[2024] KETAT 868 (KLR)

Namlink Company Limited v Commissioner of Domestic Taxes (Tax Appeal 224 of 2023) [2024] KETAT 868 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 868 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 224 of 2023

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

June 28, 2024

Between

Namlink Company Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a body corporate registered in Kenya under the Companies Act. Its principal activity is that of project consultants, engineers, general contractors and general commission agents, and it is registered as eligible to charge VAT on sales and recover input VAT from purchase.

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

3. The Appellant filed its VAT returns to the government vide the Respondent’s established i-Tax online platform.

4. The Appellant alleged that sometime in the year 2022, its iTax electronic mail account and log in credentials were altered without its authority. Consequently, it was denied visibility of the activities in the said account.

5. Aggrieved by the said assessment the Appellant objected vide a Notice of Objection dated 18th January 2023.

6. On 31st January 2023, the Respondent issued an objection decision confirming the additional assessment as issued on 29th August 2022 of Kshs. 1,941,098. 98 inclusive of Kshs. 38,052. 94 interest charges.

7. Dissatisfied with the Respondent’s objection decision, the Appellant filed a Notice of Appeal dated 28th February 2023 on 1st March 2023.

The Appeal 8. The Appeal was premised on the Memorandum of Appeal dated 14th March 2023 and filed with the Tribunal on 15th March 2023 raising the following grounds:i.That the Respondent erred in law by proceeding to conduct, charge and/or allow an additional tax assessment amounting to Kshs. 1,941,063. 98 inclusive of penalties and interest on the Appellant while the tax should be much less.ii.That the Appellant’s electronic mail address and i-Tax account credentials were compromised, wrong figures filed and wrong tax declared by persons unknown to the Appellant. Further, that the Appellant disowns the figures filed on their i-Tax account.ii.That the Respondent erred in law by not allowing the amendment of the return to reflect the correct tax position.ii.That the Respondent erred in principle by considering wrong supplier invoices as declared by ‘the’ person unknown to the Appellant and disregarding the correct supplier invoices presented in our objection dated 18th January 2023. ii.That the Respondent erred in law and fact by failing to consider that the Appellant was a registered taxpayer and was responsible for bearing input tax, used in the generation of taxable sales.

The Appellant’s Case 9. The Appeal is anchored on the Appellant’s Statement of Facts filed on 15th March 2023.

10. The Appellant stated that in July, 2022, an agent acting without its authority accessed its iTax account and filed VAT returns. The returns filed were incorrect as they lacked facts and contained information not relating to the Appellant. Subsequently, the Respondent disallowed input VAT claimed and issued an additional assessment on 29thAugust 2022.

11. The Appellant contended that the Respondent’s assessment was premised on its contention that the Appellant had claimed input VAT which had not been declared as output by the suppliers and stated as follows:i.It was the Appellant’s contention that the Respondent had relied on the wrong information as filed by an unauthorized person(s) to raise the assessment.ii.It was the Appellant’s understanding that one can claim a deduction for the tax paid as input tax if used in the acquisition of taxable supplies. The expense further was recognized on the basis that it was exclusively incurred in furtherance of the business of the Appellant.iii.The Appellant had presented the correct invoices that contained the correct input VAT. These were the correct invoices which the Respondent should have used to assess the Appellant's taxable position.iv.The Appellant applied to the Respondent to be allowed to revise returns that had been made in error and/or fraudulently in accordance with Section 31 (4)(a) of the Tax Procedures Act, CAP 469(B) of the Laws of Kenya (hereinafter “TPA”)

12. The income and expenses declared in the returns for the month of July 2022 were erroneous, incorrect and did not relate to the Appellant.

13. The Appellant contended that the invoices had all the credentials of a valid invoice for VAT claim as per the Value Added Tax, CAP 476 of Laws of Kenya (hereinafter “VAT Act”). The same bore the name and PIN of the Appellant. The tax thereon could only be claimed by the Appellant in accordance with the tax laws and that the information that was contained on the Respondent’s online reporting portal collaborated the Appellant’s assertion that the income declared in the returns was incorrect.

14. The Appellant stated that the Respondent received an application to allow the revision and amendment of the returns that were, according to the Appellant fraudulently filed to the Respondent.

15. In conclusion, the Appellant made the following prayers:(a)That this Appeal be allowed;(b)That the objection decision contained in the Respondent’s letter dated 31st January, 2023 seeking to collect Kshs. 1,941,063. 98 be set aside to allow the correct assessment of the tax payable by the Appellant;(c)That the Respondent allows the Appellant to file the correct returns pertaining to the year of income 2022 as requested under Section 31 (4)(a) of the TPA; and(d)Any other remedies that the Tribunal deems just and reasonable.

Respondent’s Case 16. Upon service, the Respondent filed its Statement of Facts dated 11th April 2023 and filed on the same day opposing the instant Appeal.

17. The case was identified through data received for over-claimed purchases in July 2022, whereby the Appellant claimed purchases with no corresponding sales declared from their suppliers.

18. The Respondent raised additional assessments on the Appellant after it emerged that it had claimed VAT input credits arising from purchases that had not been declared by the supposed supplier, contrary to Section 17(2) of the VAT Act.

19. In the month of July 2022, the Appellant filed the return and claimed input VAT from suppliers listed in the table below:Supplier Amount in Kshs. VAT Amount in Kshs.

Edge Systems Limited 3,401,280. 00 544,204. 80

Mart Networks Kenya Limited 7,121,539. 00 1,139,446. 24

PG Bison 1,371,000. 00 219,360. 00

Total 11,893,819. 00 1,903,011. 04

20. These inputs did not meet the requirements of Section 17(2)(b) of the VAT Act. The Respondent reviewed the returns by the suppliers and noted that the suppliers had declared the invoices but the amounts were different. The invoices provided by the Appellant did not match with what the suppliers had declared. From the records, it appears that the Appellant was claiming too much for their purchases.

21. In their objection application the Appellant indicated that the sales were adjusted when the additional assessment was raised.

22. The Respondent averred that it did not adjust the sales at the point of raising the additional assessment. The original return filed by the Appellant had sales of Kshs. 13,538,739. 00 and which is the same amount in the additional assessment. Section 17 (2) (b) of the VAT Act is applicable in this case as the suppliers have not declared the invoices claimed by the taxpayer.

23. The Respondent advised the Appellant that it would not allow the input tax claims for July, 2022 tax period from the supplier as it had not declared their VAT returns as the sale. On 29th August, 2022, the Respondent proceeded to issue VAT assessments disallowing the input invoices in relation to the said supplier. The Appellant objected to the assessments on 18th January, 2023 and provided supporting documents which included invoices for the Respondent’s review. A review of the objection was done with the documentation that had been availed and the Respondent proceeded to issue an objection decision dated 31st January, 2023.

24. The Appellant aggrieved by the Respondent’s decision confirming the additional assessment amounting to principal tax of Kshs. 1,903,011. 00 subsequently, filed its Memorandum of Appeal on 14th March, 2023(sic).

25. The Respondent relied on the provisions of Section 31 (1) of the TPA and Section 17 (2) of the VAT Act in its defence.

26. The Respondent refuted each of the Appellant’s grounds in the Memorandum of Appeal and Statement of Facts and further disputed the additional assessment by the Respondent and proceeded to file an objection dated 26th September, 2022(sic) as follows:“1. They had proper documentation as per VAT Act Sec 17 (3) (a) and (b) which provides as follows;“(3)The documentation for the purposes of subsection (2) shall be-a.an original tax invoice issued for the supply or a certified copy;b.…;c.a credit note in the case of input tax deducted under section 16(2); ord.a debit note in the case of input tax deducted under section 16(5).”

(ii)The Appellant provided invoices from the supplier.”

27. The Respondent further noted that the supplier however was a nil filer meaning that the sales to the Appellant were not declared which led to the claim on input tax being disallowed. The Respondent in disallowing the claim relied on Section 17 (2)(b) of the VAT Act which provides as follows:“17(2)‘If, at the time when a deduction for input tax would otherwise be allowable under subsection (1)-a.…b.the registered supplier has not declared the sales invoice in a return, the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation;”

28. The Respondent averred that it was a requirement pursuant to the above-mentioned section for input tax claims to be allowed the registered supplier must declare the sale and pay the VAT. The Respondent averred that it considered all the available information and its findings were limited to the information available during the verification.

29. The Respondent further averred that the Appellant’s suppliers failed to declare their sales in the respective returns hence the Appellant was not entitled to claim the inputs at the time the inputs were declared. The Respondent relied on Section 56(1) of the TPA which provides that the burden of proving that the tax assessment was wrong lies with the taxpayer and the Appellant herein failed to prove to the satisfaction of the Respondent that the assessment was incorrect.

30. The Respondent prayed that the Tribunal would grant it the following prayers:(a)Dismiss the Appeal with costs; and(b)Uphold the objection decision dated 31st January, 2023.

Parties’ Written Submissions 31. The instant appeal was canvassed by way of written submissions. The Appellant’s undated written submissions were filed on 3rd October 2023 whereas the Respondent’s submissions dated 16th October 2023 were filed on 17th October 2023.

32. The Appellant submitted that in the year 2022 it made significant taxable supplies to Government departments which supplies were subject to withholding VAT by the respective government agencies. The said agencies deducted withholding tax amounting to Kshs. 257,663. 30 and thereafter remitted the amount deducted to the Respondent on the Appellant’s account. In addition, in the month of July 2022 it had claimable input VAT of Kshs. 283,829. 00. However, the said amounts which in total amounted to Kshs. 541,492. 00 had not been granted to the Appellant.

33. The Appellant cited the provisions of Section 31(4) (a) of the TPA and asserted that an irregularity has been occasioned on its account through filing of fraudulent and erroneous returns. The Appellant stated that it had requested the Respondent to be allowed to file the correct returns which was allowable under the law but its request was declined.

34. On its part, the Respondent identified a single issue for determination in its submissions which it analyzed as follows:

Whether the Appellant discharged its burden of proof. 35. It submitted that it had power to assess any taxpayer’s liability under section 24(1) of the TPA and that the Appellant was assessed pursuant to the provisions of Section 31(1) of the TPA. It further submitted that the invoices and ETR receipts of the suppliers provided by the Appellant were inadequate therefore the Appellant did not satisfactorily prove that they incurred the purchase costs.

36. The Respondent asserted that the Appellant ought to have produced proof of payment, supplier confirmation, purchase ledgers, delivery notes and supplier statements, which documents were expected to be in their possession pursuant to the provisions of Section 23 (1) of the TPA and Section 43(1) of the VAT Act. The above notwithstanding, the suppliers of the purchases claimed by the Appellant did not make corresponding declarations in their VAT returns as at the time the Appellant claimed the VAT inputs.

37. Further, the Respondent relied on Section 51(8) of the TPA to demonstrate that it could either allow the objection in whole or in part or disallow it and that failure by the Appellant to provide it with complete records as requested crippled the process and the Respondent reviewed the documents provided and only allowed what could be ascertained.

38. The Respondent relied on the case of Saima Khalid v The Commissioner for Her Majesty’s Revenue and Customs TC/2017/02292 and contended that based on the foregoing, it applied the best judgment in computing the Appellant’s assessment. The Respondent further relied on the provisions of Section 17(1) and (2) of the VAT Act and stated that all the documents provided by the Appellant were considered. It referred to the provisions of Section 56(1) of the TPA and the case of Commissioner of Domestic Services v Galaxy Tools Limited [2021] eKLR in submitting that the Appellant failed to discharge its burden of proof.

39. The Respondent further submitted that the Appellant failed to produce proof of payment by providing the original tax invoices as required by Section 17(2) and (3) of the VAT Act. The Appellant also did not offer any explanations on the issue that it had over claimed input tax in some cases.

Issues for Determination 40. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions finds that the dispute distils into a single issue for determination namely:(i)Whether the Respondent’s objection decision dated 31st January 2023 was justified.

Analysis and Findings 41. The Tribunal having established a single issue for determination proceeds to analyze it as follows:i.Whether the Respondent’s objection decision dated 31st January 2023 was justified.

42. The Tribunal notes the following provisions of Section 17(1) of the VAT Act:“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.”

43. The Tribunal notes the Appellant’s assertions that sometime, earlier on in 2022 its i-Tax electronic mail account and log in credentials were altered without its authority and it was unable to monitor the activities in the said account. Subsequently, sometime in July 2022 an unauthorized agent or person accessed the said account and filed incorrect VAT returns that not only lacked facts but also contained information not relating to the Appellant. As a result, the Respondent disallowed input VAT claimed and issued an additional assessment on 29th August 2022 for Kshs. 1,941,098. 98 and Kshs. 38,052. 94 interest charges.

44. The Tribunal also notes that the Appellant produced documents in support of its notice of objection but the same was declined in an objection decision dated 31st January 2023 wherein the Respondent confirmed the additional assessment of Kshs. 1,941,098. 98 and Kshs. 38,052. 94 interest charges.

45. The Respondent contended that the Appellant’s objection was not adequately supported. For instance, the Appellant did not avail proof of payment, supplier confirmation, purchase ledgers, delivery notes and supplier statements, which documents were expected to be in their possession pursuant to the provisions of Section 23 (1) of the TPA and Section 43(1) of the VAT Act. Accordingly, the Appellant failed to discharge its burden of proof.

46. The Tribunal notes that Section 56(1) of the TPA provides that the burden of proving that the Respondent’s decision is incorrect, and Section 30 of the Tax Appeals Tribunal Act, CAP 469A of Kenya’s Laws (hereinafter “ TATA”) provides that the burden of proving that an additional assessment is erroneous, excessive or unlawful lies with the taxpayer.

47. In this Appeal, the Appellant has stated that the assessment is erroneous and excessive because in July 2022 an agent or person(s) without authority of the Appellant accessed and filed a return of VAT which was not correct, lacked facts and contained information not relating to the Appellant and that the Respondent subsequently disallowed the input VAT claimed and issued the Appellant an additional assessment of Kshs. 1,941,098. 98.

48. The Tribunal finds this to be a serious allegation that needed to be supported by evidence. The Appellant stated at paragraph 15 of its submissions that “an irregularity had occurred on the Appellant’s account through filing of fraudulent and erroneous returns”. The Appellant needed to show what it had done about this unauthorized access for instance by making a report to the police, taking legal action against the unauthorized agent and also promptly notifying the Respondent considering fraud is a serious offence.

49. From the Appellant’s pleadings, the Tribunal notes that no evidence to support the assertion was placed before the Tribunal. The objection letter dated 18th January 2023 makes assertions relating to the unauthorized access but documentation and or evidence relating to the same is not attached. The Tribunal has noted that whereas the objection decision attached to the Memorandum of Appeal refers to certain crucial documents annexed at corresponding pages referred to in that objection letter, the Appellant failed and or omitted to include those documents in a sequential order thus depriving the Tribunal of the opportunity to review and scrutinize the documents referred to and to make good sense of the objection letter.

50. The Tribunal reiterates its decision in Faisawema Company Limited versus Commissioner of Domestic Taxes TAT 326 of 2022, that “the assertions that the Appellant provided documents must be shown to the Tribunal as well”.

51. The objection decision also noted that the Appellant had failed to provide the Respondent with proof of payment, supplier confirmation, purchase ledgers, delivery notes and supplier statements, which documents were expected to be in their possession. The Appellant has not placed these documents before the Tribunal to controvert the Respondent’s position.

52. The Tribunal also notes that it was not until the 13th March 2023 that the Appellant made the application to amend the self-assessment returns filed for the period of January to December 2022. The application was therefore made after the objection decision had already been rendered on 31st January 2023.

53. The Tribunal takes the view that the ground raised by the Appellant that the Respondent erred in not allowing amendment of the return to reflect the correct tax position cannot be a valid ground of appeal in the circumstances.

54. The Tribunal holds and finds that since the Appellant has not discharged its evidentiary burden of proof as required by law, the Respondent’s objection decision of 31st January 2023 was, in the circumstances, justified.

Final Decision 55. The upshot of the above is that the Appellant’s appeal is devoid of merit and the Tribunal shall proceed to make the following Orders:a.The Appeal herein is hereby be dismissed.b.The Respondent’s objection decision dated 31st January, 2023 be and is hereby upheld.c.Each party to bear its own costs.

56. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 28TH DAY OF JUNE, 2024…………..……………….CHRISTINE A. MUGACHAIRPERSON………………………. …………….……………..BONIFACE K. TERER DELILAH K. NGALAMEMBER MEMBER………………………… ………………………….GEORGE KASHINDI OLOLCHIKE S. SPENCERMEMBER MEMBER