments and on the other hand perform an analysis of the sales declared in the VAT returns.

12. }The Appellant added that it was offensive for the Respondent to just issue a VAT return amendments rejection notice after two years of amendment application and also fail to state the reasons as to why he rejected those return amendments as required by Section 31(3) of the TPA. That the Respondent cannot just reject an application without stating any reason and thereafter issue additional assessment. The Respondent needs to understand that the Appellant is a private limited liability company that only generates revenue on purchases/importation. The Respondent cannot, therefore, assume that the Appellant is legally liable of paying taxes for not making full disclosure of the financial transactions to him.

13. The Appellant stated that it would be morally wrong for the Respondent to be allowed to exercise his powers in the wrong manner with the intention of subjecting the Appellant to discriminative and unjust tax procedures, in the name of gathering for more taxes. The Respondent knew very well that the Appellant had amended VAT returns for the years 2018 and 2019 in order to amend areas that needed some changes (including sales and purchases sections), but went forward to issue additional assessments after rejecting those amendments.

14. The Appellant contended that the Respondent’s powers need to be tamed and guided by the law in order to prevent him from subjecting the Appellant (and any other likely victims) to discriminative and excessive tax assessments.

15. That the Respondent cannot distance himself from the action of inordinate delay in issuing a decision in regards to VAT amendment application by stating that the Appellant failed to object to his decision of rejecting those amendment applications and yet he had committed an offence by contravening the provisions of Section 31(3). The Respondent claims that the VAT amendment applications do not relate in any way with his additional assessments, and yet he had carried out assessments in relation to the declarations made in the VAT Returns, IT2C returns and customs data. That the Respondent must comprehend the fact that those VAT amended returns had reconciled declarations of sales and purchases that were in line with the declarations made in the income tax company returns for the periods in question.

16. The Appellant averred that the Respondent through his email dated June 7, 2021, requested for documents ranging from VAT return amendment notifications, sales ledger and invoices, purchases ledger and invoices, bank statements for the period under review. Those documents were supposed to reach him within 7 days. That the Appellant delivered the requested documents via email on June 15, 2021 at 12. 23 hours.

17. The Appellant stated that on August 13, 2021, the Respondent requested for more documents which included sales and purchases invoices. The same requested sales invoices were emailed to the Respondent later. That as far as the purchase invoices were concerned, the Appellant is an importer and all the purchase data at the Respondent’s disposal: since the Appellant does not make local purchases.

18. That in the email dated September 20, 2021, the Respondent seem to be distancing himself from the VAT amendment applications rejection by citing that the additional assessments did not, in anyway, have any direct relationship with VAT amendment applications. The Respondent only tries to play a hide and seek game with the law by forgetting that he was the signatory to both the VAT amendment rejection notices as well as the VAT additional assessment orders generated via iTax portal.

19. That theConstitution was very clear in terms of the requirement of a public officer and any citizen to exercise high level of transparency and honesty while discharging their duties. It added that Respondent should be honest enough to tell the Tribunal why he rejected the Appellant’s VAT amendments application but went forward to perform a variance analysis on the details of sales and purchases as declared in the VAT and IT2C returns.

20. The Appellant further submitted that despite the provision of the requested documents to the Respondent in support of its grounds of objection, the Respondent did not consider any of those documents in its review exercise. That this also shows how the Respondent exercised an act of prejudice but intentionally exposing the Appellant to financial loss in terms of payment of taxes as a result of failure to conduct due process in examining the financial records of the Appellant in determining the correct financial and tax position.

21. It was the Appellant’s submission that the sales in variance between the VAT original returns and the VAT amended returns was equivalent to the total sales assessed by the Respondent. That this shows that the Respondent simply relied upon the VAT amended returns in coming up with the VAT assessments.

22. That the Respondent in the process of reviewing the returns, came to realize that he had inordinately delayed in issuing the decision regarding the amended VAT returns and issued rejection notices on April 30, 2021 after the Appellant had made return amendment application on September 25, 2019.

23. The Appellant submitted that through an email dated June 7, 2021, the Respondent requested for documents ranging from VAT amendment notification, sales ledger and invoices, purchases ledger and invoices, bank statements for the periods under review. That the documents were supposed to reach them within 7 days. It stated that it delivered the requested documents via email on June 15, 2021.

24. It was the Appellant submission that the issues arising were;i.Whether the Respondent erred in law by failing to issue his decision within the legal timelines following the Appellant’s application for the amendment of the VAT returns.ii.Whether the Respondent erred in law by failing to consider sales declared in the amended VAT returns while carrying out variance analysis after inordinately delaying in issuing rejection decision on the emended VAT returns.iii.Whether the Respondent erred in law by failing to consider the Appellant’s objections in light of material evidence submitted by the Appellant.iv.Whether the Respondent’s assumption that all purchases made by the Appellant were completely sold out in the year of purchase.

Appellant’s Prayers 25. The Appellant prayed that the Tribunal sets aside and annuls the assessment by the Respondent.

Respondent’s Case 26. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal;i.The Respondent’s Statement of Facts dated April 27, 2022 and filed on the same date.ii.The Respondent’s written submissions dated November 14, 2022 and filed on November 16, 2022.

27. The Respondent stated that it compared the Appellant’s importation against its turnovers as declared in its respective VAT & Income tax returns. That it was noted that the Appellant’s sales were grossly under declared prompting the Respondent to issue additional assessment.

28. The Respondent averred that in this case while making the assessment order and confirming the assessment, it relied on available information that it had as well as the Commissioner’s best judgement as provided for in Section 31(1) of the TPA. That further, the Confirmation of Assessment Notices were arrived at after the Respondent had also compared VAT returns of the Appellant’s suppliers and the input VAT claimed by the Appellant. The Respondent cited the provisions of Section 31(1) to support this argument.

29. It submitted that upon review of the Appellant’s notice of objection, it observed the following issues which formed the basis of its objection decision;i.The assessment was issued in accordance with the law particularly Section 31(1) of the TPA.ii.The additional assessments were as a result of the Commissioner comparing the Appellant’s respective VAT & Income tax returns where it was noted that the sales were grossly under declared, hence the additional assessment.iii.With regard to the rejection of amended returns, the Respondent stated that the rejections were made pursuant to the provisions of Section 31(2) of the TPA as the same had not been objected to considering that the objection that was before the Commissioner was in regards to additional assessments when sales data was compared to import data. As such the same could not be considered.iv.With regard to input incurred, the Respondent noted that in the Appellant’s notice of objection, the Appellant had failed to provide documentary evidence to support purchase invoices, customs entry documents in support of the input VAT claim. Further, an analysis of the input VAT amount which the Appellant intended to be allowed was not provided and as such, the Commissioner was unable to allow any input deduction being sought for lack of documentation and amounts breakdown.v.With respect to variance reconciliation, the Respondent noted that the Appellant had imported general merchandise for sale in the period under review and that the said purchases should have been reconciled cent to cent in the Appellant’s financial statements showing purchases, closing stocks and cost of sales for each year to enable the same to march with imported goods.vi.That from the foregoing, the Commissioner confirmed the additional assessment amounting to Kshs 42,230,160. 00.

30. The Respondent averred that in addition, the Appellant failed to provide the records and documents to support its case. That upon objection to the VAT assessments, the Appellant failed to provide sufficient supporting documentation to support the objection leading to the confirmation of the additional VAT assessments on January 23, 2020.

31. It stated that it relied on Section 17(3)(a) (which it cited) of the VAT Act, 2013 which required the Appellant to possess original tax invoices for the supply or certified copies thereof. That the Appellant had not complied with this Section to date.

32. The Respondent averred that the Appellant failed to provide sufficient supporting documents to prove that the Respondent’s assessment was either excessive or erroneous, leading to the confirmation of the VAT assessments.

33. The Respondent stated that it was also guided by the provisions of Section 51(3) and 51(4) of the TPA and Section 43(3) of the VAT Act.

34. The Respondent submitted that the Appellant’s objection was invalid as the Appellant failed to precisely state the grounds of objection, the amendments required to provide correct/change the decision.

35. The Respondent further stated that for input VAT to be allowed, the same must, inter alia, be fully supported, made within the given timelines and specifically applied to as provided for in Section 17 of the VAT Act.

36. To support its case, the Respondent cited the case of Highlands Mineral Water Limited vs The Commissioner of Domestic Taxes Civil Appeal No HCCOMMITA/E026 which it stated that the High Court set out the conditions to be met by the taxpayer to qualify for input VAT.

37. That the allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts unless where in agreement by the Respondent were unfounded in law and not supported by evidence.

38. The Respondent reiterated that the Appellant had failed to discharge its burden of proof in proving that the Respondent’s tax decision is incorrect as per the provisions of Section 56(1) of the TPA.

39. The Respondent stated that the Confirmed Assessment issued on January 23, 2020 was proper and the same should be upheld.

40. It was the Respondent’s considered view that the following issues were for determination in the matter;a.Whether the Appellant’s claim for VAT was justified.b.Whether the Appellant was able to justify the variance noted.c.Whether the Appellant was subjected to fair and just tax administration process.

Respondents Prayers 41. The Respondent prayed that the Honourable Tribunal finds:a.That the Respondent’s objection decision issued on January 26, 2022 on VAT amounting to Kshs 42,230,160. 00 together with the resultant penalties and interest be found to be due and payable.b.That this Appeal be dismissed with costs to the Respondent as the same is without merit.

Issues For Determination 42. Having carefully studied the parties’ pleadings, submissions and all documentation provided, the Tribunal is of the respectful view that the issues falling for determination are:a.Whether the Respondent’s Rejection Notices for Amended Return were in contravention of the law.b.Whether the Respondent erred in the assessment of VAT on the Appellant.

a. Whether the Respondent’s Rejection Notices for Amended Return were in contravention of the law. 43. It was the Appellant’s contention that the Respondent failed to recognize the true fact that the Appellant had lodged several VAT return amendments for the years 2018 and 2018 two years earlier in accordance with Section 31(2) of the TPA. That in view of the aforementioned Section of the law, the Respondent contravened the provisions of Section 31 subsection 3(a & b) by failing to issue the decision within the period specified in this Section.

44. On the other hand, the Respondent averred that the rejections were made pursuant to the provisions of Section 31(2) of the TPA as the same had not been objected to considering that the objection that was before the Commissioner was in regards to additional assessments when sales data was compared to import data. As such the same could not be considered.

45. From the parties’ submissions the Tribunal noted that the Appellant lodged two applications for amendment of its VAT returns which were acknowledged by the Respondent vide e-Return Acknowledgement Receipts dated September 25, 2019. The Respondent rejected the two applications vide Rejection Notice for Amended Return dated April 30, 2021.

46. Under Section 31(2) of the TPA, a taxpayer is allowed to apply to the Commissioner to ament its self-assessment returns. The Section provides as follows;'A taxpayer who has made a self-assessment may apply to the Commissioner, within the period specified in subsection (4)(b)(i), to make an amendment to the taxpayer's self-assessment.'

47. The law under Sections 31(3) of the TPA provides timelines for handling taxpayers’ applications for amendment of self-assessment by the Commissioner (in this case the Respondent). The Sections provides as follows;'(3) Where an amended self-assessment return has been submitted under subsection (2), the Commissioner may accept or reject the amended self-assessment return and where he rejects, he shall furnish the taxpayer with the reasons for such rejection within thirty days of receiving the application.'

48. From the above provisions of the law, the Appellant having lodged the application to amend its self-assessment returns on September 25, 2019, the Respondent ought to have provided a response on or before October 25, 2019. By using the word 'shall', Section 31(3) makes it mandatory that the Respondent must respond to the taxpayer within 30 days upon the taxpayer lodging an application to amend its self- assessment returns.

49. The Tribunal reiterates the court’s holding in Nicholas Kiptoo Arap Korir Salat vs IEBC & 6 Others [2013] eKLR where the court stated as thus;'This Court, indeed all courts, must never provide succor and cover to parties who exhibit scant respect for rules and timelines.Those rules and timelines serve to make the process of judicial adjudication and determination fair, just, certain and even- handed. Courts cannot aid in the bending or circumventing of rules and a shifting of goal posts for, while it may seem to aid one side, it unfairly harms the innocent party who strives to abide by the rules. I apprehend that it is in the even-handed and dispassionate application of rules that courts give assurance that there is a clear method in the manner in which things are done so that outcomes can be anticipated with a measure of confidence, certainty and clarity where issues of rules and their application are concerned.'

50. The Tribunal’s position is that although the law did not provide the status of such an application in case the Respondent does not respond within 30 days, it was clear that the same was not available for the Commissioner to reject the same upon lapse of the time provided to it to respond.

51. Consequently, the Tribunal finds that the Respondent’s Rejection Notices for Amended Return dated April 30, 2021 were in contravention of the law specifically the provisions of Section 31 (3) & (4) of the Tax Procedures Act.

b. Whether the Respondent erred the assessment of VAT on the Appellant. 52. The Tribunal noted that the Respondent’s assessments were issued on May 4, 2021, which was five days after it rejected the Appellant’s application to amend it self-assessment returns. It was therefore obvious that the Respondent had not considered the Appellant’s application to amend its self-assessment return dated September 25, 2019. Upon expiry of the time allowed for the Respondent to respond to the Appellant’s application to amend its self-assessment on October 25, 2019, the Appellant could only be assessed and any tax due ought to take into consideration the amended self-assessment dated September 25, 2019.

53. Having entered the earlier finding above, the Tribunal was of the view that the Respondent erred in failing to take into consideration the Appellant’s amended self-assessment legally lodged by the Appellant on September 29, 2019.

54. Accordingly, the Tribunal finds the Respondent erred in its assessment of VAT on the Appellant.

Final Decision 55. The upshot of the foregoing is that the Appeal is merited, and the Tribunal in the larger interest of justice makes the following orders:a.The Appellant’s application for amended self-assessment returns dated September 25, 2019 be and is hereby deemed to have been allowed.b.The Respondent’s Rejection Notices dated April 30, 2021 be and are hereby revoked.c.The Respondent’s objection decision dated January 26, 2022 be and is hereby set aside.d.The matter is referred back to the Commissioner to issue a fresh assessment taking into consideration the Appellant’s amended self-assessments dated September 25, 2019. e.Each party to bear its own costs.

56. It is so Ordered.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH, 2023. ERIC N. WAFULACHAIRMANCYNTHIA B. MAYAKAMEMBERGRACE MUKUHAMEMBERABRAHAM KIPROTICHMEMBERJEPHTAH NJAGIMEMBER