[2023] KETAT 276 (KLR)

Hotel Rastopark Limited v Commissioner of Domestic Taxes (Appeal 517 of 2022) [2023] KETAT 276 (KLR) (Civ) (19 May 2023) (Judgment)

Neutral citation: [2023] KETAT 276 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 517 of 2022

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

May 19, 2023

Between

Hotel Rastopark Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a private limited liability company and a registered taxpayer. The Appellant is engaged in hotel business.

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 Respondent reviewed the Appellant’s VAT returns and issued a notice of finding dated 23rd November 2021. The Appellant replied vide a letter dated 30th November 2021.

4. The Respondent issued an assessment order on iTax dated 14th February 2022 and a notice of amended assessment dated 17th February 2022. The Appellant replied on 22nd February 2022.

5. The Appellant lodged an objection vide a letter dated 3rd March 2022 and further an objection application on iTax dated 5th March 2022. The Respondent replied and requested for some documents to be provided within seven days (7) vide a letter dated 22nd March 2022.

6. The Respondent subsequently issued its objection decision vide a letter dated 28th April 2022.

7. The Appellant being dissatisfied with the Respondent’s objection decision filed this Appeal on 20th May, 2022.

The Appeal 8. The Appeal as stated in the Memorandum of Appeal dated 18th May, 2022 and filed on 20th My, 2022 was premised on the following grounds:i.That the Respondent erred both in fact and law and in disregard of Section 31(2) of the Tax Procedures Act by disregarding the Appellant’s application to amend its return to incorporate the IFMIS payment of Kshs 5,579,000. 00 and input invoices of Kshs 6,063,387. 00 for March 2021. ii.That the Respondent erred both in fact and in law and in disregard of Section 49 of the Tax Procedures Act by failing to give reasons for disregarding the Appellant’s application for amendment to incorporate the purported IFMIS payments from Busia County and purchases.iii.That the Respondent erred both in fact and in law by rejecting valid purchase invoices totalling to Kshs 6,063,387. 00 with input VAT of Kshs 836,329. 24 that were submitted to the Respondent on request.iv.That the Respondent erred both in fact and in contravention of the law by not taking into account the VAT withheld by Busia County amounting to Kshs 111,580. 00 which was deducted at source but not submitted to the Respondent by the county.v.That the Respondent erred in fact and in law by issuing amended assessment when the Appellant had already written to the Respondent to explain why it was yet to declare the purported IFMIS payments received in order to incorporate the same in its VAT returns, and same explanation was submitted to the Respondent.vi.That the Appellant had sought several requests from Busia County to issue the VAT withholding certificates to enable the incorporation of the purported IFMIS payments into its returns without success.

The Appellant’s Case 9. The Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Appellant’s Statement of Facts dated 18th May, 2022 and filed on 20th May 2022 together with the documents attached thereto.ii.The Appellant’s written submissions dated 22nd November, 2022 and filed on the same date.

10. The Appellant stated that the Respondent through its notice of findings dated 23rd November, 2021 sought for reconciliation and documentary evidence to support the total output VAT return variance of Kshs 5,579,000. 00 for the month of March 2021.

11. The Appellant averred that in its letter dated 30th November, 2021, the purported IFMIS payments of Kshs 5,579,000. 00 were from Busia County being payments for hotel and accommodation services supplied/provided to the County personnel and stakeholders. That it didn’t incorporate the IFMIS payments to its March 2021 VAT return as it was waiting for the VAT Withholding certificates from Busia County to avoid inconsistencies, double declaration and to claim its withholdings.

12. That it clarified that its non-declaration of the purported IFMIS payments was in good faith and consequently sought for amendment of its March 2021 return to incorporate the purported omission in the same letter, thereby attaching the payment vouchers from Busia County and the corresponding purchase invoices amounting to Kshs 6,063,387. 00.

13. It averred that the Respondent disregarding the requested amendment, consequently issued a notice of assessment and demand notice dated 17th February, 2022 demanding VAT of Kshs 892,640. 00 and disregarded the input invoices.

14. That the Appellant being dissatisfied by the Respondent’s decision validly raised an objection on 3rd March 2022 fully rejecting the assessment. That the Respondent acknowledged the objection notice and requested for the original invoices and proof of payments of original invoices in support of the objection.

15. The Appellant averred that in compliance with the requested documents, the Appellant submitted its bank statement as the original invoices had already been presented to the Respondent in an annexure to the letter dated 30th November, 2021.

16. That however, the Respondent in its decision dated 27th April, 2022 for which notice was given on 28th April, 2022 but received on 3rd May 2022 fully rejected the objection statutory that the documents, material facts and statements were not supported by relevant tax laws.

17. The Appellant was of the view that its submission raises the following issues to be determined by the Tribunal;a)Whether the claim for input VAT would be valid if the claim is made more than six months from the date of supply.b)Whether the Appellant’s application for amendment was valid.c)Whether claim of input VAT is valid on the basis of availing supporting documents.d)Whether tax should be charged on the supply where no input tax deduction was allowed.e)Whether claim of withheld tax can be allowed in absence of withholding certificate.

18. The Appellant submitted that the six-month limit under Section 17(2) relates to the tax period in which the supply or importation occurred. That the Respondent’s misinterpretation of Section 17(2) of the VAT Act literally means that when a taxpayer submits a VAT return late, the purchase invoices should only be allowed for claim to the extent it is within six months from the period the return was filed.

19. To support its arguments, the Appellant submitted the following example; an input VAT on an invoice dated February 2022 claimed in February 2022 return submitted in September 2022 would have been claimed as it’s been claimed in the correct tax period notwithstanding when the return was submitted.

20. To support its argument, the Appellant relied on the case in Highlands Mineral Water Limited v Commissioner of Domestic Taxes, Tax Appeal No E026 of 2020.

21. The Appellant submitted that, although the purchases invoices were more than six months from the date of the return, (the date when the amendment of the return was sought) they were six months of the tax period in which the supply or importation occurred. That the claim of input VAT was therefore valid as it was intended in the correct return i.e March 2021 notwithstanding that the amendment was sought late.

22. The Appellant submitted that the Commissioner’s refusal to amend the return on its application was against the provisions of the law. It averred that Section 31 of the TPA deals with amendment of assessments.

23. The Appellant stated that by submitting to have granted the Appellant permission to amend its March 2021 return, in its Statement of Facts and response, the Respondent alluded that the Appellant’s application was valid. That further, the Respondent was aware that the iTax portal only permits the Commissioner to enter into the return invoices dating more than six months from the date of the return. That it was therefore the duty of the Respondent to amend the return as requested in accordance with this Section.

24. The Appellant submitted that its application was in accordance with the law as the aforesaid Section 31(2) provides. That by refusing the application without notifying the Appellant of its decision, the Commissioner acted in contempt of this provision.

25. It was the Appellant’s contention that by requesting for original invoices and evidence of payment, the Commissioner was attempting to establish the authenticity of the invoice before allowing the Appellant to claim the input VAT on them. That this meant that the claim would be valid if the requested documentation was availed.

26. That in fact the Respondent’s claim that the Appellant sent scanned copies of the invoices was incorrect and an attempt to misleading the Tribunal.

27. It averred that Section 17 of the VAT Act provides the only conditions required for a taxpayer to qualify for input VAT being;i.That the input tax was incurred on taxable supply made to or importation made by a taxpayer at the end of the period.ii.That the input tax is deducted by a registered person on taxable supplies by him;iii.That the input tax is to be allowable for deduction within six months after the end of the tax period in which the supply or importation occurred.

28. That it was worth noting that Section 17 of the VAT Act does not deal with or mention the filing of purchase invoices to validate the claim on input VAT arising from them.

29. That in the Appeal No 256 of 2018 (Skyline Towers Investment v Commissioner Domestic Taxes), this Tribunal held that in the absence of any other clear, certain and unambiguous legal provisions requiring an Appellant to file VAT return in order to claim an input tax deduction, the Appellant is entitled to deduct input tax for the period under review.

30. The Appellant submitted that the decision by the Respondent to disallow the deduction of input VAT from otherwise valid purchase invoices amounts to imposition of a constructive penalty not provided by law.

31. It was the Appellant’s submission that the Commissioner’s decision to disallow the claim on input tax on supplies to Busia County implies that tax was charged on entertainment, restaurant and accommodation services where input tax deduction was not allowed. That the supplies to Busia County were of restaurant and accommodation services.

32. That in doing so, the Commissioner disregarded Section 17(4) of the VAT Act which provided that no output tax should be charged on supplies of entertainment, restaurant and accommodation services where no input tax deduction was allowed. The Appellant submitted that by charging tax on the supplies while disallowing input tax, the Commissioner contravened this provision. That in Highlands Mineral Water Limited v Commissioner of Domestic Taxes, Tax Appeal No E026 of 2020, the High Court judge ruled as follows:“The right of deduction of input tax is an integral part of the VAT scheme as a taxable person who makes a transaction in respect of which VAT is deductible may deduct the VAT in respect of goods and services acquired by him provided that such goods and services have a direct and immediate link with the output transaction in respect of which VAT is deductible”

33. That further, disallowing the purchase invoices implies that there were no purchases made by the taxpayer in furtherance of its taxable supplies to the County. It added that the Commissioner’s assessment did not reflect its actual VAT transactions.

34. The Appellant submitted that the reason it chose against incorporating the IFMIS figures to its return was that it was waiting for the withholding certificates to allow claim of the withheld tax. That unfortunately the withholding certificates delayed and has since been received.

35. It averred that the Commissioner in issuing the assessment disregarded the withheld tax deducted. It further submitted that it ought to have been allowed to claim the withheld tax deducted by the Respondent’s appointed agent.

Appellant’s Prayers 36. The Appellant prayed that;a)The Respondent’s notice of assessment dated 17th February 2022 be amended to incorporate the input purchases of Kshs 6,063,387. 00 for the month of March, 2021. b)The Respondent’s objection decision dated 28th April 2022 be quashed and/or set aside.c)Costs of this appeal be borne by the Respondent.

The Respondent’s Case 37. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Respondent’s Statement of Facts dated 29th June, 2022 and filed on the same date together with the documents attached thereto.ii.The Respondent’s written submissions dated and filed on 19th November 2022.

38. The Respondent stated that it received IFMIS data on payments by counties to suppliers in August 2021 and noted variances (non-declarations) between what had been paid (vatable value of the supply made) and what was declared by the taxpayer in the respective VAT returns.

39. That on 23rd November, 2021 it wrote to the Appellant seeking explanations for the variances noted on the VAT returns filed for the financial period February 2021- date which amounted to Kshs 5,579,000. It averred that the Appellant was requested to provide reconciliation and documentary evidence to support the variances noted.

40. It submitted that the Appellant responded on 1st December, 2021 stating that it do not dispute the payments, but wished to clarify that non-declarations for the amount in question were from payments from Busia County Government for Hotel and catering services that were offered by the Appellant.

41. That the Appellant admitted that it hesitated in declaring the payments from Busia County upon receipt in March 2021 as it was waiting for Withholding VAT certificates from the County Government. That it had purchases invoices amounting to Kshs 6,063,387 for the corresponding period which it had not claimed and that it was requesting to amend the March 2021 returns.

42. That the Respondent granted the Appellant permission to amend the March 2021 returns as requested but the Appellant never made the amendments.

43. The Respondent stated that on 14th February, 2022, it proceeded to issue an amended assessment on the variances in order to correctly assess the Appellant of its liabilities and also sent a notice of amended assessment to the Appellant on 17th February, 2022. That the tax arising from the anomaly was Kshs 1,021,040. 00.

44. That the Appellant objected to the Respondent’s decision on the assessments on 3rd March 2022. That on 28th April, 2022 it issued an objection decision on the VAT objections and stated that the objection lodged by the Appellant had been rejected on the grounds that documents, material facts and statements were not supported by the relevant tax laws.

45. The Respondent emphasized that in response to the notice on 1st December, 2021 from the Appellant where it requested for time to amend its March 2021 VAT returns, the request was granted but the Appellant failed to make the necessary amendments.

46. That the Appellant submitted scanned copies of inputs that it claimed that it incurred in the production of vatable sales of the months of December 2020-March 2021.

47. The Respondent stated that in order to claim input VAT, the Appellant was required to comply with Section 17(2) of the VAT Act 2013. It was the Respondent’s position that the scanned copies inputs submitted by the Appellant were time barred by virtue of Section 17(2) of the VAT Act 2013. To further support this argument, the Respondent cited the High Court case of Highlands Mineral Water v Commissioner of Domestic taxes.

48. The Respondent cast doubt to the Appellant’s claim that it was waiting for VAT Withholding certificates from Busia County for the IFMIS payments in order to incorporate the same in the VAT returns, as the same only came up when the Respondent issued the amended assessments.

49. That the Appellant waiting for the Withholding certificates so as to declare the same was in violation of Section 12 of the VAT Act 2013 which gives the time of supply of goods and services.

50. It averred that failure on the part of the Appellant in claiming input VAT within the statutory period which is within six months after the end of the tax period in which the supply or importation occurred was a statutory incompliance on the part of the Appellant and as such by operation of the law such claim legally failed.

51. The Respondent contended that the Appellant knowing well that the invoices were time barred was only delaying the payment of taxes due to the State. It reiterated its position as stated in the objection decision that the Appellant’s objection was fully rejected due to the Appellant’s claim not being backed by the relevant laws.

52. The Respondent was of the view that the issues requiring the Tribunal to exercise its juridical mind were;a.Whether the Respondent erred in raising additional assessment against the Appellantb.Whether the Appellant is entitled to the allowable VAT tax deduction

53. The Respondent stated that although the Appellant disparaged it for raising the additional assessments, the Appellant does not give reasons as to why there was a delay on its part to correct the tax position on its assessment and have not demonstrated how the actions of the Respondent in raising the assessment were erroneous.

54. The Respondent urged the Tribunal to appreciate the absurdity of the situation especially in light of the fact that the Appellant had already admitted to owing the Respondent tax arising from transaction between itself and the Busia County Government.

55. The Respondent submitted that it is mandated by law to amend a taxpayer’s assessment if the same is deemed to not be a reflection of the taxpayer’s true tax liability. The Respondent referred to Section 31 of the TPA to support this argument.

56. The Respondent contended that the information available to it at the time of assessment was the IFMIS data which correctly pointed the Respondent to the variance. That subject to this variance, the Respondent was able to ascertain the tax liability of the Appellant which the Appellant does not dispute.

57. The Respondent submitted that this is its mandate as advised by the law. That based on this it further submitted that the Appellant cannot purport to take issue against the Respondent fulfilling its mandate. That the correct manner in which to approach amended assessment should have been to raise objection against the same on grounds that the Respondent had erred in the assessment.

58. The Respondent stated that the Appellant had not spoken to the heart of the contention and had not made any move to dispute the accuracy of the Respondent’s assessment. That the Appellant had therefore not discharged its burden of proof as encompassed under Section 56(2) of the TPA.

59. The Respondent asserted that based on the foregoing, there was no error occasioned by itself in amending the assessment and beseeched the Tribunal to uphold the amended assessment.

60. The Respondent submitted that the Appellant cannot claim input VAT when it is statutorily time barred. That the services offered by the Appellant were offered between the months of February and March 2021 and therefore the Appellant cannot purport to claim input VAT more than a year later.

The Respondent’s Prayers 61. Based on the above, the Respondent prayed that the Tribunal;a.Upholds the Appellant’s amended assessment of Kshs 1,021,040. 00. b.That this Appeal be dismissed with costs to the Respondent as the same is devoid any merit.

Issue For Determination 62. The Tribunal upon due consideration of the pleadings, documents and the written submissions filed on the part of both parties was of the view that the only issue that crystalized for its determination was: -Whether the Respondent erred in its assessment of VAT on the Appellant.

Analysis And Determination 63. The Tribunal having appropriately ascertained the issue that fell for its determination shall proceed to make an analysis on the issue as hereafter.

64. The genesis of this dispute is the Respondent’s amended assessment dated 17th February 2022 for VAT which arose from variances noted in the Appellant’s returns for March 2021.

65. The Appellant stated that it had clarified that its non-declaration of the purported IFMIS payments was in good faith and consequently sought for amendment of its March 2021 return to incorporate the purported omission in the same letter, thereby attaching the payment vouchers from Busia County and the corresponding purchase invoices amounting to Kshs 6,063,387. 00.

66. The Appellant averred that the Respondent disregarded the requested amendment, consequently issued a notice of assessment and demand notice dated 17th February, 2022 demanding VAT of Kshs 892,640. 00 and disregarded the input invoices.

67. The Respondent on the other hand stated that it received IFMIS data on payments by Counties to suppliers in August 2021 and noted variances (non-declarations) between what had been paid (vatable value of the supply made) and what was declared by the taxpayer in the respective VAT returns.

68. That on 23rd November, 2021 it wrote to the Appellant seeking explanations for the variances noted on the VAT returns filed for the financial period running from February 2021 to the date of the request for explanation which amounted to Kshs 5,579,000. That the Appellant was requested to provide reconciliation and documentary evidence to support the variances noted.

69. It submitted that the Appellant responded on 1st December, 2021 stating that it did not dispute the payments, but wished to clarify that non-declarations for the amount in question were from payments from Busia County government for hotel and catering services that were offered by the Appellant.

70. The Tribunal noted that in the objection decision dated 28th April 2022, the Respondent rejected the Appellant’s objection stating that the documents, material facts and statements in support were not supported by the relevant tax laws.

71. Section 19 of the VAT Act provides as follows regarding payment of the tax;“(1)Tax shall be due and payable at the time of supply.(2)Notwithstanding the provision of subsection (1), a registered person may defer payment of tax due to a date not later than the twentieth day of the month succeeding that in which the tax became due.”

72. Further, Section 17(2) of the VAT Act provides as follow in relations to deduction of input tax;“(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.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.”(Emphasis added)

73. From the above provisions of the law, the Appellant having made the supply of the vatable goods in February 2021 then it ought to have made the VAT returns in respect of the supply by 20th of March 2021. In the alternative, the law further provides under Section 17(2) of the VAT Act that where the taxpayer does not hold the documentation required, then the same can only be allowable within six months after the end of the tax period in which the supply occurred. In this case six months lapsed at the end of August 2021.

74. The documents referred to above are clearly specified under Section 17(3) of the VAT Act which provides as follows;“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 section 16(2); or (e) a debit note in the case of input tax deducted under section 16(5).”

75. In the instant case, the Tribunal noted that the Appellant in response to the Respondent’s notice of findings wrote to the Respondent on 30th November, 2021 explaining the circumstances which led to its failure to declare the VAT and further requested to amend its March 2021 VAT returns. The Appellant had explained that it did not declare the payments from the County Government of Busia as it was waiting for the corresponding VAT withholding certificates.

76. As provided for under Section 17(3) of the VAT Act, clearly, the VAT withholding certificates is not one of the documents required by law for a taxpayer to file its VAT returns.

77. Further, it was the Tribunal’s view that although the Appellant had requested vide the letter dated 30th November 2021 to amend its returns for March 2021, the said amendments requested were way outside the time allowed for VAT claims under Section 17(2) of the VAT Act. It therefore follows that even if the Respondent were to consider the Appellant’s request for amendment, the input VAT claim would still not be allowable under the VAT Act.

78. The Tribunal reiterates the holding by the Court in Republic v Kenya Revenue Authority Exparte Bata Shoe Company (Kenya) Limited [2014] eKLR, where the Superior Court stated that:“Payment of tax is an obligation imposed by the law. It is not a voluntary activity. That being the case, a taxpayer is not obliged to pay a single coin more than is due to the taxman. The taxman on the other hand is entitled to collect up to the last coin that is due from a taxpayer.”

79. Consequently, the Tribunal finds that the Respondent did not err in its assessment of VAT on the Appellant.

Final Decision 80. Based on the foregoing analysis the Tribunal determined that the Appeal is not merited. The Orders that accordingly recommend themselves are as follows: -i.The Appeal be and is hereby dismissed.ii.The objection decision dated 28th April, 2022 be and is hereby upheld.iii.Each party to bear its own costs.

81. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF MAY, 2023. .................................ERIC N. WAFULACHAIRMAN.................................CYNTHIA M BOUNDIMEMBER.................................GRACE MUKUHAMEMBER.................................ABRAHAM KIPROTICHMEMBER.................................JEPHTHAT NJAGIMEMBER