[2023] KETAT 939 (KLR)

Masai Rolling Mills Ltd v Commissioner of Domestic Taxes (Appeal 1361 of 2022) [2023] KETAT 939 (KLR) (Civ) (20 December 2023) (Judgment)

Neutral citation: [2023] KETAT 939 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 1361 of 2022

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

December 20, 2023

Between

Masai Rolling Mills Ltd

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a private limited liability Company incorporated under the Companies Act and a registered taxpayer in the Republic of Kenya. Its core business activity is manufacture of steel products whose main raw material for production is scrap metal. The Appellant is also an appointed withholding tax agent for the Respondent.

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

3. The Respondent reviewed the Appellant’s filed VAT returns for four months of 2022 i.e. January, February, June and July with the sole aim of establishing whether the Appellant was tax compliant. As a result, the Respondent issued an assessment for input VAT of Kshs. 26,178,847. 53 on 2nd September 2022 on its i-Tax portal. The Appellant objected to the assessment on 3rd September 2022 on the iTax portal.

4. While acknowledging the Appellant’s objection Vide an email on 6th September 2022, the Respondent issued a Notice of Invalidation of the Appellant’s objection and demanded that the Appellant furnish its grounds of objection with supporting documentation within 7 days from the date of electronic mail as guided by Section 51(3) of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’).

5. On 7th September 2022, the Respondent vide a letter titled “Missing Traders claims” alleged that the Appellant had claimed input VAT from Tarua Scrap Metal Dealer Ltd of Kshs. 5,471,552. 00 using invoices for which no sales/deliveries were made.

6. On 12th September 2022, the Appellant in a forwarding letter informed the Respondent of a technical hitch it was experiencing on the iTax portal while filing for input VAT returns for the month of August 2022 specifically for its two major suppliers i.e. Tarua Scrap Metal Dealer Ltd and Phenka Trading Company Limited. It further informed the Respondent that it had also informed the suppliers who were working with their relevant stations to resolve the stalemate. The two suppliers’ PINs had been blocked on the Respondent’s iTax portal occasioning the hitch.

7. The Respondent provided an invoice tabulation for the two suppliers of disallowed input VAT claims that it claimed were contrary to Section 17 of the VAT Act, No. 35 of 2013 (hereinafter ‘VAT Act’) for the months in dispute.

8. On 7th October 2022, the Respondent via electronic mail reached out to the Appellant’s suppliers i.e. Tarua Scrap Metal Dealer Ltd and Phenka Trading Company Limited with the view of obtaining documentation to confirm the Appellant’s input VAT claim. The Respondent demanded the following from the two suppliers:a.Confirmation of supplies to the Appellant.b.Sales ledger for the period.c.The suppliers bank statements/ proof of payment.

9. On 26th October 2020, the Respondent issued an Objection decision against the Appellant for Kshs. 26,178,850. 32 for the months of January, February, June and July 2022 being alleged amounts of disallowed input VAT claims. The Respondent alleged that the disallowed input VAT was because they were not in compliance with Section 17 (2)(b) of the VAT Act and that the two impugned suppliers had failed to confirm the supplies made to the Appellant.

10. On 28th October 2022 the Respondent and the Appellant representatives held a meeting at the Respondent’s office where upon they agreed on a staggered payment plan for output VAT for August 2022 that had been unanimously agreed as due and payable as evidenced by the Minutes of the meeting.

11. On 31st October 2022, the Appellant wrote to the Respondent and its suppliers informing them that it had managed to file VAT returns for the month of August and September 2022 after the previously blocked PIN numbers were reactivated on the Respondent’s iTax portal.

12. Aggrieved with the Respondent’s objection decision, the Appellant lodged its Notice of Appeal on 11th November 2022.

The Appeal 13. The Appellant’s laid out the following grounds of Appeal in its Memorandum of Appeal dated 10th November, 2022 and filed on 11th November, 2022:-i.That the Respondent erred in fact and law by upholding its decision confirming the Appellant’s VAT input additional assessment arising from supply of taxable goods from its suppliers Phenka; Trading Company Limited and Tarua Scrap Metal Dealer Ltd, notwithstanding the fact that records of the Appellant show that the purchases were made and VAT accounted for as provided under the law.ii.That the Respondent erred in fact and law as it completely failed to take into account the figures, records and information supplied to it proving that the Appellant had indeed purchased goods from the aforementioned suppliers and that the said goods were actually delivered.iii.That the Respondent erred in fact and law by claiming that there were no purchases made by the Appellant from the aforesaid suppliers for the months of January, February, June and July 2022 totaling Kshs. 164,853,507. 00 and therefore stating that there was no supply of taxable goods made to the Appellant by its suppliers.iv.That the Respondent erred in fact and law by disallowing the Appellant’s Input tax amounting to Kshs. 26,178,850. 32 for the aforesaid months arising from the purchases made by the Appellant from its suppliers.v.That the Respondent erred in fact and law by failing to consider that the Appellant as a withholding tax agent had been remitting 2% of the VAT for suppliers. The Respondent should therefore be able to collect the 14% from those suppliers as the Appellant would not be making the remittances for non-existent suppliers.vi.That the Respondent erred in fact and law by disallowing VAT on purchases until the suppliers declare their output VAT thereby punishing the Appellant for the non-payment of taxes by the individual taxpayers and placing their tax burdens on the Appellant.vii.That the Respondent erred in fact by not following up on payment of tax by its taxpayers despite the fact that the Appellant had provided it with the account numbers and KRA PIN numbers. The Respondent, being an issuer of the KRA PIN numbers, has the statutory mandate to follow up on its taxpayers and cannot shift this burden on a taxpayer who has otherwise complied with its own obligations.viii.That the Respondent erred in fact and law by failing to consider the weighbridge tickets as evidence of purchases made for the supplies which were produced in lieu of delivery notes. The Respondent failed to consider that the scrap metal being unsorted material would not fit any description for which a delivery note would be issued.ix.That the Respondent erred in fact and in law to place the burden of undeclared taxes on the suppliers and instead penalized the Appellant for the suppliers’ indiscretions, despite the fact that the Appellant had paid the amounts owed to the suppliers pursuant to the sales invoices they had raised.x.That the Respondent erred in fact and law by alluding to the fact that there were missing traders whereas the fact that there were weighbridge tickets, sales invoices from the suppliers, bank payments to the suppliers, undeclared VAT by suppliers, remitting of 2% withholding tax (VAT) by the Appellant all point to the fact that the suppliers are indeed existing businesses that have been trading with the Appellant.

Appelant’s Case 14. The Appellant’s case is premised on its Statement of Facts dated 10th November, 2022 and filed on the 11th November, 2022.

15. The Appellant averred that on 6th September 2022 the Respondent acknowledged receipt of its notice of objection dated 3rd September 2022 while at the same time requesting to be furnished with documentation and grounds for the objection. This was in response to the Respondent’s additional assessment notice of 2nd September 2022 that had been lodged on the Appellant’s i-Tax portal account.

16. The Appellant averred that it wrote a letter forwarding the following requested documents in line with Section 59 of TPA;i.Supplier invoices with ETR ad supporting payment vouchersii.Detailed and well populated weighbridge tickets for actual weight of materials suppliediii.Bank statements (KCB) from January to July 2022 well marked to indicate payment.iv.A schedule of 2% Withholding VAT for relevant invoices.

17. The Appellant averred that on 20th September 2020 it wrote a letter informing the Respondent its inability to file its VAT return for the month of August 2022 due to blocking of two of its suppliers’ PINs whom the Respondent had listed under “missing trader” category. This was subsequently followed up by a meeting on 28th September 2022 of the representatives for the Appellant and the Respondent where the Appellant explained its predicament regarding the VAT filing.

18. The Appellant contended that it is supplied with scrap metal in unsorted mass of truckloads at its premises meaning it is improbable to issue delivery notes as description of the raw material delivered was impossible to make. That in lieu of delivery notes, the Appellant issues weighbridge tickets that are populated with names of the supplier, the driver, detailed description of the vehicle making the delivery, time in and time out of the factory, the gross weight of the truck entering the factory and its tare weigh leaving the factory, then the difference is recorded as net weight of the offloaded material which then becomes the basis for payment to the supplier.

19. The Appellant averred that it strictly received deliveries from suppliers who had Personal Identification Number (PIN) Certificates as well as bank accounts as payment was made strictly through the bank.

20. The Appellant averred that the Respondent’s claim of missing trader was unfounded as its suppliers were clearly identifiable and there was proof of supply in the weighbridge tickets, invoices raised by suppliers, payment vouchers as well as the Appellant’s bank statements.

21. That the Appellant being an appointed withholding tax agent for the Respondent had dutifully remitted 2% VAT withheld from its suppliers, it would be dishonest on the part of the Respondent to collect the same while ignoring the purchase tax of taxable raw materials used to manufacture the product being sold.

22. The Appellant averred that it was served with an objection decision by the Respondent on 26th October 2022 disallowing input tax of Kshs. 26,178,850. 32 for the months of January, February, June and July 2022. The reason being that the Appellant was not compliant with Section 17(2)(b) of VAT Act and that its two major suppliers had failed to confirm the supply for input VAT claimed.

23. The Appellant stated that on 31st October 2022, it wrote to the Respondent indicating that it had succeeded in filing for input VAT returns for the two suppliers for the months of August and September 2022 as their previously blocked PINs had become operational.

Appellant’s Prayers 24. The Appellant prayed that the Tribunal should set aside and annul the assessment by the Respondent with costs.

The Respondent’s Case 25. The Respondent replied to the Appellant’s Appeal through its Statement of Facts dated 2nd December 2022 and filed on even date.

26. The Respondent averred that Section 24 of the TPA allows a taxpayer to submit tax returns in the approved form and manner prescribed by the Respondent; but that it is not bound by the information provided therein and can assess additional taxes on any other available information.

27. The Respondent contended that the Appellant’s self-assessment complied with Sections 24 and 28 of the TPA and that the additional VAT assessment were issued based on disallowed VAT input claims that did not meet the requirements of Section 17(1) and Section 17(2)(b) of VAT Act.

28. The Respondent acknowledged receipt and review of the Appellant’s objection but disallowed it for failure by the highlighted suppliers to confirm the said supplies and input VAT claims within the meaning of Section 17(2)(b) of VAT Act.

Respondent’s Prayers 29. The Respondent’s prayers to the Tribunal were that its objection decision dated 26th October 2022 be upheld for being proper and that the Appeal be dismissed with costs as the same was without merit.

Parties Written Submissions 30. The Tribunal notes that the Respondent did not file written submissions. The Appellant’s written submissions dated 28th February 2023 were filed on 1st March 2023.

31. The Appellant averred that it received an additional assessment notice for allegedly disallowable input VAT claims which did not comply with the provisions of Section 17 of the VAT Act.

32. The Appellant submitted that its objection of 3rd September 2022 was rejected by the Respondent despite the fact that it claimed input which met the provisions of Section 17 of VAT Act, deducted and remitted 2% withholding tax on purchases and had all documents to prove validity of the disallowed invoices.

33. The Appellant averred that despite the correspondence with the Respondent where it provided all relevant information, explanations and documentation the Respondent went ahead to issue its objection decision of 26th October 2022.

34. The Appellant submitted on three issues in its written submissions as hereunder;

i. Whether the Respondent erred in fact and law in disallowing the Appellant’s valid purchase invoices and input amounting to Kshs. 26,178,850. 32. 35. That the Respondent erred in law and fact by disallowing the Appellant’s input claims on purchases arising from supply of taxable goods from its two suppliers notwithstanding the fact that records availed show the purchases made and VAT accounted for as provided under Section 17(1) and (2) of the VAT Act.

36. The Appellant averred that the suppliers held PIN numbers issued by the Respondent and were paid through the bank and these details had been availed to the Respondent; and if there was any problem with output VAT by the suppliers, the same could not be the responsibility of the Appellant who should not be punished by disallowing its proven input VAT. That the Respondent is responsible for PINs it issues and has the capacity and enforcement mechanisms to trace the suppliers.

37. That in any case the Respondent appointed the Appellant on January 2020 as a withholding agent for 2% Withholding tax which it had dutifully done as evidenced by the iTax platform of the Respondent whose copy was also attached in the pleadings.

(ii) Whether the Respondent was right to shift its tax obligation on the Appellant. 38. The Appellant averred that the Kenya Revenue Authority Act, Cap 469 of Kenya’s Laws preamble and Section 5 sets out the functions of the Respondent. It claimed that the Respondent could only delegate its collection functions in accordance with the laid down law as is the case with the appointment of a taxpayer as a withholding agent or an employer remitting PAYE on behalf of its employees.

39. The Appellant claimed that the Respondent listed its suppliers as “missing traders” yet it had provided all details in its possession relating to both suppliers within its knowledge.

40. To buttress its position, the Appellant relied on the case of Commissioner of Domestic Taxes V Trical & Hard Limited, TAT Appeal E46 of 2020[2022] KEHC 9927(KLR) where the concept of ‘missing trader’ was addressed as follows;“It is common ground that the issue of ‘missing trader’ is a tax fraud scheme where taxpayers deliberately and fraudulently claim tax rebates from fictitious purchases leading to the taxpayer paying less or no taxes than they should and the Government consequently losing revenue. The parties also agree and understand how the Kenyan VAT system operates.”

41. The Appellant averred that it availed evidence in form of documents, supplier details and proof of sale of manufactured products, thus its input claim of VAT was not for supply of “air.”

42. The Appellant claimed that tax statutes have no provision whatsoever where one taxpayer is required to produce another taxpayer to the Respondent so that they can remit their taxes in fulfilment of their obligation to pay taxes. The Appellant further alleged that it neither had any control nor locus standi on the operations of the said suppliers.

43. The Appellant claimed that the Respondent’s assessment apart from being unlawful and un-procedural, was unfair and created a very unfavorable business environment for the Appellant that could lead to collapse of the Appellant due to the substantial amounts claimed by the Respondent.

(iii) Whether the Appellant complied with the provisions of Section 17 of the VAT Act. 44. The Appellant claimed that it fully complied with Section 17(1),(2) &(3) of VAT Act regarding crediting it’s input tax against output tax as well as presenting evidence of tax invoices, 2% withholding tax declarations and remittances, invoices from suppliers, weighbridge tickets, bank statements with highlighted payments and suppliers payment vouchers.

45. To buttress its position further, the Appellant relied on the Tribunal’s holding in the case of Cleanshelf Supermarkets Limited vs Commissioner of Domestic Taxes, Appeal No. 194 of 2018 that;“..it is common principle that a taxable person who makes transactions in respect of which VAT is deductible may deduct in respect of goods or services acquired by him, provided that such goods or services have a direct and immediate link with the output transactions in respect of which VAT is deductible……that pursuant to Section 17 of the VAT Act, if a trader has incurred properly allowable input tax, he is entitled to set off against its output tax liability or to receive a refund if the input tax credit due to him exceeds that liability. However, evidence is required in support of the claim for repayment. In the present case, the Appellant was entitled to the input VAT as it tabled the requisite evidence.”

46. The Appellant averred that it fully complied with the provisions of Section 17 of the VAT Act and Section 59 of the TPA by availing demanded evidence and that the Respondent failed to show why and how the assessment as contained in its objection decision was confirmed.

Issue for Determination 47. The Tribunal having carefully considered and gleaned over the parties’ pleadings, documentation and submissions notes that the issue that calls for its determination is;Whether the Tax Assessment issued by the Respondent it its objection decision dated 26th October 2022 is proper.

Analysis and Determination 48. Having established a single issue for determination supra; the Tribunal proceeds to analyze the same as hereunder.

49. The Tribunal notes that the Appellant filed its VAT returns in conformity to the provisions of Section 17 of the VAT Act and Section 28 of the TPA; this has not been disputed by the Respondent. The Tribunal is guided by the High Court decision in Rabai Operations & Maintenance Ltd v Commissioner of Domestic Taxes that;“Section 17 provides for deduction of input VAT on condition that no input tax may be deducted more than 12 months after the input tax becomes due and payable. The other condition for deduction is that the taxpayer wishing to deduct input tax must be in possession of a tax invoice.”

50. It is the Tribunal’s view that the Appellant fully complied with Section 17(3) of the VAT Act and Section 59 of the TPA in its self-assessment a fact that was acknowledged by the Respondent. Further, the Appellant availed tax invoices and other documentary evidence to support the input VAT deduction that arose from the acquisition of goods used to make taxable supplies.

51. The Tribunal is alive to the duty bestowed upon the Respondent to review whether input VAT claim contains irregularities while Section 5 of the VAT Act empowers the Respondent to disallow input tax where necessary documents have not been provided. Similarly, Section 31 of the TPA empowers the Respondent to make assessments based on available information to him and to his best judgement in ensuring that the Appellant is liable for the correct amount of tax.

52. The Tribunal is aptly guided by Section 59 of the TPA that requires the Appellant to provide records to enable the Respondent determine tax liability. The importance of keeping proper records can never be overstated. Section 17(2)(a) as read together with Section 17(3) of the VAT Act provides that a taxpayer must present certain documents before being allowed to deduct input VAT incurred during purchase or import of goods with which he deals from its payable tax.

53. The Tribunal is alive to the fact that input VAT cannot be deducted without corroborative proof of purchases that is why Section 43 of VAT Act requires a taxpayer to maintain documents in more detailed terms than even the Income Tax Act. Again Section 17 of the VAT Act is very specific on what is needed to claim input VAT as it only recognizes original invoices or certified invoices. The Tribunal is properly guided by the High Court’s holding in the Silverchain Limited vs Commissioner of Income Tax & 3others (2016) eKLR that;“The Commissioner must give a taxpayer the opportunity to explain its position before computing the taxes due.”

54. The Tribunal holds that the Appellant discharged its burden of proof and met its legal obligation bestowed upon it as it proved purchases and by extension input VAT. The Respondent failed to show why the Appellant could not claim input VAT yet the Appellant had provided requisite documentation. The correspondence appended in the pleadings indicate the Appellant as a watchful taxpayer quick to engage the Respondent regarding its tax affairs indeed equity aids the vigilant and not the indolent. The Tribunal reiterates its holding in the case of Faisawema Company Limited vs Commissioner of Domestic Taxes, TAT 326 of 2022 that;“…the assertions that the Appellant provided documents, must be shown at the Tribunal as well.”

55. The Tribunal takes cognizance of the Respondent’s insistence on provision of delivery notes for the supplies made. The Tribunal notes that a delivery note is a document that accompanies shipment of goods. In the case of Osho Drappers Limited vs Commissioner of Domestic Taxes Appeal No. 159 of 2018, the Tribunal held that;“…the documentation must be supported by an underlying transaction and the taxpayer must furnish that there was an actual purchase.”

56. The Tribunal notes that weighbridge tickets issued were sufficient to confirm delivery of supplies as the contents would be similar in description to that of a delivery note. It is the shipment delivered that is described in delivery notes; it is not mandatory that a shipment description must be described in a document titled “delivery note” the weighbridge ticket aptly described the deliveries as would a delivery note. The Tribunal is guided by the High Court’s holding in the case of Trust Bank Limited vs Paramount Universal Bank Limited & 2 others (2009) eKLR that;“…It is trite where a party fails to call evidence in support of its case that party fails to substantiate its pleadings.”

57. The Tribunal observed that the Respondent’s objection decision was issued allegedly on the failure by the Appellant’s two suppliers to provide confirmation of supplies made and non-compliance to Section 17(2)(b) of the VAT Act as regards input VAT claims. Section 5(1) & (2) of the KRA Act clearly indicate the functions, powers and responsibilities bestowed upon the Respondent in regard to assessment, collection and accounting for all taxes and the laws thereto. Similarly, the same Act clearly stipulates how such functions and instances where delegation to a third party is possible. The Respondent neither disputed that the Appellant is its appointed withholding VAT tax agent nor that it was responsible for blocking and unblocking the Appellant’s suppliers’ PINs on it i-Tax portal.

58. It follows that the Respondent accepted payments made by the Appellant on behalf of its suppliers whom the Respondent blocked their PIN numbers and reactivated them during the period in dispute. Thus, the Respondent had the powers and mechanisms of tracing the “missing trader” found on its i-Tax portal and could not shift the same to the Appellant to produce them so that it fulfills its obligation to pay taxes. The Respondent did not demonstrate how else the Appellant was required to avail the suppliers other than the details it had already provided to the Respondent. The Tribunal is pertinently guided by the court’s holding in the case of Janet Kaphiphae Ouma & another vs Marie Stopes International (Kenya) HCC No. 68 of 2001 that:-“...In this matter, apart from filing its statement of defense, the defendant did not adduce any evidence in support of assertions made therein. The evidence of the witness remains and the 1st plaintiff remains uncontroverted and the statement in defense therefore remains mere allegations…. Section 107 & 108 of the Evidence Act are clear that he who asserts or pleads must support by way of evidence.”

59. It is the Tribunal’s opinion that taxpayer’s property ought to be protected by ensuring taxation is guided by proper tax laws. Taxation must be certain and demand for tax must be justified and all procedural mechanisms for such demand should be followed; tax statutes must be strictly interpreted. The Tribunal is further guided by the case of Silverchain Limited vs Commissioner of Income Tax & 3others (2016) eKLR where the court stated that;“…The task of collecting taxes should not lead to discouraging tax payers from carrying on with their business. If the taxpayers’ close shop, there will be no taxes to be collected. On the other hand, if no taxes are paid there will be no funds to run government operations. This calls for a balance between the tax collectors and taxpayers whereby the process becomes inclusive as apposed to being unilateral. There must be fairness in the process of tax assessment.”

60. In view of the foregoing, the Tribunal finds that the tax assessment confirmed by the Respondent in its objection decision of 26th October 2022 was not proper.

Final Decision 61. The upshot of the foregoing analysis is that the Appeal is meritorious and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 26th October 2022 be and is hereby set aside.c.Each party to bear its own costs.

62. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 20TH DAY OF DECEMBER, 2023ERIC NYONGESA WAFULACHAIRMANDELILAH K. NGALAMEMBERCHRISTINE A. MUGAMEMBERGEORGE KASHINDIMEMBERMOHAMED A. DIRIYEMEMBERSPENCER S. OLOLCHIKEMEMBER