[2023] KETAT 1000 (KLR)

Lake Turkana Wind Power Limited v Commissioner of Domestic Taxes (Tax Appeal 725 of 2022) [2023] KETAT 1000 (KLR) (6 October 2023) (Judgment)

Neutral citation: [2023] KETAT 1000 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 725 of 2022

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

October 6, 2023

Between

Lake Turkana Wind Power Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The appellant is a limited liability company incorporated in Kenya and whose principal business is the generation and supply of low-cost energy to the Kenya Power and Lighting Company (KPLC) through the national grid.

2. That the respondent is a principal officer appointed under section 13 of the Kenya Revenue Authority Act, 1995. Under section 5 (1) of the Act, the Kenya Revenue Authority (the Authority) is an agency of the Government for the collection and receipt of all tax revenue.

3. The appellant entered into a power purchase agreement with the KPLC dated May 13, 2013 that was subsequently amended on July 31, 2019 and September 19, 2017 (the PPA). The appellant also entered into a letter of support with the Government of Kenya, represented by the National Treasury and the Ministry of Energy, dated February 28, 2013 (the GOK Support Letter) issued in support of the implementation of the 300 MW wind power project in Marsabit County (the Project).

4. On January 12, 2022, the respondent issued the appellant with a tax assessment requiring the appellant to pay value added tax (VAT) amounting to Kes 4,587,772,502. 00 (the tax assessment).

5. The respondent issued an objection decision vide a letter dated May 30, 2022 confirming an assessment of VAT amounting to Kes 4,706,166,632. 00.

6. The appellant being dissatisfied with the objection decision filed a notice of appeal dated June 28, 2022.

The Appeal 7. The appeal is premised on the following grounds as stated in the memorandum of appeal filed on July 13, 2022: -a.That the respondent erred in law and fact by issuing the appellant with tax assessment requiring the appellant to pay the respondent value added tax (VAT) amounting to Kes 4,587,772,502. 00 without any prior communication or request for input and information from the appellant;b.That the respondent erred in law and fact by ignoring the fact that the compensation payments paid to the appellant by the Government of Kenya on account of delay in constructing transmission interconnector line (the GOK TI Delay Payments) were liquidated damages which were not in respect of taxable supply under the provisions of the Value Added Tax Act, 2013;c.The respondent erred in law and fact by ignoring the fact that the appellant had paid VAT and continues to pay VAT in respect of the electricity supplied by the appellant to the Kenya Power and Lighting Company (KPLC) and invoiced on a monthly basis (the substituted Energy Charges), of which VAT amounting to Kes 860,041,631. 10 had been remitted for the period from the September 2018 to May 31, 2022;d.That the respondent erred in law and fact by disregarding the fact that VAT on the substituted energy charges for future periods after the date of the tax assessment were not yet due and would be payable on a monthly basis, as and when, the appellant supplies electricity to KPLC; ande.That the respondent erred in law and in fact by disregarding and not factoring part of the GOK TI delay payments amounting to € 6. 2 million which the appellant had refunded to the Government of Kenya, when issuing the tax assessment.

Appellant’s Case 8. The appellant’s case is premised on the following documents:a.The appellant’s statement of facts filed on July 13, 2022 together with the documents attached thereto.b.The appellant’s written submissions dated and filed on March 24, 2023 together with the authorities attached thereto.

9. That the appellant entered into a power purchase agreement with the KPLC dated May 13, 2013 (as amended on July 31, 2019 and September 19, 2017) (the PPA). The appellant also entered into a letter of support with the Government of Kenya (represented by the National Treasury and the Ministry of Energy) (the GOK) dated February 28, 2013 (the GOK Support Letter) issued in support of the implementation of the 300 MW wind power project in Marsabit County (the Project). The GOK Support Letter as well as the PPA (including the variations) had been reviewed and endorsed by a legal opinion from the attorney general of the Republic of Kenya confirming that, inter alia, the PPA and the variations thereto, had been entered into in accordance with Kenyan law.

10. That in order for the appellant to supply power to KPLC under the PPA, a transmission interconnector line (TI Line) was required to be constructed, commissioned and be operational. The GOK was to procure the construction and completion of approximately 428 kilometers, 400 kV TI Line and the associated substation at Suswa required to transport electrical energy from the Appellant's power plant to the substation at Suswa. The GOK further agreed to bear all the risks occasioned by any delay in the construction and interruption of the operation of the Tl Line, that is, if the GOK did not commission the TI Line on time (or if there were any Tl Line interruptions in future upon commissioning), GOK would be liable to pay liquidated damages to the appellant to compensate the appellant for lost revenue as a result of being unable to commission the power plant and generate electricity for sale to KPLC under the PPA (such damages are defined under the PPA as "GOK Tl Delay Deemed Generated Energy Payments" and are herein after referred to as GOK TI Delay DGE Payments).

11. That the appellant commissioned the Project and was ready to generate and supply electricity toKPLC on January 27, 2017. At the time, the GOK had not yet completed construction and commissioning of the Tl Line, The Tl Line was later commissioned on September 24, 2018.

12. That following the delay by GOK to commission the Tl Line, the appellant invoked its right to compensation under the GOK Support Letter. The GOK, the Appellant, KPLC and other stakeholders engaged in discussions from which it was agreed how the appellant would be compensated. That the discussions and negotiations led to conclusion of a commercial agreement which was documented by the parties under the second variation agreement to the PPA dated September 19, 2017 (the Second Variation Agreement)

13. That it should be noted that the entire exercise of reaching an agreement on the overall GOK Tl Delay DGE Payment was stewarded by the Presidential Delivery Unit and other relevant GOK entities. That in these discussions, the appellant gave a concession of €17,772,013 as the DGE charges for the period January 27, 2017 to May 14, 2017 which goes to demonstrate the appellant's goodwill throughout the negotiations.

14. That GOK TI Delay DGE Payments agreed upon under the Second Variation Agreement are summarized as follows:i.For the period between May 15, 2017 to May 31, 2018, the GOK Tl Delay DGE was calculated as amounting to € 127. 6 Million and was settled as follows:a.€ 46 million was paid by GOK through an invoice dated September 22, 2017 issued by LTWP to GOK; andb.With respect to the balance of € 81. 6 million, instead of a payment being made by the GOK in the same manner as the payment referred to in 14. 1 above, GOK, due to fiscal and budgetary constraints and practicalities, offered LTWP a tariff increase of € 0. 00845 per kWh payable by KPLC under the PPA which was to be paid from September 2018 to end on or about May 31, 2024. LTWP therefore waived its right to receive payment of € 81. 6 million from GOK under the GOK support letter, agreeing instead to receive it by way of a tariff increase under the PPA on the Net Electrical Output and Deemed Generated Energy for the agreed period (the Substituted Energy Charges). The appellant therefore took full risk that it may never receive these payments if it did not generate and supply electrical energy to KPLC.ii.For the period between June 1, 2018 to September 24, 2018 (being the date of actual TI operation), the GOK TI Delay DGE Payments were calculated as amounting to € 45. 2 million. This was dealt with as follows:a.an amount of € 5. 5 million was agreed as a write-off as between the appellant and GOK and the appellant issued a credit note for this amount prior to receipt of the amount; andb.the balance of € 39. 7 million is the net amount received by the appellant as GOK TI Delay DGE Payments for this period.iii.An amount of € 6. 2 million was agreed as a further refund due to GOK, being the difference between estimated GOK TI Delay DGE Payments at the time of signing the Second Variation Agreement and the actual GOK Tl Delay DGE that was subsequently determined as required under the Second Variation Agreement (GOK Tl Delay DGE Payment Refund) and this amount was to be deducted and repaid from the € 127. 6 million. The GOK TI Delay DGE Payment Refund has since been transferred to GOK and the GOK has confirmed receipt of the GOK TI Delay DGE Payment Refund vide a letter from the KPLC dated April 27, 2022.

15. That the position is as summarized below:No Period Particulars Liquidated damages Substituted Energy Charges

1. 5th- May 2017 to May 31, 2018 Initial lumpsum payments for this period (A) € 46,000,000

€ 81,577,128

Amount recoverable from KPLC as energy charges for supply of electricity payable from September 2018 to end on or about 31st May 2024 (B)

2. June 1, 2018 to 24th Sep 2018 GOK TI DGE for the period from 1st June 2018 to 24th Sept 2018 (C) € 45,197,003

Credit Note in respect of the GOK TI Delay DGE payments for this period (D) € 5, 512,968 -

3. GOK TI Delay DGE Payment Refund remitted to GOK by LTWP (E) € 6,173,293 -

TOTAL €79,510,742 €81,577,128 -

16. That on January 12, 2022, the Respondent issued the appellant with a tax assessment requiring the appellant to pay the respondent Value Added Tax (VAT) amounting to Kes 4,587,772,502. 00 as set out below:Accrued TI DelayDGE Payments Principal VAT Penalties Interest 1% pm Total

Kes Kes Kes Kes Kes

18,499,082,672. 49 2,959,853,227. 60 147,992,661. 38 1,479,926,613. 80 4,587,772,502. 78

17. That the tax assessment was issued in respect of the GOK Tl Delay DGE Payments made to the appellant through the National Treasury and Planning (the National Treasury). It is important to note that the tax assessment was issued to the appellant without any prior communication or engagement by the Respondent to the Appellant and the Appellant was not given an opportunity to address the Respondent in respect of the issues giving rise to the tax assessment.

18. That while the Respondent did not provide the basis of arriving at the GOK TI Delay DGE Payments of Kes 18,499,082,672. 49 in the tax assessment, it is the Appellant’s understanding that the GOK TI Delay DGE Payments have been calculated as comprising of the following aspects as shown below:Particulars Amount

Liquidated damages (as shown in Table 1 above) € 79,510,742

Substituted Energy Charges (as shown in Table 1 above) € 81,577,128

GOK TI Delay DGE Refund remitted to GOK by LTWP (under item E in Table 1 above) € 6, 173,293

TOTAL IN EUROS € 167,261,163

Converted at approx. KES 110. 60=€ 1 KES 18,499,084,627. 80

19. That the appellant objected to the tax assessment vide a letter dated February 11, 2022 pursuant to section 51 of the Tax Procedures Act, 2015 (the TPA). That in its objection, the appellant asserted the following in respect of the respondent's tax assessment:-a.The GOK Tl DGE Payments amounting to € 79. 5 million were contractual liquidated damages (pursuant to the GOK Support Letter) which are not subject to VAT under the provisions of the Value Added Tax Act 2013;b.The Tl Delay DGE Payments amounting to € 81. 6 million relating to the period from September 2018 to May 31, 2024 were Substituted Energy Charges (pursuant to the PPA) on which VAT has been and is being charged on monthly invoices addressed to KPLC in respect of supply of electricity to KPLC;c.The VAT on the balance of Substituted Energy Charges was not due at the time of the tax assessment and would in fact be payable on a monthly basis, as and when it falls due in accordance with the terms of the PPA i.e. if and when a supply of electrical energy is made to KPLC.; andd.The appellant remitted the GOK Tl Delay DGE Payment Refund to the GOK in the amount of € 6. 2 million and on which no VAT is due.

20. That the respondent issued an objection decision vide a letter dated May 30, 2022 confirming an assessment of VAT amounting to Kes 4,706,166,632. 00.

21. That under paragraph 5 of the statement of findings in the objection decision, the respondent acknowledged that the credit note of € 5,512,968 issued by LTWP to GOK had already been netted of in arriving at the € 79,510,742 GOK Tl Delay DGE when computing the VAT assessment. That in this regard, it is the appellant’s assumption that there is no outstanding dispute between the appellant and the respondent in respect of the € 5,512,968 amount as VAT has not been assessed on the amount.

22. That the appellant being dissatisfied with the objection decision notified the respondent of its intention to appeal to the Tribunal against the objection decision vide a notice of appeal dated June 28, 2022 pursuant to sections 12 and 13 (1) of the Tax Appeals Tribunal Act, 2013, and rule 3 (1) of the Tax Appeals Tribunal (Procedure) Rules, 2015.

23. That the Appellant hereby appeals against the whole of the Respondent's objection decision and sets out below its facts in support of the Appeal.

24. That the facts in issue in this dispute are as follows:-i.Whether the respondent should have communicated with the appellant and requested for information from the Appellant before issuing the tax assessment;ii.Whether the GOK Tl Delay Payments i.e. the liquidated damages pursuant to the GOK Support Letter were in respect of a taxable supply under the provisions of the Value Added Tax Act, 2013 (the VATA);iii.The tax point for supply of electricity to KPLC and consequently the point at which the Appellant should have charged VAT on the Substituted Energy Payments from KPLC;iv.Whether the Respondent should have considered the VAT already paid by the appellant as at the date of issuing the tax assessment, when issuing the Tax assessment; andv.Whether the Respondent should have netted of the amount of GOK Tl Delay Payments that had been refunded to GOK by the Appellant when issuing the tax assessment.

25. That the respondent erred in law and fact by issuing the tax assessment without any prior communication or request for input and information from the appellant.

26. That it is an undisputed fact that the respondent issued its tax assessment without giving the appellant an opportunity to be heard and address itself on the tax matters set out in the tax assessment. That key to note is that upon issuance of the tax assessment, the Respondent contacted the Appellant to request for information, including all copies of invoices, debit notes and credit notes issued by the appellant since incorporation, to enable the respondent to verify its tax assessment. It would be expected that in accordance with the basic tenets of fair administrative action, the respondent would have requested for this information prior to the issuance of the tax assessment. That it was therefore, unclear to the appellant what the respondent relied on when issuing the tax assessment, seeing that this information was being sought post issuance of the tax assessment.

27. That the Appellant has the right of fair administrative action under article 47 of the Constitution of Kenya under the Fair Administrative Actions Act, 2015 (FAA Act). That the respondent, in computing the tax assessment, was engaged in an administrative action within the definition provided in the section 2 of the FAA Act which reads as follows:-“administrative action includes –i.the powers, functions, and duties exercised by authorities or quasi-judicial tribunals; orii.any act, omission or decision of any person body or authority that affects the legal rights or interests of any person to whom such action relates;

28. That the FAA enshrines in section 4 (3) that where an administrative action is likely to adversely affect the rights or fundamental freedoms of any person, the administrator is required to give the affected person prior notice and an opportunity to be heard, among other things.

29. That the respondent did not state in its tax assessment whether its assessment was a default assessment or amended assessment. That noting that the respondent stated that the appellant had failed to declare VAT which the respondent alleges was due, the appellant interprets the tax assessment as to have been issued pursuant to section 29 of the TPA which provides for the issuance of default assessments by the respondent where a taxpayer "has failed to submit a tax return for a reporting period in accordance with the provisions of a tax law...". Section 29 empowers the respondent to make such a default assessment "based on such information as may be available and to the best of his or her judgment." When making a default assessment, the respondent is required to give the taxpayer in question a notification specifying, the amount of tax, penalties and interest assessed, the reporting period to which the assessment relates, and the due date for payment of the tax, penalties, and interest.

30. That prior to issuing a default assessment, the dictates of natural justice and the right to fair administrative action require the respondent to engage with the taxpayer and provide an opportunity for the taxpayer to be heard. That while the respondent may have complied with the requirements of section 29 of the TPA in issuing the tax assessment, it did not provide the appellant with an opportunity to be heard in relation to the tax computation the respondent undertook, yet such computation was an administrative action which had adversely affected the appellant's rights,

31. That the respondent, prior to issuing the appellant with its tax assessment, should have presented its findings and allowed the appellant to give its input, clarifying key positions. That this would obviate errors such as the respondent demanding VAT which the respondent has already charged KPLC and remitted (amounting to Kes 860,041,631. 10 in respect of the substituted energy charges for the period from September 2018 to May 31, 2022).

32. That based on the above, the appellant asserts that the respondent violated the appellant's right to fair administrative action in issuing the appellant with the tax assessment without according the appellant an opportunity to be heard, and as such, the tax assessment ought to be quashed.

33. That the respondent erred in law and fact by ignoring the fact that the GOK Tl Delay DGE Payments amounting to €79. 5 million were not in respect of a taxable supply under the provisions of the VAT Act.

34. That VAT is charged, pursuant to the provisions of the VAT Act on taxable supplies made in Kenya by a registered person. Section 5 (1) of the VAT Act provides as follows:“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...”

35. That the term 'taxable supply' is defined in the VAT Act to mean:-“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."

36. The term 'supply' is defined in the VAT Act to mean "a supply of goods or services" while a "supply of goods" is defined to mean:-“(a)a sale, exchange, or other transfer of the right to dispose of the goods as owner; or(b)the provision of electrical or thermal energy, gas or water."

37. That from the outset, it would be important to understand the nature of the GOK TI Delay DGE Payments. First, the appellant appreciates that the supply of electricity to KPLC under the PPA would be a supply of taxable goods under the VATA. That said, the GOK TI Delay DGE Payments cannot be construed to be a taxable supply under the VATA for the reasons set out in the subsequent paragraphs.

38. That the GOK TI Delay DGE Payments arose from clause 11. 1 of the GOK Support Letter in which the GOK agreed that all risks occasioned by a delay in the operation of the Tl Line would be allocated between GOK, KPLC and Kenya Electricity Transmission Company Limited (KETRACO) and would not be borne by LTWP. As such, in the event of a delay in the operation of the Tl Line, the GOK would make the GOK Tl Delay DGE Payments to LTWP from the date of Deemed Commissioning of the First Unit Group (as defined in the PPA) until the date when the TI Line is operational. The GOK Tl Delay DGE Payments are defined in the PPA as:“the amount payable in accordance with the GOKsupport letter in respect of GOK TI Delay GGE commencing from the month in which the 60K TI Delay DGE Payments Commencement Date occurs." (emphasis ours)

39. That it is important to note that as set out in the above definition, GOK Tl Delay DGE Payments are made pursuant to the GOK Support Letter and not the PPA, This therefore delineates the fact that the GOK Tl Delay DGE Payments are not in respect of supply of electricity or lack thereof to KPLC but a contractual liquidated damages payment by the GOK for delays in fulfilling its obligations under the GOK Support Letter.

40. That from the foregoing provisions of the LOS and the PPA, it is notable that the appellant's responsibility was to construct the power generation plant within a given timeline and the GOK guaranteed the appellant that the Tl Line would have been constructed by the date of commissioning/operation of the appellant's power generation plant, failing which the GOK undertook to compensate the appellant for any losses suffered as a consequence of delays to construct the Tl Line.

41. That in other words, the provisions of the LOS and the PPA were such that should the situation arise whereby the Appellant's plant was deemed commissioned and mechanically ready and able to generate electricity, but the TI Line was not ready for purposes of enabling the supply of electricity to the national grid, then the Appellant was entitled to compensation from GOK for the loss suffered as a consequence of such TI Line delays.

42. That this situation in fact arose, and as a consequence, the appellant was entitled to compensation from the GOK. Between May 5, 2017 (date of Deemed Commissioning of the First Unit Group) and September 24, 2018 (the date when the Tl became operational) a total sum of compensation amounting to € 79,510,742 was paid to LTWP.

43. That two important features of the GOK TI Delay DGE Payments arise that demonstrate that the GOK TI Delay DGE Payments are not a taxable supply for the purposes of the VAT Act and are purely liquidated damages:a.First, the liquidated damages in relation to the GOK TI Delay DGE Payments were paid by the GOK through the National Treasury and not KPLC. This is evidenced by the fact that the invoices with respect to the GOK Tl Delay DGE Payments were issued by the appellant to the GOK (via) National Treasury and not KPLC. It is important to note that the said liquidated damages were not in respect of a contract for the supply of goods between the appellant and KPLC but a payment by the GOK for failing to meet its obligations under the LOS; andb.Second, the GOK TI Delay DGE Payments were paid under the GOK Support Letter and not the PPA. It is important to note that there was no supply of power or services under the GOK Support Letter and the GOK Tl Delay DGE Payments were purely meant to compensate LTWP for the loss occasioned by the TI delay.

44. That without prejudice to the above, in any case, the GOK Tl Delay DGE Payments were paid in respect of a period when the TI Line was not operational and as such, the appellant could not make any supply of electricity to the KPLC in this period and therefore the GOK Tl Delay DGE Payments cannot be said to be in respect of supply of electricity under the PPA.

45. That the Black's Law Dictionary (9th Edition) defines liquidated damages as:“an amount contractually stipulated as a reasonable estimation of actual damages to be recovered by one party if the other party breaches."

46. That under the GOK Support Letter, the GOK TI Delay DGE Payments were compensatory in nature, meant to restore any loss occasioned to the appellant by GOK’s delay in operationalizing the Tl Line. That based on this definition, it is beyond reasonable doubt that the GOK Tl Delay DGE Payments were in the nature of liquidated damages, not in respect of a taxable supply but in respect of GOK's failure to meet its obligations (which are not a taxable supply under the VAT Act).

47. That the respondent vide its objection decision erroneously concluded that the entire GOK TI Delay DGE Payments were a taxable supply pursuant to section 2 of the VAT Act and that since the alleged taxable supply was not zero-rated or exempt under the first and second schedules to the VAT Act, VAT was due to the respondent.

48. That the appellant avers that there was no supply that would in the first instance be determined on whether it is subject to VAT or not. The respondent's assertion that the GOK Tl Delay DGE Payments are not expressly exempt or zero rated under the First schedule and second schedule to the VATA, respectively, is flawed in law. That the respondent has made an erroneous conclusion that the GOK TI Delay DGE Payments are in respect of a supply made by the appellant to the GOK or lack thereof, without identifying the nature of the supply allegedly made by the Appellant.

49. That it therefore follows that unless the GOK Tl Delay DGE Payments were in respect of a taxable supply, there would be no legal basis for the respondent to subject such payments to VAT under provisions of the VAT Act. That the respondent cannot therefore purport to subject the GOK Tl Delay DGE Payments to VAT outside the confines of the law.

50. That the Appellant asserts that the Respondent's conclusion that the GOK TI Delay DGE Payments are subject to VAT is erroneous. The Appellant reiterates that the GOK TI Delay DGE Payments are not in respect of a taxable supply for the following reasons:a.The GOK Tl Delay DGE Payments are not in respect of a supply of taxable goods or services under the VATA. The Appellant did not make a supply of electrical or thermal energy to KPLC as the Tl Line was not operational or any other taxable supply for that matter. In addition, there was no service that had been provided by the Appellant to GOK and the liquidated damages were not paid in respect of a taxable service but rather GOK's failure to meet its obligations under the GOK Support Letter, which are not taxable supplies under the VATA;b.There was no agreement between the GOK and the Appellant for the supply of power. The PPA, being the "supply" contract, was entered into between the Appellant and KPLC. Therefore, any payments of supply of power would be made by KPLC. That in this case, the liquidated damages were paid by GOK pursuant to the GOK Support Letter and the payment was not in respect of any supply made by the Appellant and therefore could not have been in furtherance of a supply; andc.The liquidated damages were paid by GOK pursuant to the GOK Support Letter, a type of "guarantee" instrument whereby GOK undertook to "make good" an entity for a loss it may suffer, which the GOK has undertaken to protect the entity against, while undertaking its investment in Kenya.

51. That based on the above, the Appellant asserts that the GOK TI Delay DGE Payments are not in respect of a supply which would be subject to VAT under the provisions of the VATA.

52. That without prejudice to the above, the Appellant asserts that the GOK TI Delay DGE Payments are liquidated damages paid by the GOK which do not constitute a taxable supply. The Appellant further asserts that the liquidated damages were not in respect of a taxable supply under the VATA.

53. That the Respondent erred in law and fact by ignoring the fact that the Appellant had paid VAT and continues to pay VAT in respect of the Substituted Energy Charges (of which VAT amounting to Kes 860,041,631. 10 has been remitted for the period from September 2018 to May 31, 2022).

54. That from the outset, it would be important to note that the respondent subjected the entire amount of the GOK Tl Delay DGE Payments to VAT. However, as explained, the GOK TI Delay DGE Payments in relation to the period of May 15, 2017 and 31st May 2018 amounted to € 127. 6 million, of which € 46 million was paid by way of liquidated damages.

55. That the Appellant points out that with respect to the balance of € 81. 6 million, instead of a payment being made by the GOK by way of liquidated damages, GOK offered the Appellant a tariff increase of € 0. 00845 per kWh payable by KPLC under the PPA which was to be paid from September 2018 to end on or about 31st May 2024. LTWP therefore waived its right to receive payment of €81. 6 million from GOK under the LOS in consideration of receiving payment from KPLC under the PPA in respect of a tariff increase on the Net Electrical Output and Deemed Generated Energy for the agreed period. That the appellant therefore took full risk that it may never receive these payments if it did not generate and supply electrical energy to KPLC. That it is therefore, erroneous and unconscionable for the respondent to construe this amount as part of the GOK Tl Delay DGE Payments.

56. That the Appellant, in its objection, provided the Respondent with a schedule that set out all the amounts that it had invoiced the KPLC in respect of the provision of power from September 2018 to January 31, 2022; That pursuant to the said schedule, it was clear that from the period of September 2018 to January 31, 2022, the Appellant had invoiced the KPLC a total of €40,836,121. 31 on which VAT in the amount of €6,360,554. 31 (approximately Kes 703,477,306. 52) had been paid. That the Appellant also supplied the Respondent with all the invoices in respect of the said duration. That as highlighted above, the Appellant continues to remit VAT on the substituted energy charges on a monthly basis, as and when, it supplies electricity to KPLC, and the VAT amount that has been remitted for the period from September 2018 to May 31, 2022 amounts to Kes 860,041,631. 10 (at the actual applied EUR/KES rate prevailing at the time of each VAT remittance).

57. That the appellant and the respondent held a virtual meeting on May 11, 2022 in which the respondent requested for additional information including an amended schedule which would indicate the amounts of invoices raised by the Appellant and the VAT paid in Kenya Shillings. The Appellant supplied the said additional information through a letter dated 23rd May 2022.

58. That the Appellant was therefore, appalled when the Respondent, in its objection decision, stated that the taxes that had been paid by the Appellant were not factored in during the review of the Appellant's objection, on the ground that the total value of the invoices issued by the Appellant and the VAT paid in respect of the said invoices as set out in the schedule provided by the Appellant could not be traced to the VAT returns filed by the Appellant. That the Respondent alleged that the VAT returns that were filed by the Appellant had lumpsum amounts and therefore the VAT payments relating to the Substituted Energy Charges and contained in the schedule could not be authenticated.

59. That the Appellant submits that the schedule that was provided to the Respondent contained a summary of the total amounts that had been invoiced by the Appellant for the period September 2018 to January 2022 and the VAT that had been paid in respect of the total amounts. That the VAT in respect of the Substituted Energy Charges was arrived at through a mathematical computation owing to the fact that the Substituted Energy Charges arose on account of a tariff increase of € 0. 00845 per kWh payable by KPLC under the PPA. That the Appellant raises monthly invoices addressed to KPLC for Energy Charges supplied to KPLC using the revised increased rates and therefore there are no split invoices with the old and Substituted tariff rates.

60. That in other words, the Substituted Energy Charges were arrived at by multiplying the total invoice amount of the respective month with the tariff increase on account of Substituted Energy Charges of 0. 008449557 per KWh. That the said computations were well illustrated in the schedule sent to the Respondent and it is appalling for the Respondent to claim that the VAT on Substituted Energy Charges could not be authenticated. That in any case, it has not been disputed by the Respondent that the Appellant paid VAT in respect of all supplies made by the Appellant to the KPLC from September 2018 to date and it would be illogical for the Respondent to claim that the Appellant did not pay VAT in respect of the Substituted Energy Charges. That a simple analysis of the VAT paid by the Respondent ought to have easily determined the quantum of VAT on account of the Substituted Energy Charges and it cannot simply be disregarded that a sum of VAT in the amount of € 6,360,554. 31 (approximately Kes 703,477,306. 52) had been charged and paid by the Appellant to the Respondent in respect of the Substituted Energy Charges for the period from September 2018 to 31st January 2022. That the Appellant continues to charge and pay the VAT amount and as of 31st May 2022, the total VAT amount charged and paid by the Appellant in respect of Substituted Energy Charges is Kes 860,041,631. 10.

61. That it therefore follows that the attempt by the Respondent to subject to VAT the entire amount of the GOK Tl Delay DGE Payments would amount to double taxation.

62. That the Respondent erred in law and fact by disregarding the fact that VAT on Substituted Energy Charges relating to the future period after the date of the tax assessment to end on or about 31st May 2024 were not yet due and would be payable on a monthly basis, as and when, electricity is supplied to KPLC.

63. That as indicated above, as of January 2022, out of the total amount receivable by the Appellant on account of energy charges amounting to € 81. 6 million, the amount of € 40,741,006. 69 was yet to be billed, in this regard, and as stated above, the Substituted Energy Charges as of January 2022 are broken down as follows:a.Amounts invoiced on KPLC by the Appellant between September 2018 to 31st January 2022 € 40,836,121. 31 on which VAT in the amount of (Kes 703,477,306. 52) has already been paid; andb.Amounts that were yet to be invoiced to KPLC by the Appellant for the period from 1st February 2022 to end on or about 31st May 2024 were €40,741,006. 69 billable by the Appellant on KPLC on a monthly basis and would be billed every month up to end on or about 31st May 2024, of this amount, the Appellant has subsequently billed KPLC € 4,285,921. 08 for Substituted Energy Charges and paid the corresponding VAT amounting to € 685,747. 37 for the period 1st February 2022 to 31st May 2022. Therefore, the amount yet to be invoiced to KPLC for Substituted Energy Charges as at 1st June 2022 is € 36,455,085. 61 and if and when invoiced, the total VAT that will be remitted (on this presently outstanding amount of Substituted Energy Charges) will be € 5,832,813. 70.

64. That in its objection decision, the Respondent argued that VAT on the remainder of the Substituted Energy Charges amounting to € 40,741,006. 69 and relating to the period from 1st February 2022 to the end of May 2024 crystalized on 19th September 2017 when the GOK Tl Delay DGE amount was determined for purposes of the second variation to the PPA. That in other words, the Respondent was of the view that the tax point in respect of the Substituted Energy Payments was 19th September 2017 when the amount of GOK TI Delay DGE Payments was determined.

65. That section 12 (1) of the VAT Act provides as follows, with respect to the time of supply:“Subject to section 12 (3), the time of supply, including of imported services, shall be the earlier of —a.the date on which the goods are delivered, or services performed;b.the date a certificate is issued by an architect, surveyor or any other person acting as a consultant in a supervisory capacity;c.the date on which the invoice for the supply is issued; ord.the date on which payment for the supply is received, in whole or in part."

66. That section 12 (3) of the VAT Act in turn provides:-“if -e.goods are supplied under a rental agreement; orf.goods or services are made by metered supplies, or under an agreement or law that provides for periodic payments, the goods or services shall be treated as successively supplied for successive parts of the period of the lease or agreement, or as determined by law, and the time of each successive supply shall be the earlier of the date on which payment for the successive supply is due or received"

67. That it is not in doubt that the energy charges would constitute a "metered supply". That in any event, under the Second Variation Agreement, GOK offered the appellant, and the Appellant accepted a tariff increase of € 0. 00845 per kWh payable by KPLC under the PPA on account of the substituted energy charges, and payable periodically on a monthly basis for the period from September 2018 to end on or about May 31, 2024. That this would constitute an "agreement that provides for periodic payment" within the meaning of section 12 (3) of the VAT Act.

68. That it would therefore be the case that the time of supply, as determined under section 12 (3) of the VATA, would be the earlier of the date on which payment for the successive supply is due or received. That this position has been confirmed by this honourable tribunal in the case of Hewlett Packard East Africa Limited v the Commissioner of Domestic Taxes Appeal No 127 of 2016. That it is therefore, the case that the time of supply or the tax point of the substituted energy charges is the date when the appellant raises its invoice to the KPLC in respect of the power supplied by the appellant. That the appellant's basis of charging VAT on a monthly basis, is therefore correct because the appellant supplies power to KPLC and raises its invoice on a monthly basis.

69. That to explain further, each month, the Appellant raises an invoice to KPLC setting out the amount due for that month. That by way of illustration, with respect to the month of December 2021, LTWP raised an invoice dated January 1, 2022 for the aggregate amount of € 6,422,417 comprising VAT amount of € 885,851. That of the total invoice amount, the substituted energy charges were € 543,980. 78 on which VAT in the amount of € 87,036. 92 was charged (which is part of the total VAT amount of €885,851 charged in the invoice). That this monthly billing arrangement would continue and end on or about May 31, 2024 by which time the appellant will have invoiced KPLC for substituted energy charges amounting to € 81. 6 million and remitted VAT amounting to € 12. 9 million.

70. That pursuant to the arrangement with KPLC, the appellant has consistently issued monthly invoices to KPLC and charged VAT on these amounts, remitting the same to the Respondent. That the correct tax point is therefore monthly when the Appellant raises its invoices.

71. That the appellant submits that the respondent's demand for VAT on the entire remainder of the Substituted Energy Charges from 1st February 2022 to May 2024 is not only erroneous, but it would also render numerous practical challenges. That for one, if the Appellant were to raise an invoice for the entire € 40,741,006. 69 in order to charge VAT, KPLC would be unduly burdened. That further, if the VAT on the entire amount were to be settled before the supply is made, the appellant would run afoul of the law in future invoices which would not be subjected to VAT as it would already have been settled. That the Appellant continues to charge VAT on its invoices to KPLC on a monthly basis to date.

72. That the appellant submits that the VAT on the Substituted Energy Charges cannot be separated from the VAT on the full amount of the invoices that are issued by the Appellant. That the Substituted Energy Charges form part of the amount of each invoice issued by the Appellant. That the Substituted Energy Charges are indivisible with the full invoice amount, and it is impractical, illogical and unlawful for the Respondent to attempt to construe Substituted Energy Charges as a different component of a taxable supply.

73. That for the above reasons, the respondent's demand for VAT on the Substituted Energy Charges in relation to future periods before supply is made is erroneous and defective under the law.

74. That the Respondent has erred in law and fact by disregarding and not factoring part of the GOK Tl Delay Payments amounting to € 6. 2 million which the Appellant had refunded to the GOK, when issuing the tax assessment.

75. That as stated above, the Respondent subjected to VAT the entire amount of the TI Delay DGE payments and failed to account the amount of € 6. 2 million that had been agreed as a further refund due to GOK, being the difference between estimated GOK Tl Delay DGE at the time of signing the Second Variation Agreement and the actual GOK Tl Delay DGE that was subsequently determined as required under the Second Variation Agreement. That the Appellant proceeded to pay the refund to the GOK and the GOK has since confirmed receipt of the GOK TI Delay DGE Payment Refund vide a letter from the KPLC dated 27th April 2022.

76. That in the Respondent's objection decision, the Respondent stated that the refund of GOK Tl Delay DGE was unprocedural because the Appellant did not provide evidence of when the refund was made, and no credit note was issued by the Appellant pursuant to Section 16 of the VAT Act.

77. That in a letter from the Appellant to the Respondent dated 23rd May 2022, the Appellant provided the Respondent with a swift confirmation receipt confirming the transfer of € 6,173,293 refund from the Appellant to the GOK. That the Appellant also provided the Respondent with various letters where the Appellant was requesting for bank account details from the GOK to make payment of the refund. That the delay in making the refund was a result of delays from the GOK and the Appellant was not at fault.

78. That the Appellant points out that since VAT was not charged on the various invoices relating to the GOK Tl Delay DGE for the period from 1st June 2018 to 24th September 2018 on which a refund of € 6. 2 million was made to GOK, the Appellant was not required to issue a credit note under the provisions of the VAT Act as alleged by the Respondent. That even if a credit note was to be issued by the Appellant to GOK, the credit note would be for accounting purposes only and not for purposes of Section 16 of the VATA since the payments were not subject to the provisions of the VATA.

79. That the Appellant has provided all the evidence that Respondent requires to satisfy itself that the GOK Tl Delay DGE Payment Refund has indeed been remitted to the GOK and therefore should not have been part of the GOK TI Delay DGE that the Respondent assessed for VAT.

80. That in this regard, the Respondent's decision to disregard the GOK Tl Delay DGE Payment Refund and further confirming its tax assessment in the objection decision is erroneous and has no basis in law.

Appellant’s Prayers 81. The Appellant prays for orders, that:a.The decision of the Respondent contained in the letter dated May 30, 2022 demanding payment for value added tax amounting to Kes 4,587,772,502. 00 be set aside.b.The appeal be allowed with costs to the appellant; andc.Any other orders that the honourable tribunal may deem fit.

Respondent’s Case 82. The respondent’s case is premised on the hereunder filed documents:-i.The respondent’s statement of facts dated and filed on August 11, 2022 together with the documents attached thereto.ii.The respondent’s written submissions dated and filed on November 7, 2022 together with the legal authorities filed therewith.

83. That the respondent undertook an audit on the appellant and established that the appellant had not subjected the compensation received from the Government of Kenya (GOK) relating to the Power Purchase Agreement (PPA) entered between Lake Turkana Wind Power Company Limited (LTWP) who is the appellant and Kenya Power and Lighting Company (KLPC). Based on the audit, the commissioner issued an assessment on February 12, 2022.

84. That the respondent charged VAT on compensation for idle capacity/deemed generated electricity vide the assessment as tabulated below.Accrued DGE-TI Principal VAT Penalties @5% Interest@1%pm Total

Kes Kes Kes Kes Kes

18,499,082,672 2,959,853,228 147,992,661 1,479,926,614 4,587,772,503

85. That the appellant objected on February 11, 2022 on the grounds that the compensation of Kes 18,499,082,672 was, for liquidated damages which is not subject to VAT under the provisions of Value Added Tax Act, 2013.

86. That an objection decision was issued on May 30, 2022 confirming the assessment. That the objection decision confirmed the chargeability of VAT on compensation received for idle capacity i.e. Deemed Generated Energy (DGE).

87. The respondent avers that section 5 (2) of the Kenya Revenue Authority Act obligates it to enforce the written provisions of the law. Section 5 (2) KRA Act states that;“In the performance of its functions, the Authority it mandated to:a.Administer and enforce the provisions of the written laws, set out in part 11 of the first scheduled relating to revenue and for that purpose, to assess, collect and account for all revenues in accordance with those laws.b.To advise the Government on all matters relating to the administration and collection of revenue under the written laws.”

88. The respondent submits that it is not bound by the tax returns of the Appellant. The Respondent may asses a taxpayer's tax liability using any information available to the commissioner. Section 24 (2), Tax Procedure Act, 2015 provides:-“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.”

89. That the respondent is empowered to issue default assessments and amend returns within sections 29 and 31 of the Tax Procedure Act, 2015 respectively. That the Respondent is empowered to amend returns based on available information and to the best of the Commissioner's judgement.

90. That the Respondent states that the tax assessment was arrived after a detailed audit of the Appellant records. That the documents used for the audit were available to the Appellant. That the Appellant was given an opportunity to object where the Appellant lodged an objection on February 11, 2022. The Respondent further reiterates that the assessments and the objection decision were reached procedurally and within the provisions of the Tax Procedure Act.

91. The respondent avers that the payments were for compensation received for idle capacity i.e. Deemed Generated Energy (DGE) and not liquidated damages as alleged by the appellant. That payment or compensation for deemed generated electricity is a taxable supply.

92. That VAT is charged pursuant to the provisions of the VAT Act on taxable supplies made in Kenya by a registered person. That section 5 (1) (a) provides:-“(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;”

93. That on the definition of taxable supply, section 2 Value Added Tax Act, 2013 provides:“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;

94. To further reiterate that deemed generated electricity is a taxable supply the respondent is guided by section 2 of the VAT Act which provides that:-“supply of goods" means —(a)a sale, exchange, or other transfer of the right to dispose of the goods as owner; or(b)the provision of electrical or thermal energy, gas or water;”

95. That the respondent reiterates that all taxable supplies under the Act Are vatable except exempt taxable supplies. That the appellant has not provided evidence to demonstrate that the payment was for exempt services.

96. That the appellant received payments for idle capacity i.e. Deemed Generated Energy (DGE) which is a taxable supply. That even if the payment was made by GOK it was made for the supply of Deemed Generated Energy.

97. That the respondent avers that it is not a party to the contract and not bound by the provisions of the said contract. The respondent is bound by the tax laws. The respondent is under a legal obligation to collect VAT from all taxable supplies which have not been exempted.

98. The respondent avers that it is the duty of the taxpayer to provide documents whenever required by the Commissioner. That section 23 (1) (a) of the Tax Procedures Act, 2015 provides that a taxpayer is required to keep documents or records in such a manner that the taxpayers tax liability can be readily ascertained.

99. That the schedule provided by the appellant indicating the total invoice values and the substituted energy charges (SEC) could not be traced to the invoices and the VAT filed returns. That the VAT return and invoices had lumpsum amounts and the payments contained in the schedule could not be traced to primary documents with certainty.

100. That the documents only indicated a total invoice amount without indicating how that total was arrived with relevant documents. That further the Appellant was unable to demonstrate or trace the substituted energy charges to the invoices and VAT returns of the appellant.

101. That the tax point for accounting for services that have been performed is prescribed under Section 12 (1) (a) of the VAT Act 2013 which provides that: -“Time of supply of goods and services(1)Subject to subsection (3), the time of supply, including a supply of imported services, shall be the earlier of—(a)the date on which the goods are delivered or services performed;”

102. That the respondent states that VAT on energy charges from February 1, 2022 to end or about 31st May 2024 were due for the tax purposes of VAT in the year 2017 when they were determined as accrued deemed generated energy. That the chargeable service had been performed and therefore VAT due had crystallized on September 19, 2017 that is the due date that the accrued amounts were determined.

103. That the agreed staggered monthly plan between the appellant and KPLC was a payment plan and indeed not the tax point for VAT purposes.

104. The respondent states that the refund of TI DGE by the appellant to GOK was noted to have taken place much later than had been explained by the appellant in its notice of objection. That the AHM message printing took place on March 28, 2022 and no third-party evidence like bank statements was provided to indicate the money was actually refunded.

105. That from the documents presented by the appellant, the documents would not establish whether there was a refund and if there was a refund the date the refund was made. That the date of the refund is material since the VAT Act only allows refunds within six months.

106. The respondent avers that the right treatment of the transaction should have been issuance of a credit note to cancel out the over invoiced amount as prescribed under section 16 of the VAT Act, which provides:“Debit and credit note(I) Where goods are returned to the registered person or, for good and valid reason the registered person decides for business reasons to reduce the value of a supply after the issue of tax invoice, a credit note shall be issued for the amount of the reduction:Provided that a credit note may be issued:(a)only within six months after the issue of the relevant tax invoice; or(b)where there is a commercial dispute in court with regard to the price payable, within thirty days after the determination of the matter.”

107. That to reiterate further, credit notes for purposes of VAT can only be issued within six months after the issue of the relevant tax invoice. That where a credit note has not been issued then the Commissioner stands to lose revenue since the Appellant has a full invoice at their custody.

108. The responded reiterates that the assessments were issued within the provisions of Tax Procedure Act and that deemed generated electricity is a taxable supply as provided by Value Added Tax Act, 2013.

Respondent’s Prayers 109. The respondent prays that the tribunal do find:-a.That this appeal be dismissed with costs to the respondent as the same lacks merit.b.The objection decision dated May 30, 2022 be upheld.

Issues For Determination 110. The Tribunal having evaluated the pleadings and submissions of the parties is of the view that there are four issues that call for its determination;a.Whether the respondent correctly issued the VAT tax assessment prior to the request for documents.b.Whether the GOK payments for DGE were vatable.c.Whether the respondent was justified in holding that VAT was due on the Substituted Energy Charges.d.Whether the respondent was justified in subjecting € 6. 2 Million refund to the GOK by the Appellant to VAT.

Analysis And Findings 111. The tribunal having determined the issues falling for its determination proceeded to analyze them as hereunder.

a. Whether The Respondent Correctly Issued The Vat Tax Assessment Prior To The Request For Documents. 112. The appellant averred that the respondent issued its tax demand without giving the appellant an opportunity to be heard and address itself on the tax matters set out in the tax demand. That upon issuance of the tax demand, the respondent contacted the appellant to request for information, including all copies of invoices, debit notes and credit notes issued by the appellant since incorporation, to enable the respondent to verify its tax demand. That the appellant expected the respondent would have requested for this information prior to the issuance of the tax demand and it was therefore unclear to the Appellant what the Respondent relied on when issuing the tax demand, seeing that this information was being sought post issuance of the tax demand.

113. The appellant averred that the respondent was bound by law, specifically section 59 (1) of the TPA to request for documents relating to any perceived tax liability before issuing a demand to the appellant. That this would be followed by the issuance of an assessment, after which the appellant has the right to object. That ultimately this process would result in the issuance of an objection decision by the commissioner. The appellant relied on the case of Abdi Gedi Amin alias Abdi Ibrahim Ahmed v Commissioner of Investigations and Enforcement (TAT No 365 of 2020 (Abdi Gedi Case) where this Tribunal held as follows:“131. That said, demand for documents of the kind demanded by therespondent ought to have preceded the tax assessment so as to separate the audit process from the investigation process. Indeed, it appeared to thetribunal that therespondent had just cast out its net aside with anticipation and raised its demand without first conducting a comprehensive investigation. There was nothing preventing therespondent from demanding documents prior to raising the tax assessment…” (Our Emphasis)

114. The appellant further submitted that the respondent’s failure to issue a notice under section 59 of the TPA significantly curtailed the appellant’s right to a fair administrative action under the Constitution of Kenya. That under article 47 (1) of the Constitution, entitles the appellant to the right to fair administrative action that is expeditious, efficient, lawful, reasonable, and procedurally fair. That this constitutional standard is further supplemented by the provisions of the Fair Administrative Actions Act, 2015 (FAA Act), which in section 4 enjoins the respondent to issue prior notice to a person likely to be adversely affected by its administrative action.

115. Furthermore, the appellant submitted that a second element of procedural fairness is availing to the taxpayer the right to be heard before making any decision. That this is crucial as the respondent’s decisions, has significant pecuniary ramifications. That in this appeal, the respondent’s failure in granting the appellant an opportunity to be heard has exposed the appellant to a tax demand of Kes 4,587,772,502. 78. That the respondent was therefore obligated to engage the taxpayer before issuing a tax demand. In the case of Kenya Human Rights Commission v Non - Governmental Organizations Co-ordination Board (2016) eKLR, Onguto J restated Halsbury’s Laws of England on the right to be heard as follows:-“the rule that no person is to be condemned unless that person has been given prior notice of the allegations against him and a fair opportunity to be heard (theaudi alteram partemrule) is a fundamental principle of justice.” (Our Emphasis)

116. The appellant argued that it had a legitimate expectation rooted in the TPA that the respondent would follow the laid down process to the letter before demanding taxes. That the appellant also had an expectation, legitimately so, that it would be given an opportunity to provide its views and explain its tax position by providing all relevant information that the respondent would require during an audit process (which the Respondent did not undertake). That there was a need for the respondent, to follow the procedure set out in the law. That these procedures provide taxpayers with certainty and a sense of predictability of what to expect from the Respondent.

117. The appellant relied on De Smith, Woolf & Jowell, “Judicial Review of Administrative Action” 6th Edn. Sweet & Maxwell page 609 in which legitimate expectation was defined as follows;-“A legitimate expectation arises where a person responsible for taking a decision has induced in someone a reasonable expectation that he will receive or retain a benefit of advantage. It is a basic principle of fairness that legitimate expectations ought not to be thwarted. The protection of legitimate expectations is at the root of the constitutional principle of the rule of law, which requires predictability and certainty in government’s dealings with the public.”

118. The appellant averred that the rationale for the doctrine of legitimate expectation was underscored in R v Devon County Councilex-parteP Baker [1955] 1 All ER wherein it was held that the expectation arises not because the claimant asserts any specific right to a benefit but rather because his interest in it is one that the law holds protected by the requirements of procedural fairness; the law recognizes that the interest cannot properly be withdrawn (or denied) without the claimant being given an opportunity to comment and without the authority communicating rational grounds for any adverse decision.

119. The tribunal observes that section 5 (2) of the Kenya Revenue Authority Act places an obligation on the respondent to enforce all tax laws. The section provides as thus:-“In the performance of its functions, the authority it mandated toa.administer and enforce the provisions of the written laws, set out in part II of the First Scheduled relating to revenue and for that purpose, to assess, collect and account for all revenues in accordance with those laws.b.to advise the Government on all matters relating to the administration and collection of revenue under the written laws.”

120. The respondent averred that in fulfilling its mandate, the respondent was not bound by the tax returns of the appellant. That the respondent may assess a taxpayer’s tax liability using any information available to the respondent. Section 24 (2) of the Tax Procedure Act, 2015 provides as follows with regard to use of alternative information:-“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.”

121. The respondent argued that it is empowered to issue default assessments by virtue of section 29 of the Tax Procedures Act to issue default assessments and/or amend returns by virtue of section 31 of the Tax Procedure Act, 2015.

122. The respondent submitted that under the two provisions, it was not mandatory to notify the appellant before an assessment is made. The respondent is empowered to alter the returns based on available information and using its best judgment.

123. The respondent averred that it conducted a detailed audit of the appellant’s records before issuing the tax assessments. That after conclusion of the audit exercise the respondent was satisfied that it had all the necessary documents/records and there was no need to demand for documents from the appellant. That the documents used for the audit were available to the appellant. That the Appellant was subsequently notified of the assessment.

124. The respondent contended that whenever it alters a tax return, there is need for proper notification. That notification was given which included;a.the amount assessed as tax;b.the amount assessed as late submission penalty and any late payment penalty payable in respect of the tax:c.the amount of any late payment interest payable in respect of the tax assessed;d.the reporting period to which the assessment relates;e.the due date for payment of the tax, penalty, and interest and;f.the manner of objecting to the assessment.

125. The respondent argued that appellant was given an opportunity to object which the appellant did on February 11, 2022. The Respondent further reiterated that the assessments and the objection decision were reached procedurally and within the provisions of the Tax Procedure Act.

126. The respondent further submitted it is not mandatory as alleged by the appellant that section 59 (1) of the Tax Procedures Act must always be invoked before issuance of assessments. That the word used is “May” which means the respondent has discretion and only used those powers when necessary. Section 59 (1) (a) provides that:-“For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the commissioner or an authorized officer may require any person, by notice in writing, to —(a)produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;”

127. The respondent submitted that the word used is “May” which gives the respondent discretion to use it on a case to case basis. That in the present case there was no need to invoke the provision as the respondent’s position was it had all the necessary information and/or there was no significant information within the appellant which was not available to the respondent.

128. The respondent argued that the appellant was misconstruing the provision to make it mandatory that section 59 of the Tax Procedures Act has to be invoked even when the Respondent has all the relevant information before issuance of assessments.

129. The tribunal notes that without prejudice if the appellant had information which was so critical to this case, nothing stopped the appellant from submitting that information during the objection stage or providing that critical information which was not requested by the respondent.

130. The respondent argued that what was required was its use of best judgement using the available information. That the respondent was guided by the case of Republic v Kenya Revenue Authority ex-parte Jeffer Mujtab Mohamed (2015) eKLR where hon Odunga J held that:-“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 figure 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 intervening"

131. The tribunal reiterates its position in the case of Tenhos Sacco Society Limited v Commissioner of Domestic Taxes TATAppeal No 413 of 2019 where it was held that:-“In arriving at its assessments, the above provision does not specify any method or whether that method should be scientific. All it requires is that the respondent use its best judgement.”In Van BoeckelvC & E QB Dec 1980 [19811] STC 290 Woolf J stated that:"The use of the word 'judgment' makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgment on the material which is before them secondly, clearly there must be some material before the commissioners on which they can base their judgment. If there is no material at all it would be impossible to form a judgment as to what tax is due... What the words 'best of their judgment' envisage, in my view, is that the commissioners will fairly consider all material placed before them and on that material, come to a decision which is one which is reasonable and amount of tax which is due. As long as there is some material on which the commissioners act then they are not required to carry out investigations which may or may not result in further material being placed before them.”

132. It is therefore, the tribunal’s view that the figures used were based on material evidence which the appellant was aware of and had access to. Further, the appellant has not disputed those figures or documents but is only aggrieved that it was not requested to produce the documents which were already available to the respondent.

133. The Tribunal notes that the respondent had sufficient material to assess and determine the tax, and to that extent, the respondent had no recourse to apply section 59 of the Tax Procedures Act, 2015. On the other hand, the appellant has not demonstrated any prejudice it suffered by the failure of the respondent to request for any information prior to the assessment and the appellant was not precluded in any manner from challenging or responding to the assessment.

134. The Tribunal finds that the appellant’s right to fair administrative action was not violated and that the respondent complied with the Tax Procedures Act on issuance of the tax assessments.

b. Whether The Gok Payments For Dge Were Vatable. 135. The appellant submitted that the GOK TI Delay DGE Payments are not in respect of a taxable supply for the following reasons:a.First, the appellant did not make a supply of electrical or thermal energy to KPLC as the TI Line was not operational or any other taxable supply for that matter. In addition, there was no service that had been provided by the Appellant to GOK;b.Second, there was no agreement between the GOK and the appellant for the supply of power. There was no supply of power or services under the GOK support letter. The PPA, being the “supply” contract, was entered into between the appellant and KPLC. The GOK TI Delay DGE Payments were paid by GOK pursuant to the GOK support letter, a type of “guarantee” instrument whereby GOK undertook to “make good” an entity for a loss it may suffer, which the GOK has undertaken to protect the entity against, while undertaking its investment in Kenya. The GOK TI Delay DGE Payments were therefore not in respect of a supply or contract for the supply of goods or services between the appellant and KPLC (i.e., the PPA) but were purely meant to compensate the appellant for the loss occasioned by the TI delay; andc.Third, the GOK Tl Delay DGE Payments were paid by the GOK through the National Treasury and not KPLC. This is evidenced by the fact that the invoices with respect to the GOK TI Delay DGE Payments were issued by the appellant to the GOK (via) National Treasury and not KPLC. Therefore, any payments for supply of power by the Appellant would have been made by KPLC being the recipient of the supply. In this case, the GOK TI Delay DGE Payments could not therefore have been in furtherance of a supply.

136. The appellant submitted that based on the above facts, the GOK TI Delay DGE payments were not in respect of a supply of goods or services and therefore outside the ambit of the provisions of the VAT Act. Where there is no supply of goods or services as defined in the VAT Act, it follows that such transaction would not be subject to the provisions of the VAT Act. That the respondent had therefore made an erroneous conclusion that the GOK Tl Delay DGE payments are subject to VAT, without identifying the nature of the supply allegedly made by the appellant to GOK.

137. The appellant further submitted that the question as to whether a person made a supply is a factual issue for determination: either a supply of goods or services took place, or not. The respondent had concluded that the Appellant made a taxable supply under the GOK support letter on the basis that the GOK TI Delay DGE Payments were in respect of ‘Deemed Generated Energy’. The appellant submitted that such a premise is utterly flawed for two reasons:a.Firstly, the appellant submitted that the description of terms used in a contract are just that; purely descriptive of an item, a person or event. What matters in the construction of contracts is whether, from a simple reading, one can deduce the intention of the parties. The intention of the Parties, GOK and the appellant, in the GOK support letter was to provide for liquidated damages to the appellant for the delay in constructing of the TI Line.The appellant submitted that to assume otherwise would be tantamount to re- writing the GOK support letter, and by extension subverting the parties' intentions. In this premise therefore, the appellant urged the tribunal to, unlike the respondent, exercise a great measure of restraint and uphold the hallowed legal maxim that courts do not rewrite contracts. The appellant relied on National Bank of Kenya Ltd v Pipe Plastic Samkolit (K) Ltd (2001) eKLR, where the Court of Appeal held as follows;“A court of law cannot rewrite a contract between the parties. The parties are bound by the terms of their contract, unless coercion, fraud or undue influence are pleaded and proved.”The appellant noted that the term ‘deemed generated energy’ was used by the parties to determine with certainty the quantum of liquidated damages that would be payable to the Appellant in the event of default by GOK. The appellant humbly urged the tribunal to interpret the terms of the PPA and GOK support letter in light of the surrounding circumstances in order to ascertain the intention of the relevant parties as was the case in Aineah Liluyani Njirah v Aga Khan Health Services [2013] eKLR, where a three-judge bench of the Court of Appeal held that;“When ascertaining the intentions of the parties, the court should interpret the contract “in light of the surrounding circumstances which are reasonably available to the third party.” The English Court of Appeal confirmed this position in Prudential Assurance Co Ltd v Ayres although it is unclear whether or not there is a requirement that these surrounding circumstances should be readily available to the third party.''b.Secondly, the respondent’s premise of relying on the term ‘deemed generated energy’ as the basis of claiming the occurrence of a taxable supply was defective in law because it lent itself to the untenable notion of ‘deeming a supply’ where no supply had taken place. It is now trite that a taxpayer is not to be taxed unless the word of the taxing statute expressly and unambiguously imposes the tax on him or her. For this position, the appellant associated itself to the often-cited case of Cape Brandy Syndicate v Inland Revenue Commissioners [1921] KB 64 as applied in Keroche Industries Limited v Kenya Revenue Authority & 5 others [2007] eKLR (the Keroche Case) wherein Rowlatt J laid down the principles of taxation as follows;“In a taxing Act clear words are necessary in order to tax the subject. Too wide and fanciful a construction is often to be given to that maxim, which does not mean that words are to be unduly restricted against the crown or that there is to be any discrimination against the crown in those Acts. It simply means that in a taxing Act one has to look merely at what is clearly said. There is no reason for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing to be implied. One can only look fairly on the language used.”That as such, the respondent’s act of deeming as a supply when in fact no supply took place is akin to an illegal backdoor amendment of the VATA.

138. The appellant submitted that there was no supply undertaken by the appellant under the GOK support letter and that the GOK TI Delay DGE Payments were not in respect of a supply. That in addition, it is not in contention that the GOK TI Delay DGE Payments were not in respect of supply of electricity or lack thereof. That at no point has the respondent in its objection decision or statement of facts claimed that electricity was supplied by the appellant with respect to the tax demand. That this position can be confirmed by the fact that KPLC did not receive any supply of electricity during the period May 15, 2017 to September 23, 2018.

139. The respondent submitted that the payments were for compensation received for Deemed Generated Energy (DGE) and not liquidated damages as alleged by the appellant. That payment or compensation for deemed generated electricity is a taxable supply.

140. The respondent submitted that Deemed Generated Energy is the net energy that the appellant would have been able to transmit to the National Grid if the transmission interchange was ready.

141. The respondent submitted that the letter of support by the Government of Kenya was to guarantee payment for DGE just in case the connection to the National grid was not ready.

142. The respondent further submitted that in fact the National grid was not ready to absorb the energy when the appellant was ready to supply. The respondent submitted that there was an agreed amount of energy which would be deemed to be supplied until the national grid was ready to receive the energy.

143. The tribunal observes that VAT is charged pursuant to the provisions of the VAT Act on taxable supplies made in Kenya by a registered person. The section 5 (1) (a) provides as follows:-“(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;”

144. The section 5 (3) (3) provides that:-“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.”

145. The section 2 Value Added Tax Act, 2013 defines taxable supply as:“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;

146. That to further reiterate that deemed generated electricity is a taxable supply the respondent was guided by section 2 of the VAT Act which provides that:“supply of goods" means—(a)a sale, exchange, or other transfer of the right to dispose of the goods as owner; or(b)the provision of electrical or thermal energy, gas or water;

147. The tribunal notes that business is defined as any activity carried on by a person continuously or regularly, whether or not for gain or profit and which involves, in part or in whole, the supply of goods or services for consideration. The appellant supplied DGE for consideration. That consideration is subject to VAT.

148. All taxable supplies under the Act are vatable except exempt taxable supplies. The appellant did not provide evidence to demonstrate that the payment was for exempt services.

149. The Tribunal notes that the appellant received payments for Deemed Generated Energy (DGE) which is a taxable supply. That even if the payment was made by GOK it was made for the supply of Deemed Generated Energy.

150. The respondent submitted that terms of a contract are not superior to tax laws and it was bound by the tax laws to collect taxes from the appellant as long as the supplies of the appellant was a taxable supply.

151. The respondent agreed with the appellant that the GOK TI Delay DGE Payments were defined in the PPA as:-“…the amount payable in accordance with the GOK Support Letter in respect of GOK Tl Delay DGE commencing from the month in which the GOK Tl Delay DGE payments commencement date occurs.”

152. In the GOK letter of support Clause 11. 2 the Tribunal noted that it provided for payment of DGE. The clause provided that GOK shall make payments for the DGE to the appellant for delay until the completion date. Those payments were for guaranteed supply and consumption. The payments were for the energy the Appellant would have transmitted to the national grid if the TI was ready. The GOK paid for that supply.

153. The appellant submitted that there was no taxable supply made since that KPLC was the consumer while GOK made the payment. Therefore, according to the Appellant a supply can only be taxable if the consumer and the payer is one.

154. The respondent contended that the above assertion has no basis in law more particularly under the VAT Act, section 13 (1) which provides that:“(1)Subject to this Act, the taxable value of a supply, including a supply of imported services, shall be—(a)the consideration for the supply; or(b)if the supplier and recipient are related, the open market value of the supply.”

155. The respondent further relied on section 13 (3) which provides that:“(3)Subject to subsections (4) to (6), the consideration for a supply, including a supply of imported services, shall be the total of —(a)the amount in money paid or payable, directly or indirectly, by any person, for the supply; or(b)the open market value at the time of the supply of an amount in kind paid or payable, directly or indirectly, by any person, for the supply; and(c)any taxes, duties, levies, fees, and charges (other than value added tax) paid or payable on, or by reason of the supply, reduced by any discounts or rebates allowed and accounted for at the time of the supply.”

156. The foregoing sections provide that payment can be either in money or in kind which can be direct or indirect. The payment can be by any person for the supply. What is material is not who made the payment but rather was the payment made for a supply.

157. The respondent further submitted that the reason that GOK made the payment instead of KPLC does not negate that the payment was made for the DGE.

158. The respondent further averred that liquidated damages were defined in the case of Mawji v Kaderdina Hajee Essak Ltd (1992) KLR 429 in which Wambilianga, J as he then held that: -“i.Liquidated damages may be a genuine pre-estimate of the loss that will be caused to one party if a contract is broken by the other.ii.Liquidated damages mean that it shall be taken as the sum which the parties have by a contract assessed as the damage to be paid whatever may be actual damage.”

159. The respondent submitted that payment for DGE was not liquidated damages. It was payment for a taxable supply.

160. Article 209 of the Constitution of Kenya 2010, provides that;“Only the national government may impose income tax; value-added tax; customs duties and other duties on import and export goods; and excise tax”. Article 210 states that: “No tax or licensing fee may be imposed, waived or varied except as provided by legislation.”

161. The tribunal is persuaded that the payments received by the appellant were payment for a deemed supply received for Deemed Generated Energy (DGE) and not liquidated damages as alleged by the appellant. Payment for deemed generated electricity was a taxable supply.

162. The tribunal therefore finds that since the supply was taxable the respondent was justified to charge VAT.

c. Whether The Respondent Was Justified In Finding That Vat Was Due On The Substituted Energy Charges. 163. The appellant averred that from the outset, it would be important to note that the respondent subjected the entire amount of the GOK Tl Delay DGE Payments of € 167,261,163 to VAT, of which € 81. 6 million related to the substituted energy charges as a result of a tariff increase of € 0. 00845 per KWh. The appellant agreed to this arrangement on account of the GOK budgetary constraints to make payment. Effectively, the appellant waived its right to receive payment of € 81. 6 million from GOK under the GOK support letter in exchange for receiving payment from KPLC under the PPA in respect of a tariff increase on the Net Electrical Output and Deemed Generated Energy for the agreed period. The appellant therefore took full risk that it may not receive these payments if it did not generate and supply electrical energy to KPLC. The appellant also acknowledged that the payments would be vatable monthly with effect from the first invoice. It is therefore erroneous and unconscionable for the Respondent to construe this amount as part of the GOK Tl Delay DGE Payments.

164. An illustration of the payments received by the appellant is set out under Diagram 2 below.

165. The appellant asserted that in its notice of objection, the appellant provided the respondent with a schedule that set out all the amounts that had been invoiced to KPLC in respect of the supply of power from September 2018 to January 31, 2022. Pursuant to the said schedule, it was clear that from the period of September 2018 to January 31, 2022, the appellant had invoiced KPLC a total of € 40,836,121. 31 on which VAT in the amount of € 6,360,554. 31 (approximately Kes 703,477,306. 52) had been paid. The Appellant also supplied the Respondent with all the invoices in respect of the said duration.

166. As highlighted above, the appellant averred that it continued to remit VAT on the substituted energy charges on a monthly basis, as and when, it supplies electricity to KPLC, and the VAT amount that had been remitted for the period from September 2018 to September 30, 2022 amounts to Kes 965,264,175. 36 (at the actual applied EUR: Kes rate prevailing at the time of each monthly VAT remittance). The appellant further submitted that it diligently and dutifully remitted the VAT paid by KPLC on each monthly invoice.

167. The appellant further averred that it held a virtual meeting with the respondent on May 11, 2022 in which the respondent requested for additional information including an amended schedule which would indicate the amounts of invoices raised by the appellant and the VAT paid in Kenya Shillings. The appellant supplied the said additional information through a letter dated May 23, 2022. The appellant submitted that the allegation by the respondent in its statement of facts that the appellant did not supply the required information and a breakdown of the VAT paid on the substituted energy charges was therefore erroneous and in bad faith.

168. The appellant averred that the respondent, in its objection decision, stated that VAT that had been paid by the appellant in respect of the substituted energy charges was not taken into consideration during the review of the appellant’s objection on the ground that the total value of the invoices issued by the appellant and the VAT paid in respect of the said invoices as set out in the schedule provided by the appellant could not be traced to the VAT returns filed by the appellant. The respondent alleged that the VAT returns that were filed by the appellant had lumpsum amounts and therefore the VAT payments relating to the substituted energy charges and contained in the schedule could not be authenticated.

169. The appellant submitted that the schedule that was provided to the respondent contained a summary of the total amounts that had been invoiced by the appellant for the period September 2018 to January 2022 and the VAT that had been paid in respect of the total amounts. The VAT in respect of the substituted energy charges was arrived at through a mathematical computation owing to the fact that the Substituted energy charges arose on account of a tariff increase of € 0. 00845 per kWh payable by KPLC under the PPA. That the appellant raised monthly invoices addressed to KPLC for energy charges supplied to KPLC using the revised increased rates and therefore there are no split invoices with the old and Substituted tariff rates.

170. The appellant further submitted that the Substituted Energy Charges were arrived at by multiplying the total invoice amount of the respective month with the tariff increase on account of Substituted Energy Charges of 0. 008449557 per kWh. That the said computations were well illustrated in the schedule sent to the Respondent and it is appalling and in bad faith for the Respondent to claim that the VAT on Substituted Energy Charges could not be authenticated. That in any case, it has not been disputed by the Respondent that the Appellant paid VAT in respect of all supplies made by the Appellant to the KPLC from September 2018 to date and it would be illogical for the Respondent to claim that the Appellant did not pay VAT in respect of the substituted energy charges.

171. The Appellant asserted that a simple analysis by the Respondent of the VAT paid ought to have easily determined the quantum of VAT on account of the Substituted Energy Charges. It cannot simply be disregarded that a sum of VAT in the amount of €6,360,554. 31 (approximately Kes 703,477,306. 52) had been charged and paid by the Appellant to the Respondent in respect of the Substituted Energy Charges for the period from September 2018 to 31st January 2022. The Appellant continued to charge and pay the VAT amount and as of 30th September 2022, the total VAT amount charged and paid by the Appellant in respect of Substituted Energy Charges is Kes 965,264,175. 36.

172. The appellant averred that respondent’s singular basis of disregarding the VAT paid by the appellant and subjecting the Substituted Energy Charges to tax twice, is at paragraph 22 of its statement of facts where the respondent stated that:“The schedule provided by the appellant indicating the total invoice values and the substituted energy charges (SEC) could not be traced in the invoices and the VAT returns. The VAT returns and invoices had a lump sum amount and the payments contained in the schedule could not be traced to the primary documents with certainty.”

173. The Appellant submitted that it has discharged its burden of proof on this issue, to the extent it provided the Respondent with a schedule of the amounts invoiced to KPLC. That it is very unfair and unreasonable for the Respondent to claim that amounts in the schedule could not be traced in the tax returns and invoices. The rules and principles of natural justice and fair administrative action dictate that where the Respondent was not satisfied with the information provided to it, the Respondent could have requested for more information and documents or ask for a meeting with the Appellant to get an understanding of the figures.

174. The Appellant further averred that the Respondent had admitted that it had all the necessary primary documents i.e., the invoices and the tax returns, needed to ascertain whether the Appellant remitted VAT on the metered energy charges (which included the Substituted Energy Charges). That the Substituted Energy Charges were initially in respect of liquidated damages which the Appellant waived in exchange for an increase in tariff on the supply of electricity to KPLC. That upon waiver, the Appellant lost its rights to the liquidated damages and therefore the amount is part of the metered monthly electricity supply that the Appellant makes to KPLC. It was therefore unreasonable for the Respondent to expect the Appellant to issue two separate invoices for a monthly metered supply in which the change is an increase in tariff which was adopted as the applicable tariff for the relevant period. In any event this would go against the contractual billing and invoicing that the Appellant has with KPLC in the PPA.

175. The Appellant averred that it provided a breakdown of the VAT on the metered supply invoices relating to the original tariff and the increased tariff and provided copies of the invoices on the same. That the Respondent had failed to disclose to the Appellant the insufficiency in the documents availed to it. As such, the Appellant submitted that the Respondent simply failed to carry out a proper review and consequently issued an erroneous objection decision. That the notion that the payments could not be traced in the documents with certainty is a red herring aimed at concealing the Respondent’s indolence in conducting proper investigation into the Appellant’s tax affairs.

176. The Respondent submitted that during the objection, the Appellant provided a schedule indicating the total invoice values of alleged substituted energy charges (SEC). That however, those invoices were only totals which did not include supporting documents on how those totals were reached. That the VAT returns and invoices had lumpsum amounts and the payments contained in the schedule could not be traced to primary documents.

177. The Respondent averred that documents only indicated a total invoice amount without indicating how that total was arrived with relevant documents. Further that the Appellant was unable to demonstrate or trace the substituted energy charges to the invoices and VAT returns of the Appellant.

178. The Respondent further submitted that after the assessments were issued the burden shifted to the Appellant to proof that those assessments were wrong. That the Appellant was required to provide the documents in such a manner that they can dispense with that burden. That the schedule produced with only totals which had no supporting primary documents or supporting documents meant the burden was never shifted.

179. The Respondent relied on a similar scenario where only documents with totals were availed. That in the case of Wilken Telecommunications v Commissioner of Domestic Taxes TAT 195 of 2021 while dismissing the Appeal the Tribunal held that:“The tribunal reviewed the documents filed by the appellant and noted that the appellant only filed its financial statements. Neither the tax computation indicating how the taxable income had been arrived at nor other documents that may have supported its averments including how it arrived at the numbers in its statements were filed before the tribunal. Thus, we find that the appellant failed in discharging its burden of proving that the respondent’s assessment was erroneous excessive.”

180. The Respondent averred that the principles espoused by the above case required that when the Appellant produced the documents during the objection stage, the Appellant was required to produce the documents which can help determine its tax liability. That the Appellant produced documents with totals, without documents to support or demonstrate how those numbers were arrived that. That the burden of proof did not shift with the production of documents with mere totals.

181. The Respondent argued that the Appellant had failed to discharge its burden by adducing evidence. That the Court in Alfred Kioko Muteti v Timothy Miheso & another [2015] eKLR held that:“A party can only discharge its burden upon adducing evidence. Merely making pleadings is not enough. "In reaching its findings, the Court stated that: " Thus, the burden of proof lies on the party who would fail if no evidence at all were given by either party pleadings are not evidence”

182. The Tribunal reiterates its decision in the case of Tenhos Sacco Society Limited v Commissioner of Domestic Taxes TAT No 413 of 2019, at paragraph 84, where the Tribunal held that:“The Appellant was under a duty to provide a further breakdown of its income based on whether it is exempt or chargeable to tax and apportion the expenses accordingly. Section 56 of the Tax Procedures Act is clear that the burden to prove that a tax decision is wrong falls upon the taxpayer. The appellant in this case failed in discharging this burden.”

183. This was similarly the finding in McMillan v Canada 2012 FCA 126 when the Court of Appeal held that:“In our respectful view, it is settled law that the initial onus on an appellant taxpayer is to "demolish the Minister's assumptions in the assessment. This initial onus of "demolishing" the Minister's assumptions is met where the taxpayer makes out at least a prima facie case. Once the taxpayer shows a prima facie case, the burden is on the Minister to prove, on a balance of probabilities, that the assumptions were correct.”

184. The Tribunal therefore finds that the production with mere totals did not establish a prima facie case to shift the burden to the Respondent to justify its decision.

d. Whether The Respondent Was Justified In Subjecting € 6. 2 Million Refund To The Gok By The Appellant To Vat. 185. The appellant averred that the respondent subjected to VAT the entire amount of the TI Delay DGE payments and failed to account for the amount of € 6. 2 Million that had been agreed as a further refund due to GOK, being the difference between estimated GOK TI Delay DGE at the time of signing the Second Variation Agreement and the actual GOK TI Delay DGE that was subsequently determined as required under the Second Variation Agreement. That the Appellant proceeded to pay the refund to the GOK and the GOK has since confirmed receipt of the GOK Tl Delay DGE Payment Refund vide a letter from the KPLC dated 27th April 2022.

186. The Appellant averred that in the Respondent’s objection decision, the Respondent stated that the refund of GOK TI Delay DGE was unprocedural because the Appellant did not provide evidence of when the refund was made, and no credit note was issued by the Appellant pursuant to Section 16 of the VAT Act. With respect and conviction, the Appellant submitted that it provided the Respondent with a SWIFT confirmation receipt confirming the transfer of € 6,173,293 refund in a letter from the Appellant to the Respondent dated March 23, 2022. That the Appellant also provided the Respondent with various letters where the Appellant was requesting for bank account details from the GOK to make payment of the refund. That the delay in making the refund was a result of delays from the GOK in providing the bank details for the GOK into which the refund was to be transferred and the Appellant was not at fault.

187. The Appellant submitted that in line with section 56 of the TPA it adequately discharged its burden of proof in respect of the refund by way of evidence through the SWIFT confirmation receipt and supporting correspondence between the Appellant and GOK. Appellant associated itself with the case of Kenya Revenue Authority v Man Diestel and Turbo Se, Kenya [2021] eKLR, where the honourable Mativo J observed as follows;“31. The import of the above provisions is that the party with the obligation of persuasion (what Wigmore termed the risk of non-persuasion) is said to bear the burden of proof. The flip side of the foregoing is the effect of non-persuasion on a party with the burden of proof which is that the particular issue at stake in the litigation will be decided against him/her. Generally, the taxpayer has the burden of proof in any tax controversy. The taxpayer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect.”

188. The appellant averred that shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the commissioner's assessments or determinations of deficiency. The commissioner's determinations of tax deficiencies were presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remained until the taxpayer produced competent and relevant evidence to support his position. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer.

189. The appellant submitted that in paragraph 27 of its statement of facts, the respondent averred that the appellant did not provide third party documents. The Appellant submitted that this argument is logically flawed as the SWIFT confirmation presented by the appellant is indeed by definition a third-party document. That furthermore, it is utterly disingenuous of the Respondent to raise the issue of the third-party documents at the pleading stage, yet the Respondent could have easily made a request for additional documents before issuing the objection decision. To buttress this position, the Appellant implores the Tribunal to be guided by its judgment on the issue of request for additional documents in the case of the Abdi Gedi Case as highlighted above.

190. On the issue of raising a credit note, the Appellant submitted that as established in the entirety of the foregoing submission, the receipt of the GOK TI Delay DGE Payments was not a transaction governed by the VATA. As such, it would be entirely moot and an exercise in futility for the Appellant to raise a credit note yet the transaction does not satisfy the essential criteria spelt out Section 16 of the VAT Act. In any event, even if a credit note were to be issued by the Appellant to GOK, the credit note would be for accounting purposes only and not for purposes of Section 16 of the VATA since the payments, as has been extensively argued above, were not subject to the provisions of the VAT Act ab initio as there was no underlying taxable supply as defined in the VAT Act.

191. The Appellant submitted that in line with Section 56 of the TPA it adequately discharged its burden of proof in respect of the refund by way of evidence through the SWIFT confirmation receipt and supporting correspondence between the Appellant and GOK.

192. The Respondent submitted that the refund of TI DGE by the Appellant to GOK was noted to have taken place much later than had been explained by the Appellant in its notice of objection. That the AHM message printing took place on 28th March 2022 and no evidence like bank statements was provided to indicate the money was actually refunded.

193. The Respondent averred that from the documents presented by the Appellant, it would not be established whether there was a refund and if there was a refund the date on which the refund was made. That the date of the refund is material since the VAT Act only allows refunds within six months.

194. The Tribunal observes that the Appellant provided confirmed and acknowledged receipt of the GOK Tl Delay DGE Payment Refund vide a letter from the KPLC to the Appellant dated April 27, 2022.

195. The Tribunal also takes notes that the Appellant having provided a letter to the Respondent dated 23rd May 2022, the Appellant provided the Respondent with a swift confirmation receipt confirming the transfer of Euros € 6,173,293 refund from the Appellant to the GOK. The Appellant also provided the Respondent with various letters where the Appellant was requesting for bank account details from the GOK to make payment of the refund.

196. Guided by the above, tribunal finds that the Appellant issued the Respondent with sufficient documentary evidence to reasonably conclude that the refund of the €6,173,293 was not subject to VAT.

Final Decision 197. In view of the foregoing, the Tribunal finds that the Appeal partially succeeds and accordingly makes the following orders;a.That the objection decision dated May 30, 2022 be and is hereby varied in the following terms;i.The respondent’s VAT assessment in relation to the GOK payments for deemed generated energy be and is hereby upheld, subject to the respondent undertaking a re-computation, taking into account a deduction on the vatable amount of € 6. 2 million refunded by the appellant to the Government of Kenya, within Ninety (90) days of the date of delivery of this Judgment.ii.The respondent’s VAT assessment in relation to substituted energy charges be and is hereby upheld.b.Each Party to bear its own cost.

198. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 6TH DAY OF OCTOBER, 2023ERIC NYONGESA WAFULA.................CHAIRMANCYNTHIA B. MAYAKA........................MEMBERGRACE MUKUHA.................................MEMBERJEPHTHAH NJAGI.................................MEMBERABRAHAM K. KIPROTICH..................MEMBER