[2024] KETAT 551 (KLR)

Mooved Company Limited v Commissioner of Domestic Taxes (Appeal 1534 of 2022) [2024] KETAT 551 (KLR) (22 March 2024) (Judgment)

Neutral citation: [2024] KETAT 551 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1534 of 2022

E.N Wafula, Chair, RO Oluoch, Cynthia B. Mayaka, AK Kiprotich & T Vikiru, Members

March 22, 2024

Between

Mooved Company Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited company registered and whose principal business is in the trade construction materials.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act. 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 Respondent reviewed the Appellant’s tax affairs and issued a letter of review findings on 24th March 2021 for total tax amounting to Ksh 255,596,786. 00 being VAT and Income tax inclusive of penalties and interest. The Appellant objected vide a letter received by the Respondent on 1st September 2022.

4. The Respondent issued its objection decision vide a letter dated 28th October 2022.

5. Being aggrieved by the Objection decision, the Appellant filed the Notice of Appeal dated 28th November 2022.

The Appeal 6. The Appellant in its Memorandum of Appeal filed on the 19th December, 2022 cited the following grounds of Appeal:-i.That the Respondent erred in law by imposing income tax and VAT on transactions already declared for tax and tax paid.ii.That the Respondent erred in law and fact in charging tax on alleged variances and documentation relating to third parties.

Appellant’s Case 7. The Appellant’s case is premised on its Statement of Facts filed on 19th December 2022.

8. The Appellant was of the view that the issues for determination were as follows:-a.Did the Appellant under-declare sales?b.Has the Appellant over-claimed expenses on a number of purchases?c.Should purchases of the Appellant be disallowed on account of the compliance status of its suppliers?

9. The Appellant contended that the Respondent was flat-out and grossly inaccurate in the statement as all purchases of the Appellant were supported.

10. On VAT the Appellant stated that the Respondent charged additional Value Added Tax (“VAT”) on alleged under-declared sales. That the explanation was that the ETR reports compiled for the three years were more than the amounts declared in the VAT return.

11. That the variance was assumed to be an under-declared component of the sales. That this assumption was not consistent with the facts. It averred that its tax invoices were accompanied by ETR receipts which were serialized. That serialization flows consistently from month to month.

12. It submitted that this conclusion results from an inaccuracy on the part of the Respondent

13. Regarding VAT on unregistered suppliers, the Appellant posited that the Respondent had stated that certain purchases made from suppliers of the Appellant were disallowed because those suppliers were not registered for VAT.

14. That however, the Appellant was completely blameless if some of the suppliers who charged VAT were regarded as unregistered by the Respondent. The Appellant urged the Tribunal to note as follows: -a.That before the Appellant purchases from anyone, it visit the PIN Checker feature provided by the Respondent on its website and searched as to the validity of the PIN. That the transaction then proceeded.b.That once the Appellant makes the claim of input VAT on purchases, it declares the purchase in the input schedule in VAT 3 return. That it was important to note that it is usually impossible for a return to be uploaded if even a single PIN does not have the VAT registration nor if any PIN is faulty in any way.c.That the Appellant cannot conduct further investigations on registration validity after such a due process is followed. That its work only remains to settle the payment. That the Respondent has the juridical mandate to audit or query any of its suppliers, whom the Respondent registered and issued PIN.d.That more particularly, this matter was being raised only at this time. That while being shocked at the claim, the Appellant became curious as to how such a deep anomaly could have carried on month after month for three years. That the Appellant requested the Respondent to countercheck this but the words fell on deaf ears. The Appellant averred that it may not take up the role of Simon of Cyrene for any of its suppliers or clients.e.That it was not in tune with the law for the Respondent to raise an assessment purely based on information under its control without sharing the same with the taxpayer. That when the Appellant filed returns, the Respondent’s system accepted them and even allowed the credit. That this should not happen if the PIN had no VAT obligation. That certainly, any shortcomings of the system should be the Respondent to resolve.f.That Justice Majanja in the High Court Case PZ Cussons East Africa Ltd vs. The Respondent (Petition No 309 of 2012 Milimani Law Courts,High Court, Human Rights Division) guided that the Respondent should not arbitrarily charge tax based on information in its System, especially if it has not provided the details of the items picked and without it verifying if the agents were validly authorized taxpayers. The Appellant requested that this guideline, which is fair and reasonable, should be adhered to.g.That based on these points the assessment should be vacated on alleged “missing suppliers”.

15. Regarding VAT on missing traders, the Appellant averred that the Respondent had listed some of its suppliers as missing traders and disallowed all the input VAT it incurred on purchases from them. The Appellant urged the Tribunal to note as follows: -a.That the said suppliers are registered businesses conducting business and transacting daily.b.That the Government of Kenya had issued the companies with Certificates of Incorporation. That the details of the shareholders and directors as certified by the Registrar of Companies of Kenya(“ROC”) were available at the click of a button on e-citizen to any person. That the Respondent's iTax system was completely linked with the ROC's system.c.That before the Respondent issues a PIN to a taxpayer, it conducts diligence in coordination with the registrar.d.That the Respondent was empowered to suspend or even revoke any PIN for dubious taxpayers. That the Respondent did not undertake any such actions even up to the time of the assessment.e.That when the taxpayers file returns or pay taxes, these are admitted.f.That the Appellant was therefore at a loss for what it means to be a missing trader. That a quick online search revealed to it that it means a person who collects VAT charge on invoices and then fails to remit the taxes to the revenue authority and disappears from the jurisdiction. That if that was what took place, one will have to agree that the Respondent was in a better position to trace them for the taxes than the Appellant, who do not have any legal powers. That the Respondent could not then punish a good taxpayer because of bad behaviours on the part of its customers or suppliers.

16. The Appellant submitted that its claim was made in line with Section 17(1) of the VAT Act and Regulation 7 of the VAT Regulations of 2017.

17. The Appellant urged the Tribunal to remain faithful to its ruling in Shreeji Enterprises Limited-vs-Commissioner of Investigations and Enforcement. (TAT No. 58 and 126 of 2019) and in the case of Karshan Limited-vs-Commissioner of Domestic Taxes, tat no.123 of 2018.

18. That on this basis, the Tribunal should drop the assessment regarding missing traders.

19. On Corporation tax the Appellant stated that this relates to the first part on the variance between ETR and sales as per the declared returns. That it had already attached the Z-Reports which align with its position.

20. That the Second part was income tax on disallowed cost on alleged missing traders. It urged the Tribunal to refer to the already rendered detailed response on the subject of missing traders.

21. The Appellant stated that the law allows a claim where the expense meets the threshold in Section 15(1) of the Income Tax Act as wholly and exclusively incurred for the business,

22. The Appellant reiterated that it sources its merchandise from its suppliers and sells the same to its customers locally. That the costs of purchasing the merchandise are exclusively incurred by it in the production of its income. To support its arguments, the Appellant relied on the case of Commissioner of Income Tax v Kencell Communications Limited (Now Airtel Kenya Limited) [2016] eKLR.

23. That in this case, the Appellant did procure the merchandise from its suppliers for which it was issued with invoices and made payments upon delivery as evidence by the invoices, RTGS and delivery notes furnished to the Respondent. That therefore, it had the right to deduct the same as cost above-stated under the above-stated Section 15(1) of the Income Tax Act. That if anything, the Respondent had not adduced any evidence to the contrary.

24. Regarding deductibility of purchases, the Appellant averred that it had provided evidence in support of the purchases and the Respondent had without any reasonable factual or legal justification opted to ignore the same.

25. That it was particularly galling, for the Respondent to claim there were no goods purchased, to exclude them from the Appellant’s returns while it retain those sales for the alleged non-existent goods as part of revenue when computing the additional corporation tax.

26. That what is good for the goose must also be good for the gander if there were no goods purchased in the first place, both the reported proceeds of their sale as well as costs of their purchase must be excluded from the Appellant’s declared returns as there were no goods sold. That if that is done, then there would be no additional Corporation tax.

27. That further, the Appellant's submissions are encapsulated in the decision of the Tribunal in TAT 187 of 2018, Ukwala Supermarkets-vs-Commissioner of Domestic Taxes.

28. That it was the Appellant's position that these issues are a matter fact and law and the Respondent had failed to take the matters into account in raising the additional assessments.

Appellant’s Prayer 29. The Appellant prayed that the Tribunal upholds the Appeal and sets aside the additional assessments raised by the Respondent.

Respondent’s Case 30. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The Respondent’s Statement of Facts dated 19th January 2023 and filed on the same date together with the documents attached thereto.ii.The Respondent’s written submissions dated 14th July 2023 and filed on 17th July, 2023.

31. The Respondent stated that it reviewed the Appellant’s tax affairs and established a variance on sales as per returns against sales as per ETR reports. That the Respondent charged VAT and Income tax for the variances that had been established.

32. That the Respondent raised the assessments on the basis of the Appellant's undeclared sales of z-reports reconciliations, disallowed purchases from duplicate invoices and suppliers and gave a return for findings vide a letter dated 24th March 2021.

33. It averred that the Appellant failed to provide a detailed analysis of the z-reports to its notice of objection.

34. The Respondent stated that it further noted that the Appellant had duplicate invoices and the same were disallowed.

35. The Respondent submitted that it allowed purchases of Kshs 8,124,244. 00 which had been properly supported. That the disallowed amount of Kshs 7,567,260. 00 had not be supported and was found to have been double claimed.

36. That the resultant summary of the total taxes owed to the Respondent were as per the table below;Taxhead Principal Penalty Interest Total

VAT 94,044,528 4,702,226 30,643,569 129,390,323

Income Tax 96,135,781 4,806,789 25,263,902 126,206,472

TOTAL 190,180,309 9,509,015 55,907,471 255,596,796

37. The Respondent noted that after a verification of purchase invoices that the Appellant claimed part of their inputs from un-registered VAT taxpayers in the year 2018 and 2019. That the Respondent disallowed the same.

38. That the Respondent further noted that the Appellant revealed a presence of unidentifiable suppliers characterized by a similarity of invoices as the same was characterised by invoices that had similar postal and email addresses for different taxpayers.

39. That the Respondent issued additional assessment for VAT and Income tax in relation to the same. That it rendered its objection decision on 28th October, 2022.

40. The Respondent averred that whereas Section 24(2) of the Tax Procedures Act, 2015 allows a taxpayer to submit tax returns in the approved form and manner prescribed by the Respondent, the Respondent is not bound by the information provided therein and can assess for additional taxes based on any other available information. The Respondent further relied on Section 17(2) of the Value Added Tax Act, 2013 to support its arguments.

41. That the Appellant failed to provide proper documentation to the Respondent to establish that the transactions took place and to further show that the said suppliers were genuine.

42. The Respondent further relied on the provisions of Section 17 (3) of the Value Added Tax Act,2013 which lists documentation that is required for deduction of input tax.

43. To buttress its averments, the Respondent also relied on the court case of Highlands Mineral Water Limited v The Commissioner of Domestic Taxes Tax Appeal E026 of 2020.

44. That the Appellant failed in its duty to provide invoices mapped to proof of payment to demonstrate that it had incurred the expense to enable the Respondent to follow up on the purported suppliers.

45. That the Appellant also failed to provide invoices clearly mapped to payments to demonstrate the purchases and subsequent sale of goods.

46. The Respondent stated that it relied on Section 31(c) of the Tax Procedures Act which states that: (c) in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.

47. Further, that Section 51(8) of the Tax Procedures Act states that:-“Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and Commissioner's decision shall be referred to as an "objection decision"

48. That in the exercise of its mandate, the Respondent made its objection decision allowing purchases of Kshs. 8,124,244. 00 that had been supported and disallowing Kshs. 7,567,260 that had not been supported and that was found to be double claimed.

49. That the Respondent relied on Section 5 of the VAT Act,2013 on charge of tax and Section 12 of the VAT Act, 2013 which provides for the time of supply of goods.

50. The Respondent equally relied on Section 15 and 16 of the Income Tax Act which provide for the deductions allowed and the deductions not allowed.

51. That Section 56(1) of the Tax Procedure Act, states that:-“(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect. That the Respondent invited Appellant to disapprove the Respondent's decision with evidence.”

52. The Respondent maintained that in its Objection decision, the Appellant was informed on the basis for which the assessment was issued and further, the Appellant was informed why/how the Respondent arrived at its decision as outlined in the objection decision and as such the objection decision was valid and issued according to the letter of the law.

The Respondent’s prayers. 53. The Respondent prayed that:i.The Objection decision dated 28th October, 2022 be upheld.ii.This Appeal be dismissed with costs.

Issues for Determination 54. Having carefully considered the parties’ pleadings and all the documents attached to the Appeal, the Tribunal was of the view that the issues falling for its determination are:-a.Whether the Respondent erred in its decision to disallow input VAT.b.Whether the Respondent erred in assessing the resultant additional Corporation tax after disallowing input VAT.

Analysis and Findings a. Whether the Respondent erred in its decision to disallow input VAT. 55. The Respondent submitted that it reviewed the Appellant and established a variance on sales as per returns against sales as per ETR reports. That the Respondent charged VAT and income tax for the variances that had been established.

56. The Respondent stated that it further noted that the Appellant had duplicate invoices and the same were disallowed.

57. The Respondent added that after a verification of purchase invoices that the Appellant claimed part of its inputs from un-registered VAT taxpayers in the year 2018 and 2019.

58. That the Respondent further noted that the Appellant revealed a presence of unidentifiable suppliers characterized by a similarity of invoices as the same was characterised by invoices that had similar postal and email addresses for different taxpayers.

59. The Appellant on the other hand contended that the Respondent was flat-out and grossly inaccurate in the statement as all purchases of the Appellant were supported.

60. That the Respondent charged additional Value Added Tax (“VAT”) on alleged under-declared sales. That the explanation was that the ETR reports compiled for the three years were more than the amounts declared in the VAT return.

61. That the variance was assumed to be an under-declared component of the sales. That this assumption was not consistent with the facts. It averred that its tax invoices were accompanied by ETR receipts which were serialized. That serialization flows consistently from month to month.

62. Regarding VAT on unregistered suppliers, the Appellant posited that it was completely blameless if some of the suppliers who charged VAT were regarded as unregistered by the Respondent.

63. Section 17(1) of the VAT Act in providing for input VAT claims provides as follows:“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 only to the extent that the supply or importation was acquired to make taxable supplies.”

64. The foregoing provision embodies the well-established principle of VAT law that a taxable person who makes transactions in respect of which VAT is deductible may deduct the VAT in respect of the 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.

65. Further, Section 17(3) of the VAT Act provides as follows regarding documentation;“The documentation for the purposes of subsection (2) shall be—a.an original tax invoice issued for the supply or a certified copy;b.a customs entry duly certified by the proper officer and a receipt for the payment of tax;c.a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction;d.a credit note in the case of input tax deducted under section 16(2); ore.a debit note in the case of input tax deducted under section 16(5).”

66. It is trite that for the Appellant to claim input VAT, there must be a purchase of a taxable supply. Further, it is not enough to have the documentation listed in Section 17(3). The documentation must be supported by an underlying transaction and the taxpayer must furnish proof that there was an actual purchase.

67. Section 30 of the Tax Appeals Tribunal Act places the burden of proof on the taxpayer to submit all the necessary documentation to support its case. The same position was held by the court in Metcash Trading Limited –vs Commissioner for the South African Revenue Service and Another Case CCT 3/2000, where it was held that:“But the burden of proving the Commissioner wrong then rests on the vendor under section 37. Because VAT is inherently a system of self-assessment based on a vendor’s own records, it is obvious that the incidence of this onus can have a decisive effect on the outcome of an objection or appeal. Unlike income tax, where assessments can elicit genuine differences of opinion about accounting practice, legal interpretations or the like, in the case of a VAT assessment there must invariably have been an adverse credibility finding by the Commissioner; and by like token such a finding would usually have entailed a rejection of the truth of the vendor’s records, returns and averments relating thereto. Consequently, the discharge of the onus is a most formidable hurdle facing a VAT vendor who is aggrieved by an assessment: unless the Commissioner’s precipitating credibility finding can be shown to be wrong, the consequential assessment must stand.”

68. Additionally, Section 107 of the Evidence Act provides that:“Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.”Thus, it was upon the Appellant to prove that it indeed purchased the supplies. In a bid to discharge this onus, the Appellant furnished some documents detailing the transactions including, delivery notes, ETR invoices and C17 for importation.

69. The Respondent does not dispute these documents but raised the issue of variances, duplicated invoices, purchases from unregistered/missing suppliers and failure by the Appellant to map invoices to payment for the goods.

70. The Respondent had indeed raised the issue of payment of the purported goods in the objection decision pointing out that there was no proof of payment provided. It further stated in the Statement of Facts that the Appellant failed in its duty to provide invoices mapped to proof of payment to demonstrate that it had incurred the expense to enable the Respondent to follow up on the purported suppliers.

71. The Tribunal scrutinized the documents and noted that while some invoices and ETR receipts indicate that there may have been supplies made, evidence of payment to the suppliers of goods was not provided to demonstrate that the goods were paid for by the Appellant. The Respondent in the Statement of Facts had further stated that the Appellant had been invited to provide proof for the transactions to support the purchases as per the invoices but the Appellant failed to honor the invite. The Tribunal noted that the Appellant did not address these issue in its Statement of Facts.

72. In view of the above, it was the view of the Tribunal that the Appellant did not discharge its burden and thus did not prove that it indeed purchased all the said supplies.

73. Accordingly, the Tribunal finds that the Appellant did not furnish sufficient proof of purchase. Given the foregoing, the Tribunal finds that the Respondent did not err in its decision to disallow input VAT.

b. Whether the Respondent erred in assessing the resultant additional Corporation Tax after Disallowing Input VAT Claim. 74. Regarding income tax, the Respondent submitted that it relied on Sections 15 and 16 of the Income Tax Act which provide for the deductions allowed and the deductions not allowed.

75. The Appellant on the other hand submitted that it was particularly galling, for the Respondent to claim there were no goods purchased, to exclude them from the Appellant’s returns while it retain those sales for the alleged non- existent goods as part of revenue when computing the additional Corporation tax.

76. The Appellant submitted that what is good for the goose must also be good for the gander if there were no goods purchased in the first place, both the reported proceeds of their sale as well as costs of their purchase must be excluded from the Appellant’s declared returns as there were no goods sold.That if that is done, then there would be no additional Corporation tax.

77. Section 15(1) of the Income Tax Act provides as follows regarding deductions allowed for purposes of ascertainment of an individual’s total income;“For the purpose of ascertaining the total income of any person for a year of income there shall, subject to section 16 of this Act, be deducted all expenditure incurred in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income…”

78. Further, Section 16(1)(a) of the Income Tax Act provides as follows regarding deductions not allowed;“(1)Save as otherwise expressly provided, for the purposes of ascertaining the total income of a person for any year of income, no deduction shall be allowed in respect of—a.any expenditure or loss which is not wholly and exclusively incurred by him in the production of the income;”

79. Flowing from the above provisions of the law, it follows that having found that the Appellant’s claims for the input VAT were not allowable, the same could not be deducted as expenditure incurred by the Appellant in the production of income during the period under review. The effect of disallowing the expenses therefore was to increase the Appellant’s taxable income for the period.

80. Consequently, the Tribunal finds that the Appellant’s VAT having been correctly disallowed, the Respondent did not err in assessing the resultant Corporation tax.

Final Decision 81. On the basis of the foregoing analysis, the Tribunal finds that the Appeal lacks merit and accordingly proceeds to make the following Orders:i.The Appeal be and is hereby dismissed.ii.The Respondent’s Objection decision dated 28th October 2022 be and is hereby upheld.iii.Each party to bear its own costs.

82. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF MARCH, 2024ERIC NYONGESA WAFULA - CHAIRMANDR RODNEY O. OLUOCH - MEMBERCYNTHIA B. MAYAKA - MEMBERABRAHAM K. KIPROTICH - MEMBERTIMOTHY B. VIKIRU - MEMBER