[2024] KETAT 343 (KLR)

Kiewa Group Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal 1206 of 2022) [2024] KETAT 343 (KLR) (8 March 2024) (Judgment)

Neutral citation: [2024] KETAT 343 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1206 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

March 8, 2024

Between

Kiewa Group Limited

Appellant

and

Commissioner of Legal Services and Board Coordination

Respondent

Judgment

Background 1. The Appellant is a resident company duly registered in Kenya involved in the selling and distribution of equipment for power generation and distribution.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 of the laws of Kenya. Under Section 5(1) of the Act, the Respondent 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 Respondent is mandated to administer and enforce all the provisions of the written laws as set out in Parts 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenue in accordance with those laws.

3. On 12th May 2020, the Respondent issued an additional assessment via i-Tax for Kshs. 27,528,436. 00 in respect of the period 1st July 2015 to 31st July 2015.

4. On 28th August 2020, the Appellant lodged a manual late objection application objecting to the additional assessments in whole.

5. On 30th April 2021, the Respondent accepted a late objection application by the Appellant and requested the Appellant to validate its late objection by 6th May 2021.

6. The Appellant validated its notice of objection on 26th July 2022. On 5th September 2022, the Respondent issued an objection decision confirming the additional assessment.

7. Aggrieved by the Respondent’s decision, the Appellant filed a Notice of Appeal on 4th October 2022.

The Appeal 8. The Appeal is premised on the following grounds contained in the Appellant’s Memorandum of Appeal filed on 17th October 2022:a.The Respondent erred in its findings by stating that there was no supply of taxable goods to the Appellant by its suppliers.b.Consequent to the above the Respondent erred in law and in fact by disallowing the Appellant’s input credits brought forward from previous months, amounting to Kshs. 26,940,862. 89, validly claimed while filing the previous month’s VAT returns.c.The Respondent erred in fact and in law by failing to consider the evidence of validly filed manual VAT3 returns forms used before iTax for the months of December 2014 to June 2015 where input VAT was validly claimed for purchases within six (6) months of being incurred as per the law.d.The manual VAT3 returns show that the Appellant legitimately claimed the input VAT on the purchases in the months they were incurred.e.The Appellant had legitimately claimed the input VAT on the prescribed form (that is manual VAT 3 return forms) under the law before iTax system as under Section 73(2) of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’).f.The Respondent erred in law by disallowing the VAT credits filed in the manual VAT3 returns forms, which were brought forward from the Respondent’s system.g.The Respondent only needed to check records filed through its manual system to confirm validity of the VAT credits brought forward.h.The Respondent erred in law and fact by upholding its decision to disallow the Appellant’s input tax arising from the supply of taxable goods from its suppliers even though records of the Appellant show that the purchases were made and VAT accounted for as provided under the law.i.The Respondent erred in fact in finding that the Appellant did not provide tax invoices to demonstrate that the expenses were incurred even though these records were delivered to the Respondent’s office and received on 26th July 2022j.The Respondent erred in fact and in law in its finding that invoices from the Appellant’s supplier, Greystones Industries, who are validly registered taxpayers, do not adhere to guidelines on what constitutes a proper invoice as they are not fiscalised.k.Value Added Tax Regulations, 1994, Rule 4 (2) and Value Added Tax Regulations, 2017, Section 9 (1), provide guidelines as to what constitutes a proper tax invoice and invoices from Greystones Industries issued in 2015 have adhered to these guidelines.l.The Appellant complied with Section 17(3) of the VAT Act, No. 35 of 2013 (hereinafter ‘VAT Act’) which provides for an original tax invoice issued for the supply or a certified copy as a required document before deduction of input tax.m.The Respondent is silent on the status of other inputs claimed by the Appellant other than those of Greystone Industries hence not giving a clear objection decision.n.The Respondent erred in fact and law in basing its assessment on the fact that the invoices issued by Greystone Industries in year 2015 have not been paid for up to date.This contravenes the provisions of Section 12 of the VAT Act which defines the time of supply of goods and services to be the earlier of the date the goods were delievered, the invoice for the supply was issued, or the date payment is received. Further to this, the Respondent was provided with a signed letter dated 13th May 2022 from Greystone Industries confirming that the balances are still owed by the Appellant.o.The Respondent erred in fact by failing to take into consideration all the evidence of the purchases made by the Appellant including the tax invoices, proof of payment and confirmation by the suppliers that the purchases were made and VAT was validly charged on the purchase cost by its various suppliers who are validly registered taxpayers.p.Upholding the objection decision, the Appellant would be caused to suffer from the Respondent’s internal record keeping as it is the Respondent that initiated the move from manual filing to iTax filing. The Appellant has complied by filing the inputs in the time they were incurred and in the appropriate form and should not be disenfranchised by the Respondent’s record keeping.q.The Respondent erred in fact and law in finding that the Appellant was involved in a scheme involving use of a related entity, Greystone Industries, to reduce its VAT payable by claiming inputs that have not been incurred and paid for. The Respondent does not provide any evidence or rational basis to support its claim.r.The Appellant fulfilled its burden of proof as per Section 56(1) of the TPA by providing the Respondent with evidence concerning the transactions in question. To this effect, the Respondent denies the Appellant’s right to fair administration as provided for by Article 47 of the Constitution of Kenya , 2010 (hereinafter ‘the Constitution’) and Section 4 of the Fair Administrative Actions Act, No. 4 of 2015 (hereinafter ‘FAA’).

Appellant’s Case 9. The Appellant’s case is set out in its Statement of Facts filed on 17th October 2022 as hereunder:

10. The Appellant stated that the Respondent issued an additional assessment via iTax bearing assessment order number KRA202003XXXX on 12th March 2020 for a principal sum of Kshs. 27,528,436. 00. The assessment was premised on cumulative disallowed purchases and input VAT legitimately claimed manually before the iTax system, of Kshs. 26,940,862. 89.

11. That the Respondent alleged that there was no actual supply of goods with which input VAT was claimed against. The Appellant lodged a manual late objection application vide a letter dated 28th August 2020 objecting to the VAT assessment in its entirety.

12. The Appellant averred that it exchanged various electronic mail correspondence and held meetings with the Respondent where several documents were provided to support the objection.

13. That the Respondent issued its objection decision vide a letter dated 5th September 2022 confirming the additional assessment being a principal sum of Kshs. 27,528,436. 00

Appellant’s Prayers 14. The Appellant’s prayers were that the Respondent’s objection decision dated 5th September 2022 be set aside and that the costs of this Appeal be borne by the Respondent.

Respondent’s Case 15. In response to the Appellant’s grounds of appeal as contained in the Memorandum of Appeal, the Respondent filed a Statement of Facts dated and filed on 11th November, 2022.

16. The Responded stated that VAT is charged pursuant to the VAT Act under Section 5(1)(a) and Section 2 of the VAT Act provides as follows:“taxable supply” means a supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person, including a supply made in connection with the commencement or termination of a business….”

17. That the Respondent was not bound by the tax returns filed by the Appellant and could assess a taxpayer’s tax liability using any available information as provided under Section 24(2) of the TPA.Furthermore, the Respondent is empowered to amend returns under Section 31(b) of the TPA based on available information and to the best of the Respondent’s judgment.

18. The Respondent stated that input VAT can only be claimed when used to make a taxable supply, according to Section 17(1) of the VAT Act. The Respondent reviewed the credits claimed by the Appellant which led to questioning the supplies purported to have been made by Greystone Industries Limited. The invoices were raised to reduce the VAT payable without the actual supply being done.

19. That a mere invoice was not a 100% proof of a supply having been made. Section 59 of the TPA empowers the Respondent to call for further documents where a transaction has been questioned.The Respondent requested for documents from the Appellant to demonstrate that payments were made to Greystone Industries. The Appellant only provided invoices which were more than 7 years old, the corresponding details of payment and further, the Appellant and Greystone Industries were owned by the same individuals.

20. That the Appellant did not demonstrate how it had paid for supply of concrete poles from Greystone Industries Limited in the year 2015. The Appellant did not provide any evidence to show it had procured and paid for the poles. It is the duty of the taxpayer to provide documents whenever required by the Respondent. Section 23(1)(a) of the TPA requires a taxpayer to keep documents or records in such a manner that the taxpayer’s liability can be easily ascertained. The burden lay with the Appellant to prove that the assessments and objection decision were wrong as provided for under Section 56(1) of the TPA .

Respondent’s Prayers 21. The Respondent prayed that the Appeal would be dismissed with costs and the objection decision of 5th September 2022 would be upheld.

Parties Submissions. 22. The Appellant’s submissions dated 21st June, 2023 were filed on 23rd June, 2023 whilst those of the Respondent were dated 5th June, 2023 and filed on 8th June, 2023. The submissions of both parties were adopted by the Tribunal.

23. In its submissions, the Appellant identified one issue for determination as follows:

Whether the Respondent erred in disallowing the input VAT of Kshs. 27,528,436 claimed by the Appellant. 24. The Appellant proceeded to analyse the issue it had identified for determination by making the hereunder submissions:

25. That VAT is charged pursuant to Section 5(1) of the VAT Act which provides as follows:“5. Charge to tax(1)A tax, to be known as value added tax, shall be charged in accordance with the provisions of this Act on—(a)a taxable supply made by a registered person in Kenya;”

26. That Section 2 of the VAT Act defines taxable supply as follows:“taxable supply" means a supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person, including a supply made in connection with the commencement or termination of a business.”

27. The Appellant averred that VAT can only be claimed when used to make taxable supply as was evident from the Appellant’s VAT3 returns. It further relied on Section 17(1) of the VAT Act which provides 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.”

28. That the VAT Regulations, 1994 under Rule 4(2) (revoked by VAT Regulations, 2017) and Rule 9(1) of the VAT Regulations, 2017 (Deleted by Legal Notice 188 of 2020, Rule 2) provide guidelines as to what constitutes a proper tax invoice which invoices from Greystone Industries complied with.

29. The Apellant argued that Section 17(2) of the VAT Act is clear on input VAT deduction by the Appellant, and provides that:“(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,….”

30. That the invoices from Greystone Industries contained tax invoice particulars that are compliant with the VAT Regulations and in particular, they had the names; address; PIN of suppliers; address of recipient; individualized serial number of the invoice; the date on which the tax invoice was issued; the date of the supply; the description of the goods supplied; the consideration for the supply and the amount of tax charged.

31. That it complied with Section 17(3) of the VAT Act which provides for an original tax invoice issued for the supply or a certified copy as a required document before deduction of input tax.

32. The Appellant averred that the Respondent erred in basing its assessment on the fact that the invoices issued by Greystone Industries in year 2015 have not been paid for to date which position contravenes Section 12 of the VAT Act that defines the time of supply of goods and services to be the earlier of the day the goods were delivered, the invoice for the supply was issued or the date payment is received.

33. That the Respondent was provided with a signed letter dated 13th May 2022 from Greystone Industries confirming the balances are still owed by the Appellant.

34. That the Respondent erred in fact by failing to consider all the evidence of the purchases made by the Appellant including the tax invoices, proof of outstanding payments, and confirmations by suppliers that indeed purchases were made and VAT was validly charged on the purchase cost by its various suppliers who are validly registered taxpayers.

35. That Greystone Industries Limited had and have demonstrated that they declared the said invoices as output VAT and the same were declared in iTax.

36. That by upholding the objection decision, the Appellant would be caused to suffer from the Respondent’s internal record keeping since it is the Respondent who initiated the change from manual filing to i-Tax.

37. That the Appellant complied by filing the inputs in the time they were incurred and in the appropriate form and should not be disenfranchised by the Respondent’s record keeping.

38. That the Appellant has fulfilled its burden of proof under Section 56(1) of the TPA by providing the necessary evidence to the Respondent and that the Respondent denied the Appellant the right to fair administrative action under Article 47 of the Constitution and Section 4 of the FAA.

39. To buttress its position the Appellant cited the case of Robert K. Ayisi v Kenya Revenue Authority & Another [2018]eKLR where it was held that the Respondent must provide a rational basis for its decision. More particularly the holding in this case was as follows:-“As this Court has held time and again a taxing authority is not entitled to pluck a figure from the air and impose it upon a taxpayer without some rational basis for arriving at that and not another figure. Such action would be arbitrary, capricious and in bad faith. It would be an unreasonable exercise of power and discretion and that would justify the Court in intervening. In Republic vs. Institute of Certified Public Accountants of Kenya ex parte Vipichandra Bhatt T/A J V Bhatt & Company Nairobi HCMA No. 285 of 2006, it was held that in the absence of a rational explanation, one must conclude that the decision challenged can only be termed irrational within the meaning of the Wednesbury unreasonableness, was in bad faith and constitutes a serious abuse of statutory power since no statute can ever allow anyone on whom it confers a power to exercise such power arbitrarily and capriciously or in bad faith.”

40. The Appellant further relied on the case of Encee Place Limited v Commissioner of Domestic Taxes TAT Appeal No.610 of 2020 where the Tribunal held as follows:“Therefore, once the taxpayer adduces evidence by providing the documents required, he discharges his burden where upon the onus shifts to the Respondent to impeach the credibility of the documents for the assessment to stand.”

41. That this same position was held by the Supreme Court of Canada in Hickman Motors Ltd. v Canada [1997] 2S.C.R.336. The case supports the proposition that where the Commissioner’s assumptions have been “demolished” by the appellant, “the onus . . . shifts to the Commissioner to rebut the prima facie case” made out by the appellant and to prove the assumptions made by the Commissioner. Where the burden has shifted to the Commissioner, and the Commissioner adduces no evidence whatsoever, the taxpayer is entitled to succeed and that this would be the case even where the evidence contained “gaps in logic, chronology, and substance”.

42. In its submissions the Respondent also identified a single issue for determination which was:

Whether the Respondent erred in disallowing the claimed input VAT. 43. The Respondent proceeded to analyse the issue for determination which it had identified by submitting as hereunder.

44. The Respondent stated that VAT is charged under Section 5(1)(a) of the VAT Act, with Section 2 of the Act defining ‘taxable supply’ for purposes of VAT. A taxable supply is defined in the VAT Act as follows:“…A supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person, including a supply made in connection with the commencement or termination of a business;”

45. Further, the Respondent submitted that Section 24(2) of the TPA provides that the Respondent is not bound by the tax returns filed by the Appellant. The said Section 24(2) of the TPA provides as follows:“(2)The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

46. That the Respondent is empowered to amend returns under Section 31(1)(b) of the TPA based on the available information and its best judgement .Section 31(1)(b) provides as follows:“(1)Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that—(b)in the case of an excess amount of input tax under the Value Added Tax Act, 2013 (No. 35 of 2013), the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period;”

47. That Section 17(1) of the VAT Act provides that input VAT can only be claimed when used to make a taxable supply. It therefore reviewed the credits claimed by the Appellant and questioned the supplies purportedly made by Greystone Industries Limited and established that the invoices were raised to reduce the VAT payable without actual supply being done.

48. That an invoice is not 100% proof that a supply took place and can call for further documentation in accordance with Section 59 of the TPA if a transaction is being questioned. It requested documents from the Appellant to prove that payments were made to Greystone Industries, but the Appellant only provided invoices which were 7 years old.

49. That the corresponding details of payment were not provided, and the Appellant and Greystone Industries were owned by the same individuals. The Appellant did not provide evidence to show that it had procured and paid for concrete poles from Greystone Industries. The Appellant’s duty to provide required documents is provided for under Section 23(1) of the TPA.

50. That Section 56(1) of the TPA further places the burden of proof on the Appellant to prove that a tax decision is incorrect. Section 30 of the Tax Appeals Tribunal Act No. 40 of 2013 (hereinafter’TAT’)places the burden of proof on Appellant in cases before the Tribunal.

Respondent’s Prayers 51. The Respondent therefore prayed that the Appeal be dismissed with costs and the objection decision of 5th September 2022 be upheld.

Issues for Determination 52. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions notes that a singular issue calls for its determination as follows:Whether the Respondent erred in disallowing the input VAT of Kshs. 27,528,436. 00 claimed by the Appellant.

Analysis and Findings 53. A good starting point would be to examine the reasons for the Respondent’s objection decision contained in the Respondent’s letter of 5th September 2023. The Respondent held in that letter that the Appellant did not provide proper tax invoices to demonstrate that the expenses were actually incurred. In particular, that the invoices from Greystone Industries did not adhere to the guidelines given in law as to constitute proper invoices and were not fiscalised.

54. Additionally, the Respondent determined that upon review of the invoices, it was noted that they were in 2015 and had not been paid at the time of the objection decision. The Respondent held that this pointed to a scheme where the Appellant could have been using a related entity to reduce the VAT payable by claiming inputs that had not been incurred or paid for.

55. Lastly, the Respondent held that VAT on purchases can only be claimed within 6 months of incurring the same and therefore the Appellant cannot claim the same beyond six months. It is trite that in cases before the Tribunal, the burden of proof lies with the Appellant to show that the tax decision is excessive or erroneous. This Tribunal and the Courts have held that this burden is not static but swings like a pendulum (see Mativo J (as he then was) in Republic v Kenya Revenue Authority ex parte Proto Energy Limited and Majanja J in Commissioner of Domestic Taxes v Trical and Hard Limited.

56. It was the Respondent’s contention that the taxpayer did not provide proper tax invoices to demonstrate that the expenses were actually incurred, the Appellant has annexed to its Appeal the invoices in question. The Respondent also contended that in particular, the invoices from Greystone Industries did not adhere to the guidelines given in law as to constitute proper invoices and were not fiscalised. To this contention, the Appellant has submitted that the invoices comply with the law and has cited VAT Regulations, 1994 Rule 4(2) (revoked by VAT Regulations, 2017) and Rule 9(1) of the VAT Regulations, 2017 (Deleted by Legal Notice 188 of 2020, Rule 2) which the Appellant submitted provided for what a proper tax invoice should be and that the invoices from Greystone Industries complied with the said Regulations.

57. The Appellant contended that disallowing the invoices would disenfranchise it and that the Respondent should not be allowed to do so considering that the Respondent has (and is expected to have) a record of the said returns that were filed by the Appellant.

58. On the Respondent’s determination that upon review of the invoices, it was noted that they were in 2015 and had not been paid at the time of the objection decision, the Appellant has argued that there was no requirement in law that the invoices must have been paid. The Appellant has relied on the provision of the VAT Act that define the time a supply is made to support its assertion.

59. The Respondent also held, in its objection decision that the circumstances of the case pointed to a scheme where the Appellant could have been using a related entity to reduce the VAT payable by claiming inputs that had not been incurred or paid for. To this, the Appellant has argued that the Respondent does not provide any evidence or rational basis to support its claim that this is indeed a scheme by the Appellant. The Appellant also relied on a letter that was authored by the supplier that confirmed that the amounts in question were still outstanding.

60. The last ground in the objection decision is that the Respondent held that VAT on purchases can only be claimed within 6 months of incurring the same and therefore the Appellant cannot claim the same beyond six months. The Appellant has argued that it validly claimed the input tax within six (6) months of being incurred as stipulated in law. In addition, the Appellant has also complained that the Respondent is silent on the status of other inputs claimed by the Appellant other than those of Greystone Industries hence not giving a clear objection decision.

61. The Tribunal is of the view that in this case, the Appellant has made out a prima facie case and discharged its initial burden by producing the documents stated above and by relying on the cited provisions of the law. The pendulum, in view of the Tribunal has swung to the Respondent’s side and the Respondent is required to rebut the prima facie case made by the Appellant.

62. The Tribunal is aware of the Court decision in the case of Commissioner of Taxes v Galaxy Tools Ltd [2021] eKLR, in which the Court held that: -“With greatest respect, the Tribunal got it wrong. What the Respondent had done by producing the invoices, the delivery notes and payment schedules was only prima facie evidence of purchase. On producing the said documents, the evidentiary burden of proof shifted to the appellant. The appellant in answer not only queried the said documents but informed the Tribunal that; he had carried investigations on the alleged suppliers and concluded that they never existed, that there was no supply of any goods at all. That the documents produced did not contain critical details to support any reasonable commercial transaction. All this was laid before the Tribunal.”

63. The current case is different in several respects. In Galaxy case [Supra], the Respondent queried the said documents and informed the Tribunal that it had carried out investigations on the alleged suppliers and concluded that they never existed (or missing). In the current case, no such investigations have been alluded to. In fact, the supplier in question is available, and is registered with the Respondent. Even though the Respondent has alleged that the documents produced did not contain critical details to support a reasonable commercial transaction, the Appellant has provided reasonable explanations to all the matters raised by the Respondent which explanations have not been controverted by the Respondent.

64. The Respondent was required to rebut the Appellant’s case by demonstrating how the invoices exhibited by the Appellant did not comply with the law. Further, the Respondent needed to show the legal basis for its insistence that the invoices had to have been paid. The Tribunal also needed to be shown the basis on which the Respondent arrived at the conclusion that this was a scheme by the Appellant to use a related entity to reduce its VAT liability. The mere fact that entities are related does not in itself disentitle a taxpayer from claiming a benefit provided by a tax law, unless there is reasonable and or lawful basis to restrict the taxpayer from having such recourse.

65. The Tribunal did not see any rebuttal from the Respondent on the Appellant’s contention that it claimed the input tax within six (6) months stipulated in law and that the returns were filed before iTax and that physical filing was permitted by the law. The Respondent has not disowned the returns which bears it’s receipt stamp.

66. Hickman Motors Ltd. v Canada [1997] 2S.C.R.336 is a Canadian Supreme Court decision which has been cited with approval by our High Court. In the said case the Court held that where the burden has shifted to the Respondent as is the case in this Appeal, the Appellant is entitled to succeed and that this would be the case even where the evidence contained “gaps in logic, chronology, and substance”.

67. The Tribunal finds that the Respondent has done little to discharge the burden that has shifted back to it. The Respondent did not file any supplementary set of documents to counter what the Appellant has stated. It did not rebut the evidence of the Appellant. It did not counter the legal arguments and provisions of law advanced by the Appellant.

68. For the above reasons the Tribunal finds and holds that the taxpayer is entitled to succeed in this Appeal.

Final Decision 69. In light of the foregoing analysis, the Tribunal finds the Appeal herein succeeds and the Tribunal accordingly makes the following orders:a.The Appeal be is hereby allowedb.The objection decision dated 5th September 2022 be and is hereby set aside.c.Each party to bear its own costs .

70. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF MARCH, 2024. ERIC NYONGESA WAFULA - CHAIRMANDELILAH K. NGALA - MEMBERCHRISTINE A. MUGA - MEMBERGEORGE KASHINDI - MEMBERMOHAMED A. DIRIYE - MEMBERSPENCER S. OLOLCHIKE - MEMBER