[2024] KETAT 1012 (KLR)

Jilk Construction Company Limited v Commissioner of Legal Services & Board Coordination (Tax Appeal 1436 of 2022) [2024] KETAT 1012 (KLR) (12 July 2024) (Judgment)

Neutral citation: [2024] KETAT 1012 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1436 of 2022

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

July 12, 2024

Between

Jilk Construction Company Limited

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a Private Limited Liability Company in Kenya and is registered Taxpayer. The Appellant’s main economic activity is construction of buildings, roads and dams.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority is charged with the responsibility of among others, assessment, collection, accounting, and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Appellant filed VAT returns for the months of August 2021 and March 2022 and claimed input tax against the sales for the said period. The Respondent conducted returns review and upon conclusion of the exercise, alleged that input VAT claimed by the Appellant was not merited. Consequently, the Respondent issued VAT assessment dated 15th September 2022 and the dispute arose therefrom.

4. Dissatisfied with the assessment, the Appellant objected on 17th September 2022. Upon considering the objection, the Respondent issued its Objection Decision dated 16th November 2022.

5. The Appellant being dissatisfied with the Objection Decision, lodged its Appeal vide the Notice of Appeal dated 24th November 2022 and filed on 28th November 2022.

The Appeal 6. The Memorandum of Appeal dated 24th November 2022 and file 2nd December 2022 raises the following grounds of appeal:a.That the Respondent erred in law and fact in disallowing the input VAT for the period August 2021 and March 2022 despite the fact that the same were genuine and incurred in furtherance of its business.b.That the Respondent erred in law and fact by alleging that there was no evidence of supply between the Appellant and Afrikon Ltd thereby wrongly disallowing input VAT incurred and confirming the assessment.c.That the Respondent erred in law and fact by finding that invoices from its supplier, Afrikon Ltd were not from zero rated supplies.d.That the Respondent erred in law and fact in confirming the assessment despite the Appellant having discharged the burden of proof pursuant to Section 56 of the Tax Procedures Act read together with Section 30 of the Tax Appeals Tribunal Act that the assessment was erroneous and excessive.e.That the Respondent failed to consider the Appellant’s evidence in the form of the documents and invoices availed before arriving at the Objection Decision.f.That the Respondent misapplied the law thereby arriving at an erroneous decision by confirming assessment for the period August 2021 and March 2022.

The Appellant’s Case 7. The Appellant case is premised on its;i.Statement of Facts dated 24th November 2022 and filed on 2nd December 2022 together with the documents attached therein; and,ii.Written submissions date 9th April 2024 and filed on 11th April 2024.

8. The Appellant stated that it filed VAT returns for the months of August 2021 and March 2022 and claimed input tax on the sales. Thereafter, the Respondent conducted a review on the claim and requested the Appellant to support the input VAT claim.

9. The Appellant alleged that it provided documentation in support of the claims to the Respondent to demonstrate that Afrikon Ltd being the supplier had supplied and/or provided goods and services to the Appellant for the period August 2021 to March, 2022. According to the Appellant, this was worth Kshs. 86,060,176. 72 and Kshs. 236,669,873. 90 for the periods August, 2022 and March, 2022 respectively.

10. According to the Appellant, the claim for input VAT arose because Afrikon Ltd had been awarded a contract by the National Irrigation Board on 4th June 2019. The contract was for the construction sheet pilling for the Bura Irrigation and Settlement Scheme Rehabilitation Project. Due to the inability of Afrikon to complete the contract, the same was assigned to the Appellant vide an agreement dated 31st August 2022.

11. The Appellant averred that it demonstrated the purchases/input VAT claims by providing the following documents: Invoices to support the purchases from Afrikon Ltd, copy of contract between the National Irrigation Board and Afrikon Ltd, an agreement for the assignment of the contract between the Appellant, and Afrikon Ltd, and Tax exemption certificate issued by the National Treasury.

12. The Appellant also avowed that it explained and demonstrated that since Afrikon Ltd could not continue with the contract entered into with the National Irrigation Board, the implementation and completion of the contract was assigned to the Appellant, who proceeded to execute the said contract as per the terms of the consent. In executing the contract as per the terms of the assignment entered into with Afrikon Ltd, the Appellant assumed and paid all liabilities and belonging to Afrikon Ltd.

13. The Appellant stated that despite providing the evidence that the input VAT was genuine, the Respondent proceeded to disallow the purchases and consequently issued the assessment to the Appellant on 15th September, 2022, to which the Appellant objected to on 17th September 2022 and subsequently the issuance of the Objection Decision dated 16th November 2022.

14. In further support of the Appeal, the Appellant relied upon its written submissions and submitted as hereinunder.

15. The Appellant identified four (4) issues for determination, namely;i.Whether the Respondent has raised any issue of law to oppose the Appeal;ii.Whether the Appellant demonstrated that supplies were made by Afrikon Ltd;iii.Whether the Appellant demonstrated that the services offered by the Appellant to the project owner National Irrigation Board were zero rated; and,iv.Whether the Appellant proved its various claims of input VAT from its various suppliers.

16. On the first issue, the Appellant submitted that the Respondent was not able to oppose the Appeal when the Appellant demonstrated as per its grounds of Appeal and Statement of Facts that the burden was discharged by way of production of documents and explanation and engagements between the Appellant and the Respondent wherein further information was provided to the Respondent.

17. The Appellant further submitted that the issue of burden of proof is a largely a factual issue, therefore, there cannot be an issue of law that the Respondent can use to oppose the Appeal.

18. On the second issue, the Appellant submitted that Afrikon Limited provided the Appellant with the construction works and that the invoices were availed to the Respondent and that were filed to support this Appeal which invoices were used to claim input tax in compliance with Section 17 of the VAT Act but the Respondent rejected them on basis that no services were supplied.

19. The Appellant cited the case of Commissioner of Domestic Taxes vs. Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) to submit that the burden of proof in tax matters is not stationary but is like a pendulum swinging between the tax payer and taxman at different points but more times than not swings towards the taxpayer.

20. According to the Appellant, whereas the Respondent alleged that the claim of input VAT from Afrikon limited invoices could not be allowed under Section 17 (2) (b) of the VAT Act because Afrikon limited had not declared the invoices on their part, it submitted that the position by the Respondent has no basis in law and at the time when the input VAT were claimed or disallowed by the Respondent, there was no requirement that a supplier has to declare the invoices on their end for the Appellant’s input VAT claims to be considered valid. It therefore submitted that the Respondent was not able to impeach the invoices.

21. On the third issue, whereas the Respondent alleged that the services offered by the Appellant to the National Irrigation Board were not zero-rated but exempt thus the Appellant was wrong to claim input VAT, the Appellant submitted that there was an initial agreement dated 4th June 2019 between Afrikon limited and National Irrigation Board. The Appellant relied on a letter dated 27th August 2021, wherein an assignment was approved by National Irrigation Board for the Appellant to undertake the completion of the project. It also relied on deed of assignment dated 30th August 2021 wherein the Appellant was to undertake the execution of the project as per the initial agreement. The Appellant submitted that the Agreement dated 4th June 2019 was explicit that the project was zero rated in accordance with Section 68 (4A) of the VAT Act.

22. On the fourth issue, the Appellant submitted that various services were offered to the Appellant by various parties. It submitted that in the Appellant’s objection letter dated 17th September 2022, the Appellant detailed all the invoices issued by the suppliers including the suppliers name, invoice number, the invoice date and the amount charged. The Appellant also submitted that during the parties’ various engagements during the objections review, the Appellant provided soft copies of these invoices due to the voluminous nature of the invoices.

23. Consequently, the Appellant submitted that it discharged its burden of proof in accordance and to the standard of the law.

Appellant’s Prayers 24. The Appellant urged this Honourable Tribunal be pleased to:a.Allow the Appellant’s Appeal;b.Respondent Objection Decision be set aside; and,c.The Appellant’s input VAT claims be declared merited.

THE RESPONDENT’S CASE 25. Pursuant to the Ruling delivered on 22nd March 2024, the Respondent was not granted leave to file its Statement of Facts. Therefore, the Respondent’s case shall proceed on the basis of its written submission dated 8th April 2024 and filed on 10th April 2024.

26. In its written submissions, the Respondent identified one issue for determination that is;Whether the charge to tax of the Appellant on VAT are erroneous or excessive.

27. The Respondent relied on the cases of Kenya Revenue Authority vs. Man Diesel & TurboSe, Kenya [2021] eKLR, and Pearson vs. Belcher CH.M Inspector of Taxes Tax Cases Volume 38 to submit that the burden of proof falls upon the Appellant.

28. The Respondent relied on Sections 24 and 31 (1) of the Tax Procedures Act which allows and/or empowers the Respondent to amend a taxpayer’s assessment. When exercising its powers under Section 24, the Respondent submitted that it is guided by the principles of rationality and reasonability therefore it was guided by its best judgement in issuing the assessment order.

29. The Respondent submitted that the Appellant did not discharges its burden of proof. That while Section 17 (1) of the VAT Act allows for input VAT deductions, Sections 17 (2) and (3) of the VAT Act provide for conditions precedents of the evidential standards a taxpayer must muster to enjoy the deductions under sub clause (1). It stressed that a valid claim for input tax must be accompanied by, in the present case, copies of invoices a taxpayer wishes to rely on.

30. The Respondent also relied on Regulation, 7 (1) of the Value Added Tax (Electronic Tax Invoice) Regulations, which prescribes mandatory elements of an invoice inter alia including: the PIN of the registered user of a register, the buyer’s PIN, and the item code of supplies (for exempt, zero-rated and other rate supplies) as provided by the Commissioner in accordance with the Act. Consequently, the Respondent submitted that the invoices Appellant seeks to rely on under annexure JLK 2 do not satisfy the requirements of the said rules.

31. The Respondent reiterated the provisions of Sections 30 of the Tax Appeals Tribunal Act as read with Section 56 of the Tax Procedures Act, which bestow the burden of proof in tax matter upon the Appellant. It submitted that the Appellant failed to tender cogent and direct evidence in the form of invoices in support of its claim for deductions from Afrikon, contrary to Sections 23 and 56 of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act.

32. The Respondent further submitted that the Appellant seeks to rely on non-compliant tax invoices contrary to Regulation 7 (1) of the Value Added Tax (Electronic Tax Invoice) Regulations and the specifications itemized in the rules.

33. On whether the Appellant musters exemption under the VAT Act, the Respondent submitted that whereas the Appellant attempts to legitimize its claim on the premise that the subject supplies encompassed exempt goods, the Appellant’s claim should fail because the subject supplies were made in the years 2021 and 2022 respectively. It goes without saying that the applicable law is the provision of the Value Added Tax (the Act) as amended by the Finance Act 2015. In particular, the Respondent relied on the provisions of the First Schedule Part I and II, paragraphs 51 and 20, which provides;“Part I paragraph 51, reads:Taxable goods, imported or purchased for direct and exclusive use in the implementation of official aid funded projects upon approval by the Cabinet Secretary responsible for the National Treasury.Part II paragraph 20 reads:Taxable services for direct and exclusive use in the implementation of official aid funded projects upon approval by the Cabinet Secretary to the National Treasury.”

34. Consequently, the Respondent submitted that the plain and ordinary meaning of provisions above is that, only taxable goods and supplies, utilized directly and exclusively, in aid funded projects are eligible for exemption.

35. According to the Respondent, the statute must, in the first instance, be given their plain and ordinary meaning of the words. It relied on Justice Mativo on construction of statutes wherein the judge wrote as follows:“The most important rule is the rule dealing with the statutes plain language. The starting point of interpreting a statute is the language itself. In the absence of an expressed legislative intention to the contrary, the language must ordinarily be taken as conclusive.”

36. Whereas the Appellant sought to rely on a letter dated 20th August 2021 as the basis for exemption, the Respondent submitted that substantive elements of letter demonstrate that the exempt items broadly fell under the categories “project consumables” and “goods and equipment belonging to the contractor”. These heading then items the specific items exempt in accordance with the First Schedule Part I and II, paragraphs 51 and 20 of the Act.

37. The Respondent reiterated that from the master plan, it is unequivocal that ONLY goods that were exempt under the donor funded project were eligible for exemption which is buttressed by the proviso at the end of the letter which states;“In this regard, you are advised that any subsequent application for exemption should indicate the amount/quantity approved in the master list, the exempted amount/quantity, the balance and the amount/quantity being applied for. In addition, the Ministry of Water, Sanitation and Irrigation will take responsibility for the items that are granted exemption.”

38. According to the Respondent, the only exempt class of items under the master plan were goods particularized in the letter of 20th August 2021, which does not make mention of exemption of services. Therefore, the Respondent submitted that a claim outside the letter cannot stand.

39. Apart from the foregoing, the Respondent submitted that Appellant substituted the Afrikon in execution the subject contract, it assumed he sole position of the individual provider entitled to enjoy exemptions under the First Schedule Part I and II, paragraphs 51 and 20 the Act. It also argued that no evidence is placed before the Tribunal demonstrating that services offered by Afrikon were utilized in complementation of the relevant donor funded project.

40. On whether a legitimate commercial transaction exists between the Appellant and the Afrikon, the Respondent cited the case of Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR in which it was observed, that;“A tax payer can only produce documents in his custody and relating to transactions undertaken by him/her.”

41. The Respondent further relied on the case of Isaac Mugweru Kiraba T/A Isamu Refri- Electricals vs. Net Plan East Africa Limited [2018] eKLR where the court noted that commercial and business common sense dictates a series of events exist between the contracting parties. The court noted that the purchaser raised a local purchase order detailing the purchase price and dispatched the local purchase order to the vendor, who demonstrated acceptance by delivering the goods and raising an invoice at the quoted price.

42. The Respondent took issue with the Appellant’s paragraph 7 of the Statement of Fact where it averred that it received goods and services from Afrikon as its supplier.

43. The Respondent pointed out that the Appellant did not provide evidence of any series of commercial events exist between the contracting parties, therefore, demonstrating a legitimate commercial venture. The Respondent argued that the Appellant did not provide documents such as a contract, whether written or oral, defining the nature and scope of services/goods being requested from Afrikon neither did the Appellant provide documents such as payment details in satisfaction of goods/services received by the Appellant.

44. Further, the Respondent submitted that the Appellant did not tender relevant commercial documentation evidence business with Afrikon, as received from Afrikon including: receipts confirming payment for goods/services offered nor delivery notes.

45. The Respondent relied on the case of Geoffrey Mwonjoira Mwangi vs. Commissioner of Domestic Taxes Tax Appeal No 332 of 2018, where the Tribunal noted that in the absence of evidence in support of an objection a taxpayer’s position fails.

46. On whether the Appellant’s claim for deduction under Section 17 of the VAT Act is regular, the Respondent relied on the first schedule of the Act which deals with exempt supplies. It relied on Section 2 of the VAT Act on definitions which defines ‘‘exempt supplies” to mean supplies specified in the First Schedule which are not subject to tax. The Respondent submitted that the accounting consequence of goods/services being exempt is that, from the onset, the subject items do not bear any tax liability. It added that from an accounting point of view, the import of exemption being that the subject goods and services are not subject to Value Added Tax.

47. Consequently, the Respondent argued that the seller will not charge their customers any VAT, but they (seller) also is not eligible to reclaim any VAT paid on costs related to the goods or services.

48. The Respondent argued that subject supplies being exempt, there was no output VAT payable by the Appellant since the taxable supplies were equally not subject to input VAT. The Respondent also submitted that presuming the Appellant erroneously paid out input tax on its Supplies, Sections 47 and 47A of the Act prescribes an elaborate and mandatory procedure for recovery of overpaid or erroneously paid taxes.

49. The Respondent submitted that the Tribunal has upheld the doctrine of exhaustion, where statute prescribes remedial procedures, a party must exhaust available remedies.

50. Consequently, the Respondent submitted that the Appellant is not entitled to claim deductions under Section 17 of the Act.

Respondent’s prayers 51. The Respondent prayed that this Honourable Tribunal;a.Upholds the Respondent’s decision to confirm the assessments and the Objection Decision dated 16th November 2022 as proper and in conformity with the provisions of the Law; and,b.That this Appeal be dismissed with costs to the Respondent as the same is devoid of merit.

Issues For Determination 52. The Tribunal having considered the Appellant’s Memorandum of Appeal and Statements of Facts, and the parties’ submissions, puts forth the following issue for determination:Whether the Respondent erred in disallowing the input VAT for the period August 2021 and March 2022.

Analysis And Findings 53. The Tribunal wishes to analyse the issue as hereunder.

54. It was the Appellant’s assertion that that Afrokon Ltd supplied goods and services to the Appellant for the period August 2021 to March, 2022 amounting to Kshs. 86,060,176. 72 and Kshs 236,669,873. 90 for the periods August 2022 and March 2022 respectively. To support this claim, the Appellant adduced two invoices from Afrikon Ltd dated 24th August 2021 and 9th August 2021.

55. Whereas the Appellant maintained that the invoices complied with the provisions of Section 17 of the VAT Act, the Respondent submitted that the invoices do not comply with not only the provisions of Section 17 (3) of the VAT Act, but they were not compliant with the provisions of Value Added Tax (Electronic Tax Invoice) Regulations which prescribes mandatory elements of an invoice including: the PIN of the registered user of a register, the buyer’s PIN, and the item code of supplies (for exempt, zero-rated and other rate supplies) as provided by the Respondent in accordance with the Act therefore, it disallowed the invoices.

56. Section 17 of the VAT Act provides for credit for input tax against output tax. In particular, Section 17 (1), (2) and (3) of the VAT Act at the time of the assessments provided as follows:“(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), and(b)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.

(3)The documentation for the purposes of subsection (2) shall be—(a)An original tax invoice issued for the supply or a certified copy.’’

57. Pursuant to provision of Section 17 (1) of the VAT Act, it is clear that input tax can only be allowed to the extent that the supply or importation was acquired to make taxable supplies. Additionally, the taxpayer must be in possession of documentation in support the claim. These documents are clearly provided for under Section 17 (3) which requires that the invoice be an original one or a certified copy.

58. The Tribunal is guided by the case of Commissioner of Domestic Taxes vs. Airtel Networks Kenya Limited (Income Tax Appeal E062 of 2022), Where the High Court observed that;“on interpretation of tax statutes, the courts have held that the same should be given strict interpretation with no room for intendment.”

59. Further, the Tribunal is guided by the case of Republic vs. Commissioner of Domestic Taxes Large Tax Payer’s Office Ex-Parte Barclays Bank of Kenya LTD [2012] eKLR, the court held that:“The approach to this case is that stated in the oft cited case of Cape Brandy Syndicate v Inland Revenue Commissioners [1920] 1 KB 64 as applied in T.M. Bell v Commissioner of Income Tax [1960] EALR 224 where Roland J. stated,“in a taxing Act, one has to look at what is clearly said. There is no room for intendment as to a tax. Nothing is to be read in, nothing it to be implied. One can only look fairly at the language used…If a person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.”

60. The Tribunal noted that that, whereas the issue of the tax invoices has been extensively canvassed by the parties herein, the thrust of the issue focuses more on the tax-exempt status of the Appellant’s supplies and not the Appellant itself in relation to the subject project.

61. It was the Appellant’s case that due to the inability of Afrikon to complete the project which Afrikon had started, the said project was assigned to the Appellant vide an agreement dated 31st August, 2022. The Appellant asserted that it inherited the contract from Afrikon vide an agreement for the assignment of the contract between the Appellant and Afrikon Ltd.

62. The Appellant argued that it filed a tax exemption certificate issued by the National Treasury dated 20th August 2022 captioned as, ‘Exemption from Excise Duty, Import Duty, VAT, IDF AND RDL: (Construction of Bura Irrigation And Settlement Rehabilitation) Project Contract No. NIB/DRP/ 023/2018-2019. If the Appellant inherited a tax-exempt project from Afrikon, then the Appellant’s claim for input VAT is inconsistent with the provisions of Section 17 (1) of the VAT Act which provides that input VAT is only deductible to the extent that the supply or importation was acquired to make taxable supplies.

63. The Tribunal’s view is that upon a tax payer supplies being exempted from VAT, as was in the case of the instant Appellant, then the circumstances preclude the such a taxpayer (the Appellant) from claiming input VAT, since no liability on VAT can accrue for want of the Appellant making taxable supplies.

64. Consequently, the Tribunal finds and holds that the Respondent was justified in disallowing the input VAT for the period August 2021 and March 2022 and therefore, was justified in issuing the assessment. The Appellant’s Appeal therefore fails.

Determination 65. The upshot of the foregoing is that the Tribunal finds and holds that the Appeal is unmerited and consequently makes the following orders; -a.The Appeal be and is hereby dismissed;b.The Respondent’s Objection Decision issued on 16th November 2022 be and is hereby upheld; and,c.Each party to bear its own cost.

66. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF JULY 2024ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERELISHA N. NJERU - MEMBERBERNADETTE M. GITARI - MEMBERABDULLAHI DIRIYE- MEMBER