[2024] KETAT 1009 (KLR)

Kankam Exporters Limited v Commissioner Domestic Taxes (Tax Appeal 279 of 2023) [2024] KETAT 1009 (KLR) (19 July 2024) (Judgment)

Neutral citation: [2024] KETAT 1009 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 279 of 2023

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

July 19, 2024

Between

Kankam Exporters Limited

Appellant

and

Commissioner Domestic Taxes

Respondent

Judgment

1. The Appellant is company incorporated in Kenya whose principal business activity is clearing, warehousing activities for transportation and forwarding services.

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 Respondent conducted a compliance check on the compliance status of the Appellant and noted that the Appellant had undeclared sales as per the data obtained from the purchases claimed from the Appellant's PIN, subsequently, the Respondent raised the additional VAT tax assessment vide a demand notice dated 16th September 2022 of taxes amounting to Kshs. 736,725. 62 for the period 2018 to 2019 and Kshs 8,192,872. 94 for VAT for the period 2017 to 2019.

4. Aggrieved by assessment, the Appellant lodged its objections dated 31st December 2022 against the Respondent’s assessments, which were acknowledged on the 3rd January 2023.

5. Upon considering the objections, the Responded confirmed the assessment vide objection decisions dated 17th February 2023 and 27th February 2023.

6. The Appellant being dissatisfied by these decisions lodged its Notice of Appeal on 22nd March 2023.

The Appeal 7. The Appellant vide its Memorandum of Appeal filed on 4th April 2023 raised the following grounds of appeal:a.That our clients misdirected themselves both in law and fact by claiming Custom VAT input from Kankam Exporters limited, instead of claiming the Input VAT from Commissioner of Customs. This brought about a variance in sales, the Commissioner failed to take this into consideration and assumed that the Appellant had under-declared sales.b.That as a clearing Agent, disbursement to Appellant’s clients would be accounted for per clearance done. Such accountability during the period in review formed part of the Appellant’s invoice to its clients. However, the Appellant would further break down the costs and support with supporting documents including ETR receipts to Vatable Amount, which would then be declared as sales and thus income. However, the Commissioner acknowledged this fact and failed to deduct the amount declared and only charge the incremental amounts.c.That the Commissioner received confirmation from Repelectric (Kenya) Limited that they claimed VAT input as local purchases instead of imports. They also confirmed that they are yet to amend their VAT returns for the affected periods. Having confirmed the above information, the commissioner should have allowed our objection in full.d.That the Commissioner erred in law and fact for not considering all our grounds for objection as per Tax Procedure Act No. 29 of 2015, Section 51 (8).

The Appellant’s Case 8. The Appellant’s case is set out on its;a.Statement of Facts filed 4th April 2023 together with its documents attached thereto; and,b.Written submissions dated 7th February 2024 and filed on 21st February 2024.

9. The Appellant stated that its clients, namely Jos. Hansen & Soehne (East Africa) Limited, Repelectric (Kenya) Limited, Endmor Steel Millers Limited among others claimed VAT input erroneously for the period under review. They claimed total invoice amount which was not correct.

10. According to the Appellant, the total Amount would include money used as disbursement and service fees charged to client as clearing services fees. The invoice would be supported by the documents attached and would bear the clients name. In addition, money charged as agent clearing services fees would be supported by an ETR receipt attached to the invoice.

11. The Appellant further stated that it misdirected itself in both law and fact by claiming VAT from imports from the Appellant instead of claiming from the Respondent. As such the Appellant claimed that it should claim VAT during these periods as Imports and not as local purchases from the Appellant. Consequently, the Respondent believed that the Appellant’s sales were under declared.

12. The Appellant avowed that it claimed VAT from its exports. In some instances, the Appellant would be tasked by the client to apply for an IDF for export. The Appellant would then pay for relevant taxes in its own name.

13. The Appellant in its written submissions identified the issues for determination as;i.Whether the Respondent's assessment dated 16th September 2022 and the resultant Objection Decision dated 17th February, 2023 are valid; and,ii.What remedies are available to the Appellant.

14. The Appellant submitted that the assessment dated 16th September 2022 and the resultant Objection Decision are invalid in law as the same were issued on the erroneous assumption that the Appellant had undeclared sales for the years under review. It submitted that it was subsequently able to prove to the Respondent’s agents that this was not an issue of undeclared sales but rather one where its clients erroneously claimed VAT from the Respondent instead of claiming the same from the Commissioner of Customs as service charge.

15. The Appellant submitted that it is unfair and unjust to punish the Appellant on the ground that some of its clients failed to confirm within the required timelines as this does not change the truth of the matter and the fact that the Appellant doesn’t bear any tax liability. It asserted that the Respondent having received confirmations from the Appellant’s clients it cannot continue insisting that the assessment and its Objection Decision are valid as the same were issued on the erroneous impression that the Appellant under declared its sales.

16. The Appellant relied don the case of Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya 2021] eKLR wherein the court held that;‘‘at the Tax Court, a taxpayer is required to disprove an assessment by the Commissioner. In other words, a Tax payer challenging a tax assessment will need to collect and present evidence in order to disprove the Commissioner's position. This is the basic principle. However, there are some situations where this responsibility or "onus" is reversed. The onus may also shift based on the stage of the proceedings and the actions taken by the parties.’’

17. The Appellant relied on a letter dated 22nd August 2023 wherein the Appellant alleged that it reached out to the Respondent and informed it that two companies namely Dikmat Fbnezer Motors and Ariyan Limited claimed input VAT from the Appellant yet were unknown to the Appellant as it had not traded with the companies.

18. The Appellant submitted that the information sought by the Appellant through the letter 22nd August, 2023 is critical to the determination of this suit as the Respondent is the custodian of the information. It argued that the actions of the Respondent indicate that it is determined to ensure that the Appellant shoulders an incorrect tax burden. It also submitted that the Respondent neglected its duty of determining the Appellant correct tax position.

19. Finally, the Appellant submitted that the Respondent is a public body and has a duty under Article 35 of the Constitution of Kenya and Section 4 of the Access to information Act to comply with request for information more so when the information sought is necessary for resolution of a dispute between itself and a tax payer. The Appellant relied on the case of Katiba Institute vs. Presidents Delivery Unit and 3 others [2017] eKLR where the court held that;‘‘The Constitution is therefore clear that information held by the state is accessible by citizens and that information is available on request. What this means is that once a citizen places a request to access information, the information should be mailed to the citizen without delay. Article 35 of the Constitution does not in any way place conditions for accessing information. The most important thing is that information be in possession of the state, state officer or public body.’’

Appellant’s Prayers 20. The Appellant herein prayed for the following orders:a.That the Respondent be and is hereby compelled to set aside the decision to additionally assess VAT on input claimed by our clients erroneously as local purchases;b.That the Respondent set aside VAT decision confirming the additional assessment on 17th and 27th February 2023; and,c.That the cost of this Appeal be borne by the Respondent.

The Respondent’s Case 21. The Respondent case is predicated upon its;a.Statement of Facts dated 2nd May 2023 and filed on 4th May 2023 together with the documents attached thereto; and,b.Written submissions dated and filed on 7th February 2024.

22. The Respondent stated that it conducted a compliance check on the compliance status of the Appellant and noted that the Appellant had undeclared sales as per the data obtained from the purchases claimed from the Appellant’s PIN. It averred that from the data obtained from the Appellant’s clients, there were variances between the sales declared by the Appellant vis a vis the sales declared by customers.

23. According to the Respondent, the variances were brought to the Appellant’s attention where it was notified of the outstanding taxes on the 6th October 2021, to which the Appellant responded by bringing sample invoices which did not sufficiently explain the variances.

24. Subsequently, the Respondent raised the additional VAT tax assessment vide a demand notice dated 16th September 2022. The Appellant lodged an objection on 31st December 2022 against the Respondent’s assessments.

25. The Respondent stated that it held a meeting with the Appellant’s agents on 7th February 2023, where it was agreed that the Appellant would avail all relevant supporting documents and reconciliations in support of their objection by 10th February 2023.

26. Further, the Respondent stated that it wrote email to the Appellant requesting the Appellant to validate the Objection. In particular, the Respondent averred that it requested for the following documents: Invoices, import documents & custom entries, purchase & sales ledgers, proof of payments/Bank statements for the invoices, and confirmations from the three clients Jos Hansen and Repelectric clearly stating that they erroneously claimed input schedule of the service charge e.g. transport that ought to have been charged VAT.

27. According to the Respondent, the Appellant failed to provide all the documents the Respondent requested for review leaving the Respondent with no option but to confirm the assessment vide objection decision dated 17th February 2023 then the Appellant filed this Appeal.

28. In response to ground one of the Memorandum of Appeal, the Respondent contended that the Respondent only received feedback from one client, Repelectric (Kenya) Limited which confirmed that they filed their returns claiming inputs as local purchases instead of imports due to the fact that the Appellant had not provided them with customs entry documents. However, the Respondent argued that the said company was yet to amend its returns to reflect the true position now that they have the necessary documents. The Respondent further asserted that though the Appellant’s client was yet to amend their returns, based on the confirmation by the Appellant’s client they made adjustments based on the available documents from Kshs. 8,192,872. 94 to Kshs. 6,957,618. 64.

29. In response to ground two of the Memorandum of Appeal, the Respondent contends that following the meeting with the Appellant’s agents on 7th February 2023, it was agreed that the Appellant would avail all relevant supporting documents and reconciliations in support of the objection by 10th February 2023.

30. The Respondent asserted that the documents to be availed included sample invoices, import documents and custom entries, client confirmations, monthly sales schedule and any other relevant document. The Respondent averred that the Appellant failed to provide the required documentation for review prompting the Respondent to confirm the assessment save for one where the supplier provided information.

31. In response to ground three of the Memorandum of Appeal, the Respondent contended that Appellant’s clients are yet to amend their returns to reflect the true position now that they have the necessary documents. That notwithstanding, the Respondent stated that it partially allowed the Appellant’s objection application and consequently, reviewed the assessments from Kshs. 8,192,872. 94 to Kshs. 6,957,618. 64.

32. In response to ground four of the Memorandum of Appeal, the Respondent stated that the Objection Decision was limited to the documents examined and inferences made from them. The Respondent cited the provisions of Section 51 (8) Tax Procedures Act which states that;‘‘where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and Commissioner's decision shall be referred to as an "objection decision.”

33. The Respondent maintained that it carefully considered the evidence and explanations availed by the Appellant and made the best judgement based on what was availed. It added that despite multiple reminders, the Appellant failed to avail all requested documents, therefore failing to sufficiently support their objection.

34. The Respondent further averred that pursuant to Section 56 (1) of the Tax Procedures Act, 2015, the burden of proof is on the Appellant to produce the evidence challenging the Respondent’s decision but the Appellant failed to do so.

35. The Respondent asserted the Appellant was given an opportunity to present its case by way of documentary evidence which it squandered prior to its Objection Decision and has not bothered to present the said documents before this Tribunal.

36. The Respondent relied in its written submissions identified one issue for determination being,Whether the Respondent was justified in partially allowing the Appellant’s objection and confirming the rest.

37. The Respondent submitted that it was not possible to address the Appellant’s Objection on merits without the information requested since the Respondent could not merely rely on the Appellant’s word of mouth without proper explanation and proper supporting documents in support of the variance noted between the sales declared by its client’s vis-a vis sales declared by the Appellant.

38. It relied in the case of Republic vs. Kenya Revenue Authority Ex-parte Funam Construction Limited where the learned Judge held that;‘‘For an objection notice to be effective it must unequivocally deal with all aspects of the assessment and specify the Taxpayer’s position on each with clear answers and figures admitted or not admitted.”

39. The Respondent submitted that it has a duty under Section 5 (2) (a) of the Kenya Revenue Authority Act (KRAA) to enforce written laws. It also cited the provisions of Article 210 of the Constitution of Kenya read together with Article 2 (1) which provide that;‘‘1) No tax or licensing fee may be imposed, waived or varied except as provided by legislation.2)If legislation permits the waiver of any tax or licensing fee-(a)A public record of each waiver shall be maintained together with the reason for the waiver; and(b)Each waiver, and the reason for it, shall be reported to the Auditor-General.’’

40. Based on the foregoing provisions of the law, the Respondent submitted that it could only review and amend the assessment that was justified and supported for the other two suppliers no information nor confirmation was availed to warrant a further review and they remained mere allegations.

41. The Respondent also relied on Section 51 (8) Tax Procedures Act to submit that its decision was based on available documents. The Respondent maintained that Acts of Parliament are not enacted in vain and same must be strictly followed as was established in the case of Speaker of National Assembly vs. Njenga Karume [2008] 1 KLR 425 where the court held that;“In our view, there is considerable merit in the submission that where there is a clear procedure for the redress of any particular grievance prescribed by the Constitution or an Act of Parliament, that procedure should be strictly followed.”

42. The Respondent relied on the cases of Digital Box Limited vs. Commissioner of Domestic Taxes TAT No. 115 of 2017 and Diversity Distributors Ltd vs. Commissioner of Domestic Taxes where it was held that the burden of proof falls on the taxpayer who has to demonstrate a tax decision is incorrect.

Respondent’s Prayers 43. Based on the above grounds, the Respondent prays that;a.The Appeal be dismissed with cost; and,b.The confirmed assessments be upheld.

Issues For Determination 44. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts, and submissions, puts forth the following issue for determination:Whether the Respondent was justified in partially allowing the Appellant’s objection and confirming the assessment;

Analysis And Findings 45. The Tribunal wishes to analyse the issue as hereunder.

46. The Appellant asserted the its clients namely Jos. Hansen & Soehne (East Africa) Limited, Repelectric (Kenya) Limited and Endmor Steel Millers Limited erroneously claimed VAT input for the years under review on the one hand.

47. On the other hand, the Respondent asserted that it made the decision based on documentation that were available and the best judgement being so empowered by the law to so do.

48. Section 29 (1) of the Tax Procedure Act allows the Respondent to make default assessment based on available documentation. Further, Section 31 (1) of the Tax Procedures Act allows the Respondent to issue amended assessment from the available information and to the best of the Respondent’s judgement.

49. Further, Section 51 (8) of the Tax Procedures Act allows the Respondent to issue an Objection Decision based on available information. The Tribunal is minded that the Respondent is seized of the authority to make a decisions based documentation or information in its possession.

50. The Respondent stated that it only received feedback from one client, Repelectric (Kenya) Limited who confirmed that they filed their returns claiming inputs as local purchases instead of imports due to the fact that the Appellant had not provided them with customs entry documents. The Respondent also averred that though the Appellant’s client was yet to amend their returns, based on the confirmation by the Appellant’s client the Respondent made adjustments based on the available documents from Kshs. 8,192,872. 94 to Kshs. 6,957,618. 64. The Tribunal is of the view that the Appellant offered a reasonable and sufficient explanations to warrant the Respondent to act appropriately.

51. The question then is, whether the Respondent would have made a different decision if the other clients had responded on time. The Appellant submitted as follows at paragraph 8 of its submissions:‘‘On 29th June 2023, Jos. Hansen & Soehne (East Africa) Limited confirmed to the Appellant and the Respondent’s agents that they had managed to amend their VAT returns for August, 2018 and that amendments for December 2018 and February 2019 were in progress.’’

52. The Tribunal noted that the Respondent filed its written submissions on 7th February 2024 while the Appellant filed its written submissions on 21st February 2024. It then follows that the Respondent could not have responded to the contents of Appellant’s written submissions without the leave of the Tribunal.

53. The Tribunal is alive to the requirement that if a person has to be taxed, then the person should pay the tax and if the state seeks to recover taxes from anyone, the state has to bring the person within the provisions of the law.

54. Based on the foregoing reasoning, it would be unfair and unjust to tax the Appellant when it has identified the person(s) or clients allegedly responsible for the tax liability. Under the circumstances of this particular case, the Tribunal is of the view that the Appellant ought to be afforded an opportunity to sought out the claims that it has against the identified person(s) by furnishing the documents and/or evidence to the Respondent.

55. it is trite law that the omissions of the Appellant’s clients’ in failing to confirm and lodging their claims to the improper Commissioner ought not be visited upon the Appellant herein.

56. Guided by the provisions of Section 29 (3) of the Tax Appeals Tribunal Act, this Tribunal is of the view that the matter ought to be referred back to the Respondent for reconsideration.

57. Consequently, the Respondent was justified in partially allowing the Appellant’s objection and ought to reconsider the other claims from the third-party taxpayers.

Determination 58. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is meritorious and consequently makes the following orders;a.The Appellant’s Appeal be and is hereby allowed;b.The Objection Decision dated 17th February 2023 be and is hereby set aside;c.The matter be and is hereby referred back to the Respondent for reconsideration, with the Appellant providing the necessary documents to the Respondent within 30 days of the date of delivery of this judgement and the Respondent be at liberty to issue a decision within 60 days thereafter.d.Each party to bear its own cost.

59. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF JULY 2024ROBERT M. MUTUMACHAIRPERSONMUTISO MAKAU ELISHA N. NJERUMEMBERBERNADETTE M. GITARI ABDULLAHI DIRIYEMEMBER