[2023] KETAT 147 (KLR)

Loyalty Refined Limited v Commissioner of Domestic Taxes (Tribunal Appeal 382 of 2022) [2023] KETAT 147 (KLR) (10 February 2023) (Judgment)

Neutral citation: [2023] KETAT 147 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 382 of 2022

RM Mutuma, Chair, RO Oluoch, E.N Njeru, D.K Ngala & EK Cheluget, Members

February 10, 2023

Between

Loyalty Refined Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company during incorporated under the Companies Act of the laws of Kenya and with its principal business activity being the distribution and supply of soft drinks in Bondo Town, Siaya County.

2. The Respondent is the principal officer appointed under Section 13 the Kenya Revenue Authority Act and the Kenya Revenue Authority is an agency of the Government mandated with the function of among others, the assessment, collection, receipting, accounting for all tax revenue as well as the administration and enforcement of the relevant tax laws set out in the Schedule to the said Act.

3. The dispute giving rise to this Appeal arose when the Respondent conducted a review of the Appellant’s income tax returns whereon it established variances on its income tax and VAT returns.

4. The Respondent vide its letter dated 27th October,2021 demanded from the Appellant to pay VAT as a result of the variance. The variances were brought to tax and the Respondent raised additional VAT assessments of Kshs 24,185,564. 00.

5. The Appellant thereafter raised an objection through the iTax system on 21st January 2022.

6. The Appellant’s objection was rejected by the Respondent on 22nd March 2022.

7. Dissatisfied with the Respondent‘s objection decision the Appellant filed a Notice of Appeal on the 14th April, 2022.

The Appeal 8. The Appellant filed a Memorandum of Appeal on the 14th April 2022 in which it set out the following grounds of appeal ;i.That the Respondent defaulted in making a decision within the prescribed time and the said objection was deemed to have been allowed.ii.That the Respondent sent to the Appellant an objection decision with reference to an objection application done on 14th October 2021. iii.That the Respondent sent to the Appellant an objection decision with a tax due of Kshs 25,327,198 which it did not object to.iv.That the Respondent confirmed the notice of assessment without due regard to all records, explanations and information provided by the Appellant; thereby failing to appreciate all issues presented by the Appellant before confirming the assessment.v.That Section 51(3) of the TPA, provides for the conditions that need to be fulfilled for a notice of objection to be treated as validly lodged by a taxpayer. The Appellant stated precisely the grounds of objection, the amendments required to correct the decision, and the reasons for the amendments as provided for in the Tax Procedures Act, which is the responsibility of the Commissioner to involve and direct the Appellant on additional documentation needed.vi.That the amounts confirmed by the Respondent of Kshs 25,327,198 in respect to VAT for the period 2017 -2020 is therefore wrong in law and fact and should be annulled.

9. Wherefore by reason of the foregoing grounds , the Appellant prays that the Tribunal allows the Appeal and sets aside the decision of the Respondent or be varied in such manner as is just and reasonable.

The Appellant’s Case 10. The Appellant in support of the Appeal filed a Statement of Facts on the 14th April, 2022

11. The Appellant stated that during the year 2017 when the Appellant started the business of supplying soft drinks, its PIN was suspended for the reason it was not filing VAT3 yet it had obligations, all the returns were filed nil to enable the Appellant get its pin activated.

12. The Appellant further stated that after the activation the Appellant amended all the returns from the month of June 2017 to October 2017 on 19th December 2017, out of which only the September 2017 return has been approved , months after , but the others are not yet approved to date , which brings about variance an the IT2 and VAT3.

13. It was also stated that in the year 2018 the Appellant filed all the returns except for the month of November 2018 where sales were understated and purchases not declared hoping to amend later, which was not amended, and this also brought about the variance between IT2 and VAT sales for the year 2018.

14. In the year 2019, the Appellant stated that it also filed a nil return for the months of September, October and November, and this also brought a variance between IT2 and VAT3 sales.

15. The Appellant stated that in the year 2020, the following months were filed zero; February, March, and April, which also brought a variance between the IT2 and VAT 3 sales.

16. The Appellant stated that the variance in all these years were as a result of sales of IT2 returns; were declared correctly, but in the case of the VAT3 sales, some months were not declared.

17. The Appellant also stated that on the 27th of October 2021, the Appellant received communication from the Respondent regarding the variances after which the Appellant responded to the Respondent , and they agreed that the returns were to be amended accordingly , but the Appellant was unable to amend because of some technicalities, as the inputs were past the prescribed period of six months.

18. Thereafter on 26th November 2021, the Respondent requested the Appellant to avail the original invoices, which were submitted the same day.

19. The Appellant further stated that on the 22nd December 2021, the Respondent raised VAT additional tax assessment dated the same date for the period August 2017, September 2017 , November 2017 , November 2018 , October 2019 , and April 2020 in respect of VAT , as set out herebelow ;Month Amount of Assessment

August 2017 - ……………………… Kshs 5,983,117. 85

September 2017 - ……………………… - Kshs 518,819. 90

November 2017 - ……………………… - Kshs 547,373. 64

November 2018 -……………………… - Kshs 2,883,900. 88

October 2019 - ……………………… - Kshs 7,706,233. 54

April 2020 - ………………………… - Kshs 6,660, 772. 97

TOTAL Kshs 24,300,218. 78

20. The Appellant stated that the reason the Respondent erred in arriving at the abovesaid assessment, and thereby arrived at the wrong assessment is because;i.The resultant VAT assessment is as a result of taking into consideration only sales without considering purchases for the period November 2018, October 2018 and April 2020, which was actually the cost applied to generate the same income.ii.For the year 2017, there were application of returns amendment for the months of June 2017, July 2017, August 2017 and October 2017 which have not been approved to date.

21. By reason of the foregoing submissions, the Appellant prayed to the Tribunal to allow the Appeal and set aside the Respondent’s objection decision.

The Respondent’s Case 22. The Respondent has set out its response to the Appellant ‘s case in its Statement of Facts filed on 13th May 2022 and the written submissions filed on 14th November 2022.

23. The Respondent stated that a dispute arose when it conducted a review of the Appellant’s income tax returns where it established variance on its income tax returns and VAT returns. The Respondent demanded from the Appellant vide its letter of 27th October 2021 payment of VAT as a result of the variance.

24. The Respondent further stated that the variances were brought to tax and the Respondent raised additional VAT assessments amounting to a total of Kshs 24,185,564. 00, as restated herebelow;2017 2018 2019 2020 TOTAL

Sales as per IT2C 102,484,186 200,786,423 220,990,081 216,629,404

Sales as per VAT3s 65,089,699 182,762,042 172,826,121 169,052,454

Variance 37,394,487 18,024,381 48,163,960 47,576,950

VAT@16% 5,983,118 2,883,901 7,706,234 7,612,312 24,185,564

25. The Respondent stated further that it established that there were duplicate invoices for the months of September and November 2017, that had been claimed in the respective returns. The Respondent states that these resulted to double claim of the credit carried forward which brought about VAT assessments of Kshs 1,502,122. 00

26. The Appellant did not provide any relevant documentation in support of its objection in regard to the issue of duplicate invoices.

27. The Respondent stated that it analyzed the various amendments provide by the Appellant and found that if adopted would have reconciled the variances raised by the Respondent.

28. It was contended by the Respondent that the Appellant proposed amendments for the Months of November 2018, August 2019 , September 2019, October 2019 , February 2020, March 2020 , and April 2020. Theproposed amendments had both sales which had not been declared and purchases which had not been claimed.

29. The Respondent contended that the input tax claim was made after six months as such the purchases cannot be claimed .

30. The Respondent submitted that section 17 of the VAT Act, provides that VAT should be claimed within six months from the time of supply. The Respondent states that the right to claim VAT is not dependent on the time of filing the VAT return but the timing when the VAT fell due. Consequently, the input tax claimed after the end of the tax period when the supply occurred is time barred.

31. The Respondent stated that it issued its objection decision on 22nd March 2022 confirming the VAT Assessment of Kshs 25,327,198. 00 for the period 2017 to 2020.

32. The Respondent submitted that the Appellant cannot claim VAT input outside the six months from the time it fell due , as provided under Section 17 of the VAT Act.

33. The Respondent submitted that Section 17 of the VAT Act provides that VAT should be claimed within six months from the time of supply. The Respondent states that the right to claim input VAT is not dependent on the time of filing the VAT return but the timing when the VAT input fell due (time of supply). Consequently , the input tax claimed after the end of the tax period when the supply occurred is time barred.

34. The Respondent made reference Section 17(1) of the VAT Act which makes provision for VAT input tax as follows:-“(17)Credit input tax against output tax,1. Subject to the provisions of this section and the regulations, input tax on a taxable supply to , or importation made by , a registered person may , at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but to the extent that the supply or importation was used to make taxable supplies .2. ….. provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred “.

35. The Respondent submitted that the right to claim input VAT is not dependent on the time of filing the VAT Returns but the timing when the VAT fell due (time of supply or importation).

36. The Respondent submitted that the foregoing principle was echoed in the case of Highlands Mineral Ltd -vs- Commissioner of Domestic Taxes [2021] eKLR, where it was held , “ The straightforward interpretation of section 17 (2) of the VAT Act is that the six month period of claiming input VAT begins to run when the supply or importation occurred not necessarily when the return is filed. Meaning, if a taxpayer files a VAT return say, 7 months after when the supply or importation occurred, then the input tax claimed on that return cannot be allowed “

37. The Respondent therefore submitted that the additional taxes raised in their assessments were proper in law and were based on the evidence availed by the Appellants.

38. The Respondent submitted that the core issue is whether there was proof of a taxable supply for which the Appellant could base its claim for input tax refunds. It was also the submission of the Respondent that Section 59 of the TPA requires the Appellant to provide records to enable it determine its tax liability. The Respondent states that the Appellant failed to avail the records to reconcile the duplicated invoices.

39. The Respondent further submitted that the burden is on the Appellant to demonstrate that it has discharged its tax liability as provided for under Section 56 of the TPA and Section 30 of the TAT Act. The Respondent submitted that this burden was never discharged as no documentary evidence was availed to the Respondent as alleged.

40. The Respondent cited the case of Kenya Revenue Authority -vs- Man diesel & Turbo Se. Kenya [2021] eKLR, where it was held, “ Generally, the taxpayer has the burden of proof in any 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.”

41. The Respondent stated that from the case law and the legal provisions cited, it is not enough to state that the Respondent failed to consider something , instead that the same was raised and ignored during the objection stage, and the evidence was presented and ignored or was not considered.

42. The Respondent submitted that there were no documents provided by the Appellant or any additional information which would have led to a change in the tax assessment, noting that the tax assessment process is designed to require taxpayers to provide the Respondent with all documents which allow them to identify their appropriate tax position.

43. The Respondent therefore urged the Tribunal to find that the Appellant had done absolutely nothing to discharge the burden of proof and that the Respondent assessments were proper in law.

44. By reason of the foregoing submissions, the Respondent prays that this Honourable Tribunal upholds the objection decision dated 22nd March 2022 and dismiss the Appellant‘s Appeal with costs.

Issues For Determination 45. The Tribunal have carefully considered the pleadings filed, the evidence submitted and the submissions made by the parties is of the considered view that the Appeal herein crystalizes into two issues as hereunder;i.Whether the Respondent erred in disallowing the Appellant’s VAT input tax claims ?ii.Whether the Respondent was justified in confirming the assessment against the Appellant ?

Analysis And Determination i Whether the Respondent erred in disallowing the Appellant’s VAT input tax claims ? 46. The pertinent issue in the Appeal herein is whether there is proof of taxable supplies for which the Appellant could base its claim for input tax refunds.

47. In its averments, the Appellant stated that it amended all the returns from the month of June 2017 to October 2019 on 19th December 2017 out of which only the September 2017 return was approved, but the others were not approved bringing about variance on the IT2 and VAT3.

48. The Appellant stated that in the year 2018 it filed all the returns except for the month of November 2018 where sales were understated and purchases not declared hoping to amend later, which was not amended and this also brought about the variance between IT2 and VAT3 for the year 2018.

49. The Appellant in the year 2019 it filed nil returns for the months of September, October, and November and this also brought about a variance between IT2 and VAT3.

50. That lastly in the year 2020 the Appellant filed nil returns for the months of February, March, and April, which also brought about a variance between IT2 and VAT3.

51. The Appellant averred that the variances in the particular years were as a result of IT2 returns which were declared correctly but the VAT3 returns for some months were not declared.

52. The Appellant also submitted that it did engage with the Respondent with a view to amending and submitting the VAT input tax claim but the same turnout to be past the prescribed six months’ period.

53. On the other hand, the Respondent averred that it established that there were duplicate invoices for the months of September and October 2017, that had been claimed in the respective returns, and these resulted in double claim of the credit carried forward which brought about VAT assessment of Kshs 1,502,122. 00. The Respondent stated that the Appellant did not provide any relevant documentation in support of its objection in regard to the issue of duplicate invoices.

54. The Respondent also averred that it analyzed the various amendments provided by the Appellant and found that if adopted they would have cleared the variances raised by the Respondent.

55. The Respondent further averred that the Appellant proposed amendments for the months of November 2018, August 2019, September2019, February 2020, March 2020, and April 2020.

56. However, the Respondent contended that the input tax claim was made way after the statutory period of six months and as such the inputs could not be claimed.

57. The Respondent submitted that the Appellant cannot claim input VAT beyond the statutorily allowed period of six months, as provided for under Section 17 of the VAT Act;“(2)…Provided that the input tax shall be allowable for deduction within six months after the end of the tax period in which the supply or importation occurred.”

58. The Respondent submitted that the right to claim input VAT is not dependent on the time of filing the VAT, but the timing when the VAT fell due.

59. In the case of Highlands Mineral Water Ltd -vs- Commissioner of Domestic Taxes [2021] eKLR, the learned Judge held that:-“The straightforward interpretation of Section 17(2) is that the six- month period of claiming VAT begins to run when the supply or importation occurred not necessarily when the return is filed. Meaning , if a taxpayer files a VAT return say , seven months after when the supply or importation occurred , then the input tax claimed on that return cannot be allowed .”

60. The Respondent therefore submitted that the additional taxes raised in their assessments were proper in law and were based on the evidence availed by the Appellant.

61. The Tribunal has considered whether the Respondent was justified in disallowing VAT input tax claimed by the Appellant due to late filing of its VAT returns, beyond the six month’s period. In the Tribunal’s considered view, the wording of Section 17(2) of the VAT Act is clear and unambiguous , with the effect that where a taxpayer files its returns late , then the VAT input tax should only be allowed for deductibility to the extent that it is within six months at the time of filing the return.

62. Section 17(2) of the VAT Act deals with , “ Credit for input tax against output tax “ and shows that the input tax on a taxable supply or importation made by a registered person, may at the end of the tax period in which the supply occurred , be deducted by the registered person from the tax payable by the person on supplies by him in that tax period, which under Section 2 of the VAT Act means one calendar month or such other period as may be prescribed in the Regulations to the extent that the taxable supply was acquired to make taxable supplies.

63. However, under the proviso, input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply occurred.

64. To this extent the Tribunal agrees with the Respondent that the plain and unambiguous language of Section 17(2) of the VAT Act is clear the condition provided for a taxpayer to qualify for Vat input tax claim is that the input tax is to be allowable for deduction within six months after end of the tax period in which the supply or importation occurred.

65. The Tribunal therefore concludes that flowing out of the foregoing submissions, the only inescapable finding we can make is that the Appellant’s VAT input tax claims having been made beyond the statutorily allowed period of six months, were ineligible for refund claim nor allowable, and the Respondent was justified in disallowing the same.

ii. Whether the Respondent was justified in confirming the assessment against the Appellant? 66. It may be as well to conclude the Appeal herein with the first issue and which is core, ie, the proof of tax inputs. However, the Tribunal is minded of the fact that there were other issues of proof of taxable supply on which the Appellant could base its claim for input tax refunds, and there is also the issue of double claim of credit carried forward. The Appellant did not provide any insight or documentation to rebut the Respondent’s contentions in this regard.

67. The Respondent contended that Section 59 of the TPA requires the Appellant to provide necessary documents to enable it determine its tax liability. The Respondent averred that the Respondent failed to avail the records to reconcile the duplicated invoices.

68. The Respondent further submitted that the burden is on the Appellant to demonstrate that it has discharged its tax liability as provided for under Section 56 of the TPA and Section 30 of the TAT Act. The Respondent submitted that this burden was never discharged as no documentary evidence was availed to the Respondent.

69. The Tribunal took note of the citation in Kenya Revenue Authority -vs- Man Diesel & Turbo Se. Kenya Ltd [2021[ eKLR , where it was held that:-“Generally, the taxpayer has the burden of proof in any 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.”

70. From the averments of both parties, there is no doubt that the invoices, VAT tax inputs and returns submitted by the Appellant did not provide additional information, which would have led to a change in the tax assessment.

71. It would therefore be justified for the Tribunal to conclude and make a finding that the Appellant did not discharge its burden of proof and that the Respondent’s assessments were proper in law.

72. In view of the foregoing the Tribunal finds and holds that the Respondent was justified in confirming its tax assessments against the Appellant.

Final Decision 73. The upshot of the foregoing analysis is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders;a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 22nd March 2022 be and is hereby upheld.c.Each party to bear its own costs.

74. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF FEBRUARY, 2023. ROBERT M. MUTUMACHAIRPERSONRODNEY O. OLUOCHMEMBERELISHAH NJERUMEMBERDELILAH K. NGALAMEMBEREDWIN K. CHELUGETMEMBER