[2024] KETAT 1053 (KLR)

Kassmatt Supermarkets Limited v Commissioner of Domestic Taxes (Appeal E241 of 2023) [2024] KETAT 1053 (KLR) (12 July 2024) (Judgment)

Neutral citation: [2024] KETAT 1053 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal E241 of 2023

CA Muga, Chair, BK Terer, D.K Ngala & SS Ololchike, Members

July 12, 2024

Between

Kassmatt Supermarkets Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited company incorporated in Kenya under the Companies Act Cap 486 laws of Kenya and operates a supermarket.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. On 23rd February 2023, the Respondent demanded withholding VAT of Ksh 62,165,945. 00 in the 2017 to 2022 years of income.

4. After conducting investigations against the Appellant’s withholding tax affairs, the Respondent vide an electronic mail of 9th March 2023 requested the Appellant to avail documents for purposes of VAT withholding compliance check.

5. On 9th March 2023 vide an electronic mail, the Appellant attached withholding exemption letters.

6. On 20th March 2023, the Appellant objected to the VAT withholding demanded taxes of 23rd February 2023 this was invalidated by the Respondent on 22nd March 2023 citing lack of supporting documents. The Appellant validated their objection on 28th March 2023.

7. On 28th April 2023, the Respondent rendered its objection decision enumerating a summary of withholding taxes amounting to Ksh 50,473,289. 00 in relation to years 2017 to 2022.

8. Aggrieved by Respondent’s objection decision dated 28th April 2023, the Appellant filed its notice of appeal dated 22nd May 2023 at the Tribunal on 24th May 2023.

The Appeal 9. The Appeal was premised on the following grounds as laid-out in the Memorandum of Appeal and Statement of Facts dated 22nd May 2023 and filed on 24th May 2023:(i)That the Appellant be granted acceptance of Appeal notice to the Tribunal.(ii)The Appellant be granted reassessment of the paid invoices to assess all the withholding tax.(iii)That the Appellant’s notice of appeal be admitted into the Tribunal’s records.

Appellant’s Case 10. The Appellant stated as follows in its Statement of Facts dated 22nd May 2023 and filed on 24th May 2023:

11. The Appellant averred it took time to review and search for the report on paid invoices before the Appeal which took a long time due to lack of the report on the system for the period under assessment.

12. That the withholding VAT tax on input tax was wholly and exclusively used in generation of income.

13. The Appellant averred that owing to different payment periods for VAT tax, it was unable to withhold all the entitled withholding tax thus the demanded tax by the Respondent was unreasonable and unfair and went against the legitimate expectations of the Appellant as an exempted taxpayer as evidenced by documents presented.

Appellant’s Prayer 14. The Appellant’s prayers to the Tribunal were that;a.The Respondent’s decision be found invalid, unfair to the expectations of the Appellant.b.Respondent be estopped from demanding or taking further action or recovery steps on alleged principal tax, penalties and interest.c.The Appellant be granted a re-assessment of paid invoices to assess all withholding tax.

The Respondent’s Case 15. The Respondent replied to the Appeal through its Statement of Facts dated and filed on 23rd June 2023;

16. The Respondent stated that its investigation had established that even though the Appellant was a registered VAT withholding agent since 6th October 2017, it was not withholding VAT as required under Section 42A of the Tax Procedures Act, CAP 469B of Kenya’s Laws (hereinafter “TPA”).

17. The Respondent stated that it sought and considered information and documents including verification of Appellant’s i-Tax ledgers vis-à-vis VAT returns to find out whether VAT was held correctly and remitted in accordance with the law which resulted in total VAT withholding assessment of Ksh 50,473,289. 00 in relation to 2018, 2019,2020, 2021 and 2022 years of income.

18. The Respondent contested the Appellant’s stance that variances noted in the remission of withholding VAT were attributable to payment plans the Appellant had with certain suppliers; instead the Respondent’s position was that the Appellant as an agent was solely responsible for ensuring that withholding tax was collected and remitted to the Respondent irrespective of terms entered into with suppliers. Additionally, the Respondent asserted that the Appellant failed to sufficiently avail documentation to support its allegations.

19. The Respondent contested the assertion by the Appellant that it had not been informed beforehand when making payments for supplies that it had been appointed as a VAT withholding agent. Moreover, that the Appellant only attached notices of assessments as supporting documents which the Respondent found insufficient. Additionally, the Appellant failed to adequately provide supporting documents regarding certain supplies which it claimed were exempt from payment of withholding VAT contrary to Section 49A and 51(3) of the TPA.

20. The Respondent asserted that the Appellant’s duty on the self-assessment regime required full disclosure in good faith and was backed by law as provided for under Section 58 and 59 of the TPA which require production of documents and information by a taxpayer to enable the Commissioner ascertain tax liability of the taxpayer.

21. The Respondent was adamant that the Appellant was duty bound to discharge its burden of proof as couched under Section 56(1) of the TPA and that the Respondent complied with Article 47 and 50 of the Constitution of Kenya, 2010 ( hereinafter “the Constitution) as read with Section 4(1) and (2) of the Fair Administrative Action Act, CAP 7L of Kenya’s Laws (hereinafter “FAAA”) when it extended time for the Appellant to discuss the tax dispute and communicated the findings in writing.

Respondent’s Prayer 22. The Respondent made the following prayers to the Tribunal:(i)That the Tribunal upholds the objection decision dated 28th April 2023 as proper and in conformity with the provisions of the law.(ii)That the Appeal be dismissed with costs to the Respondent.

Parties’ Submissions 23. The Appellant’s undated written submissions were filed on 5th February 2024.

24. The Appellant submitted that a meeting with the Respondent’s representatives was held in the year 2018 to assess the Appellant’s corporate tax compliance and it was established that the Appellant had encountered challenges with its Point of Sale (POS) software on withholding tax and was in the process of restructuring and upgrading the same for full integration. That it was these challenges coupled with the huge transaction flow that necessitated the Appellant to contact the Respondent for support and guidance and it was indeed confirmed by the Appellant’s service provider (Vortex Solutions) vide a letter that there were withholding tax errors.

25. That following the physical and telephone calls engagement with the Respondent and the software challenges at hand, the Appellant remitted full supplier payments for the 2018 and 2019 years of income. That in the other years i.e. 2020 to 2022, the Appellant indicated it as a work-in-progress and was working to avail the data by February 2024.

26. The Appellant submitted that it was not in breach of any regulations but a technical hitch that was duly acknowledged by the system provider and that the Appellant was willing to provide details of payments made to suppliers and in the case of those found not to have complied, the Appellant would withhold their payment until compliance was done and evidence adduced.

27. The Respondent’s written submissions were dated and filed on 26th February 2024 wherein the Respondent submitted on a single issue for determination;Whether the Respondent’s charge to tax of the Appellant was erroneous or excessive

28. The Respondent submitted that whereas Section 51(3)(c) of the TPA require the Appellant to provide all relevant documentation in support of their objection, Section 23 of the TPA as read together with Section 43 of Value Added Tax Act, CAP 476 of Kenya’s Laws (hereinafter “VAT Act”) mandate the Appellant to maintain documents required under any tax law and provide the same upon request by the Respondent which allows tax liability to be readily ascertained. In buttressing this position, the Respondent cited Section 24(2) of the TPA which provides that the Respondent is not bound by a tax return or information provided by, or on behalf of, a taxpayer and may assess tax liabilities using any information available.

29. The Respondent averred that its assessment was conducted against the backdrop of Section 3 of Income Tax Act, CAP 470 of Kenya’s Laws (hereinafter “ITA”) which provides for taxation of incomes derived from or accrued in Kenya and Section 5 of the VAT Act which is the charging section for vatable imports. The Respondent relied on the following caselaw in firming up its position; Kenya Revenue Authority v Man Diesel & Turbo SE, Kenya[2021]eKLR

Pearson vs Belcher CH.M Inspector of Taxes(Tax Cases Volume 38) referred to by Majanja J in PZ Cussons East Africa Limited vs Kenya Revenue Authority (2013)eKLR

30. The Respondent was categorical that the Appellant failed to prove that the Commissioner’s tax decision was in anyway inconsistent, erroneous or incorrect. The Respondent relied on Section 42A (1) of the TPA in placing the responsibility of withholding and remitting VAT to the Respondent. The Respondent opined that the Appellant despite being obligated to withhold VAT failed to tender evidence demonstrating its compliance thus failed to controvert the Respondent’s computations. The Respondent cited the Court’s decision in Silver Chain Limited vs Commissioner of Income Tax and 3 Others [2016] eKLR where it was held as follows:“calls for a balance between the tax collectors and taxpayers whereby the process becomes inclusive as opposed to being unilateral. There must be fairness in the process if tax assessment.”

31. The Respondent stated that it clearly demonstrated its computation of amounts brought to charge therefore justifying the amounts sought as reasonable and rational.

Issues For Determination 32. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions notes two issues call for its determination as follows;a.Whether the Appellant was exempt from being a withholding tax agent.b.Whether the Respondent’s objection decision dated 28th April 2023 was justified.

Analysis And Determination 33. Having established the two issues for determination, the Tribunal proceeds to delve into them as hereinunder;(a)Whether the Appellant was exempt from being a withholding tax agent.

34. The instant dispute arose from withholding VAT demand by the Respondent for the 2017 to 2022 years of income following a compliance check upon the Appellant’s VAT withholding affairs. The Tribunal notes that whereas the Respondent asserted that the Appellant was a registered VAT withholding agent since 6th October 2017 pursuant to the provisions of Section 42A of the TPA and was therefore not exempt from having that status. The Appellant contested this stating that it had not been informed beforehand that it was an appointed withholding agent of the Respondent. The Tribunal notes that Section 5(3) of the VAT Act provides as follows:“Tax on a taxable supply shall be a liability of the registered person making the supply and, subject to the provisions of this Act relating to accounting and payment, shall become due at the time of the supply.”

35. The Tribunal notes that on one hand, the Appellant averred that it was exempt from being a withholding VAT agent by virtue of the fact that it was engaged in transactions with exempt suppliers which was challenged by the Respondent who was categorical that the Appellant was a non-compliant appointed withholding VAT agent pursuant to Section 5(3) of the VAT Act. The Tribunal was not afforded documentation or evidence by the Appellant to substantiate the averments that it was not a withholding VAT agent.

36. The Tribunal has notes that the Appellant’s attached ten supplier letters from the Respondent exempting the suppliers from withholding VAT pursuant to Section 42A(4A) (repealed) of the TPA which then allowed the Respondent to grant an exemption from the provisions of Section 42A of the TPA to taxpayers who demonstrated that due to operation of the specified Section they shall be in a continuous credit position. The Tribunal notes that Section 2 of the VAT Act provides that;“’exempt supplies’ means supplies specified in the First Schedule which are not subject to tax.”

37. The Tribunal observes that any such exemption would have been expressly granted by the Respondent in written form and for a specified period. The Appellant did not adduce any particularized express exemption that was granted to it by the Respondent pursuant to Section 42A(4A) of the TPA. The Tribunal notes that whereas the Appellant’s suppliers were exempt from withholding VAT, the Appellant was not afforded the same merely by implication. Thus, the Tribunal reiterates the Court holding in the case of Trust Bank Limited vs Paramount Universal Bank Limited & 2 others (2009) eKLR where it was held as follows:“…It is trite where a party fails to call evidence in support of its case that party fails to substantiate its pleadings.”

38. It is the Tribunal’s view and holding that the Appellant was obligated to act as a withholding VAT tax agent.(b)Whether the Respondent’s objection decision dated 28th April 2023 was justified.

39. The Tribunal notes that the Respondent averred that the Appellant only attached notices of assessments as supporting documents which the Respondent found not sufficient to discharge its burden of proof as couched under Section 56(1) of the TPA. On its part, the Appellant admitted to a “technical hitch” that resulted in tax errors as confirmed by its software vendor and that it was unable to adduce reports on paid invoices as they were not there in the system that is why it even sought the support and guidance of the Respondent.

40. The Tribunal notes the Appellant’s concerns and steps it took to correct the anomaly with the technical guidance of the Respondent. As an honest taxpayer, who strived to make amends and ensure that it would pay the correct tax, the Appellant ought not be punished for managing its tax affairs but rather, should be guided by the Respondent and afforded an opportunity to pay the tax that it owes. The Tribunal affirms the Court decision in Silverchain Limited vs Commissioner of Income Tax & 3others (2016) eKLR where it was held as follows:“…The task of collecting taxes should not lead to discouraging tax payers from carrying on with their business. If the taxpayers’ close shop, there will be no taxes to be collected. On the other hand, if no taxes are paid there will be no funds to run government operations. This calls for a balance between the tax collectors and taxpayers whereby the process becomes inclusive as apposed to being unilateral. There must be fairness in the process of tax assessment.”

41. The Tribunal notes the uncontroverted averments by the Appellant, that it engaged the Respondent and managed to remit full supplier payments for the 2018 and 2019 years of income and that 2020 and 2022 years of income was work-in-progress. That being the case, the Tribunal reiterates the Court’s decision in the case of Republic v Commissioner of Domestic Taxes Large Tax Payer’s Office Ex-Parte Barclays Bank of Kenya Ltd [2012] eKLR where it was held as follows:“for the proposition that the decision to tax must have a legal basis and that section 56(1) does not empower the appellant to make speculative assessments (citing Johnson v Scott(Inspector of Taxes)) nor was it the intention of the legislature to put the taxpayer in a position where he would be required to produce any documents that the taxman requires.”

42. The upshot of the foregoing is that the Tribunal’s finding that the Respondent’s objection decision dated 28th April, 2023 was not justified in the circumstances.

Final Decision 43. The upshot of the foregoing is that the Appeal herein partially succeeds and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby partially allowedb.The Respondent’s objection decision dated 28th April 2023 be and is hereby varied as follows:(i)The 2018 and 2019 assessments are to be expunged.(ii)The Respondent to review the assessment in respect of the years 2020-2022 to determine the correct taxes due.c.Each party to bear its own costs.

44. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 12TH DAY OF JULY, 2024. .........................................CHRISTINE A. MUGACHAIRPERSON……………………………. ……..............……………..BONIFACE K. TERER DELILAH K. NGALAMEMBER MEMBER………………………………OLOLCHIKE S. SPENCERMEMBER