[2024] KETAT 1307 (KLR)

Newmont Commodities v Commissioner of Domestic Taxes (Appeal E511 of 2023) [2024] KETAT 1307 (KLR) (6 September 2024) (Judgment)

Neutral citation: [2024] KETAT 1307 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal E511 of 2023

E.N Wafula, Chair, G Ogaga, RO Oluoch, AK Kiprotich & Cynthia B. Mayaka, Members

September 6, 2024

Between

Newmont commodities

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a registered taxpayer.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. For the performance of its function under Subsection (1), the Authority is mandated under Section 5(2) of the Act to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act to assess, collect, and account for all revenues under those laws.

3. The Respondent conducted a return review exercise comparing the Appellant’s declarations of sales/purchases in the Value Added Tax (VAT) and Income tax returns and raised additional assessments of VAT and Income tax on the resultant variance for the years 2016 to 2018.

4. The Respondent issued its assessment orders for VAT for December 2016 and December 2018 and Income tax for the years of income 2016 and 2018 via the Kenya Revenue Authority (KRA) iTax portal on 9th December 2021.

5. The Appellant objected to the additional assessments on 8th January 2022 via the KRA iTax portal and was issued with the objection acknowledgement receipts on the same date.

6. The Respondent notified the Appellant on 25th January 2022 via the iTax system that the objection notices lodged were time-barred and rendered late objection rejection notices.

7. The Appellant appealed the Respondent’s decision to the Tribunal on 2nd February 2022 and a Judgment was later issued on 26th May 2023 setting aside the Respondent’s late objection rejection notices and directing the Respondent to make an objection decision within sixty (60) days from the date of delivery of the Judgment.

8. Following the Tribunal’s Judgment, the Respondent issued its objection decision on 24th July 2023, partially allowing the objection and confirming part of the assessments.

9. The Appellant being dissatisfied with the Respondent’s objection decision filed its Notice of Appeal on 25th August 2023.

The Appeal 10. The Appeal is premised on the Memorandum of Appeal dated 21st August 2023 and filed on 25th August 2023 which raised the following grounds: -a.That the Respondent erred in law and fact by charging VAT on the entire variance in sales for the year 2016 contrary to the provisions of the VAT Act, 2013. b.That the Respondent failed in law to demonstrate how it arrived at a gross profit margin of 5% used in determining the taxable profit for the year 2018 without considering the Appellant’s audited financial statements.c.That the Respondent was wrong in submitting to tax the entire variance in sales for the year 2017 after comparing the sales as declared in the VAT returns from those in the ITC return.

Appellant’s Case 11. The Appellant’s case is premised on the following documents filed before the Tribunal: -a.The Appellant’s Statement of Facts dated 21st August 2023 and filed on 25th August 2023 and the documents attached to it; andb.The Appellant’s Written Submissions dated 26th April 2024 and filed on 9th May 2024.

12. The Appellant stated that the Respondent conducted a return review exercise comparing the Appellant’s declarations of sales/purchases in the Value Added Tax (VAT) and income returns and raised additional assessments of VAT and income tax on the resultant variance for the years 2016 to 2018.

13. The Appellant stated that the Respondent issued its assessment orders for VAT for December 2016 and December 2018 and Income tax for the years of income 2016 and 2018 via the Kenya Revenue Authority (KRA) iTax portal on 9th December 2021.

14. That the Appellant filed its objection applications to the additional assessments on 8th January 2022 via the KRA iTax portal and was issued with the objection acknowledgement receipts on the same date.

15. The Appellant stated that it was notified by the Respondent on 25th January 2022 via the iTax system that the objection notices lodged were time-barred.

16. The Appellant appealed the Respondent’s decision to the Tax Appeals Tribunal on 2nd February 2022 and a judgment was later issued on 26th May 2023 setting aside the Respondent’s late objection rejection notices and directing the Respondent to make an objection decision within sixty (60) days from the date of delivery of the Judgment.

17. The Appellant stated that the Respondent subsequently issued its objection decision on 24th July 2023, wherein the Respondent allowed all the purchases that were in variance for the years 2016 and 2017 after the Appellant submitted supporting documents for the same, and confirmed the remaining assessments.

18. The Appellant appealed the objection decision to the Tribunal and listed its issues for determination in this Appeal as follows:a.Whether the Respondent erred in law by charging Value Added Tax on exempt sales in variance for year 2016. b.Whether the Respondent erred in law by failing to conduct an inspection and examination on the Appellant’s books of account before confirmation of the additional assessments.c.Whether the Respondent erred in law by deriving a gross profit margin of 5% and an allowable expenditure of 40% on estimated taxable income in year 2018.

a. On whether the Respondent erred in law by charging Value Added Tax on exempt sales in variance for year 2016. 19. The Appellant stated that the Respondent in its objection decision, subjected the sales in variance of Kshs. 816,650,793. 40 in the year 2016 to VAT at the general rate of 16%, charging Kshs. 130,664. 126. 94.

20. The Appellant submitted that the Respondent contravened the provisions of the Second Schedule to the VAT Act, 2013 by subjecting exempted sales in variance to VAT at the general rate of 16%.

21. The Appellant averred that the Respondent failed to understand that the goods that the Appellant trades in are both vatable and exempted in their nature and by subjecting the sales in variance to VAT, the Respondent contravened the provisions of the VAT Act, 2013 which specify the class of goods or items that should be charged VAT and those that should not be charged VAT.

22. The Appellant averred that the variance as established by the Respondent in the year 2016 was in relation to rice importation as supported by the purchases contained in the Customs Management System.

b. Whether the Respondent erred in law by failing to conduct an inspection and examination on the Appellant’s books of account before confirmation of the additional assessments. 23. The Appellant averred that the Respondent did not get time to review its books of account as required by Section 59 of the Tax Procedures Act, 2015 in establishing the correct position of sales as had been recognised by the Appellant during the year 2017. That, therefore, the variance in sales for the year 2017 should be treated as erroneous in nature and be adjusted accordingly to reflect the actual position as per the Appellant’s books of account.

24. The Appellant cited Section 59 of the Tax Procedures Act, 2015, which requires the Respondent to issue a notice in writing specifying the information required in establishing the correct and fair tax liability of any taxpayer.

25. The Appellant referred to the case of Robert Ayisi v Kenya Revenue Authority and Another NRB Petition No. 412 of 2016 [2018] eKLR where the Court held that a taxing authority must have a rational basis for arriving at the sum demanded from the taxpayer.

26. The Appellant averred that it discharged its duty as required by the law by providing all the required documents as requested by the Respondent. That it delivered documents to the Respondent via email on various dates as had been requested on 12th September 2021. That it was, therefore, upon the Respondent to show cause, with sufficient evidence, for the arrival at the sum demanded from the Appellant.

27. The Appellant stated that it did not make local purchases during the year of income and that all its supplies/sales were as a result of imported goods. That the sales in variance as established by the Respondent were in relation to exempted supplies made by the Appellant but had not been declared in the VAT returns as they did not contain any tax implication in as far as VAT is concerned. That, therefore, the same should not be subjected to VAT as doing so will be violation of the Second Schedule of the VAT Act, 2013 and that the Appellant will be subjected to unfair tax administration.

28. It was the Appellant’s statement that the Respondent subjected the variance in the year 2016 to tax without first examining the Appellant’s sales day books and ledgers in determining the nature of the sales that were in variance.

29. The Appellant stated that it established a sales variance of Kshs. 49,864,200. 00 in the year 2017 and the same was subjected to Corporation tax at the rate of 30%, deriving a tax liability of Kshs. 747,963. 00.

30. The Appellant further stated that the personnel in charge of submitting tax returns (who had just been newly hired), submitted the VAT return for the period of February 2017 using a sales report for the month of January 2017 and that its director was not aware of the error as all the sales that were declared were exempt in nature and did not have any tax implication.

31. The Appellant claimed that it discovered the erroneous declaration of the sales for the month of February 2017 in the succeeding year during its audit. The Appellant averred that its auditors recorded the adjustment on the erroneously declared sales by going as per the actual sales as had been transacted during the year of income. That the correct sales for February 2017 were the difference between the sales in variance from those sales as had been declared in the VAT return for January 2017.

c. Whether the Respondent erred in law by deriving a gross profit margin of 5% and an allowable expenditure of 40% on estimated taxable income in year 2018. 32. The Appellant averred that the Respondent failed to demonstrate practicability in deriving an expenditure margin of 40% on imported goods upon subjecting those goods to a 5% profit margin in the year 2018.

33. The Appellant argued that the Respondent needs to know that the Appellant is a private limited company and not a parastatal, and that in realising and recognising revenue, various expenses must be incurred by the Appellant. That the expenses include, but are not limited to customs duty and other taxes/charges, shipping charges, port charges, transport charges, F147, direct labour costs and other several incidental costs.

34. The Appellant further argued that while the Respondent used the total value of imported goods in deriving the estimated taxable income, it does not make sense for it to go ahead and disallow 60% of the importation value/expenditure in the name of lacking validity in as far as its documentation is concerned.

35. The Appellant stated that the Respondent was in custody of the Appellant’s customs data and that is why it derived an estimated taxable sales figure upon which a margin of 5% was imposed. That the Respondent should allow the purchase cost 100% and not 40% as it is the case.

36. The Appellant averred that it is in possession of all the importation documents and other documents for the direct costs incurred in making taxable supplies.

37. The Appellant further stated that it has all the records for the transactions that were conducted in the year 2018 and the fact that the income tax company return had not been submitted by the time the Respondent carried out its assessment, does not mean that the Appellant does not have records for its business operations for that particular year of income.

38. The Appellant asserted that it had secured professional audit services from different auditors who were still in the process of conducting their audit and that as provided in law, the Appellant intended to submit an amended version of its income tax company return for the year 2018.

39. The Appellant averred that the Respondent assumed that the gross profit margin realised by the Appellant was 5% without demonstrating how it arrived at that margin. That based on the general operations on the Appellant, it can either generate a profit or loss, depending on the existing market conditions and the existing closing stock at the end of the trading cycle.

40. It was the Appellant’s averment that it normally operates on a slim profit mark-up of between 2. 5% to 3%, subject to the prevailing market conditions for a given year. That the Appellant does not agree with the Respondent on its estimated gross profit margin of 5% and an expenditure margin of 40% for the year of income 2018.

41. The Appellant referred to the case of Minazini Enterprises Limited Vs The Commissioner of Domestic Taxes, Tax Appeal Number 56 of 2016 [2018] eKLR where this Honorable Tribunal held that:“The Tribunal is aware that the Respondent under Section 77 of the ITA the Commissioner is clothed with the powers to make additional assessments according to the commissioner's best judgement, in this case, the Respondent flagrantly disregarded the documents presented and adjusted the Appellant's profit margin to 10%. The Tribunal views this to be arbitrary as the Respondent has not tendered before it any evidence nor provided cogent and persuasive argument as to the reason for adjusting the profit margin.”

42. The Appellant referred to paragraph 31 of the Judgment in case of Minazini Enterprises Limited vs The Commissioner of Domestic Taxes, Tax Appeal Number 56 of 2016 [2018] eKLR (supra) where this Honorable Tribunal held: -“The Tribunal finds it well established in statute that expenses may only be deducted in calculating profits of a business where the expenses have been incurred wholly and exclusively for the purposes of that business. The Tribunal agrees with the Appellant that Section 15(1) of Income Tax Act entitles a taxpayer to deduct all expenses incurred wholly and exclusively in the production of income…”

43. The Appellant submitted that the input VAT it incurred for the purchases made in 2018 should be allowed as the same was incurred by the Appellant and had been paid directly to the Respondent, and that it will be extremely unfair for the Appellant to be forced to pay VAT on the estimated sales without considering the input VAT.

44. The Appellant averred that if it will be denied an opportunity to claim the input VAT incurred on the estimated sales for 2018, then it will fall a victim of double taxation and the same will have an adverse effect on the operations of the Appellant.

Appellant’s prayers 45. The Appellant prayed to the Tribunal to set aside and annul the assessment by the Respondent.

Respondent’s Case 46. The Respondent’s case is premised on the following documents:a.The Respondent’s Preliminary Objection dated 28th September 2023 and filed on 2nd October, 2024. b.The Respondent’s Statement of Facts dated 28th September, 2023 and filed on the 2nd October, 2023 and the documents attached thereto.

47. The Respondent averred that the Appeal herein is fatally defective as it is based on a defective Notice of Appeal contrary to the mandatory provisions of Section 13 of the Tax Appeals Tribunal Act.

48. The Respondent raised a Preliminary Objection seeking that this Appeal be struck out, with costs in the first instance, on grounds among others that the Notice of Appeal and purported Memorandum of Appeal and Statement of facts, filed at the Tribunal were filed out of the required timelines and without prior leave of the Tribunal.

49. The Respondent referred to Section 24(2) of the Tax Procedures Act in submitting that it is not bound by the Appellant’s return and that it is empowered to vary and make amendments using the available information.

50. The Respondent averred that it noted variances between VAT and income tax declarations for the years of income ending December 2016 and 2017 and undeclared income from imports for the year of income 2018. That it issued VAT and income tax assessments following this finding.

51. The Respondent cited Section 31(1) of the Tax Procedures Act which empowers it to make alterations or additions to an original assessment from available information for a reporting period based on the Respondent’s best judgement.

52. The Respondent placed reliance on Section 51(3) and Section 59 of the Tax Procedures Act which require the Appellant to provide records to enable the Respondent to determine its tax liability. The Respondent stated that the Appellant failed to provide sufficient supporting documents.

53. It was the Respondent’s submission that that the Appellant bears the burden to demonstrate that it has discharged its tax liability, according to Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act.

54. The Respondent submitted that this burden of proof was not discharged by the Appellant since not all relevant documents in support of the objection were produced.

55. The Respondent contended that in issuing the aforementioned assessment orders, it exercised its mandate as provided and within the law.

56. The Respondent stated that from the documents that the Appellant provided in support of the objection, the Respondent established that:a.The variance between VAT and income tax of Kshs. 49,864,200. 00 for 2017 and Kshs. 816,650,793. 40 for 2016 for VAT was not supported by the records availed neither were explanations for the variances provided.b.For the variances of purchases for the years 2016 and 2017, the taxpayer provided the ledgers with an explanation of the variances, as such the variance was sufficiently supported.c.That in the year 2018, it was established that the taxpayer made some imports which were not declared in the income tax returns and VAT returns. That the taxable value was arrived at after adding a gross profit margin of 5% and 40% expenses allowed. The Respondent stated that the taxable amount of Kshs. 59,276,014. 77 was brought to charge for both VAT and income tax for the year 2018 as the taxpayer had filed nil returns.

57. The Respondent averred that Section 31(2) of the Tax Procedures Act allows a taxpayer who has made a self-assessment to apply to the Commissioner, within 5 years to make an amendment to the taxpayer’s self-assessment. The Respondent stated that the Appellant failed to do so.

58. The Respondent submitted that, in exercise of the aforementioned mandate, it partially allowed the objection, and the additional assessment was partially vacated in the objection decision dated 24th July 2023 to the extent of the amount proved by the Appellant.

59. The Respondent contended that it was therefore correct in issuing the objection decision and cannot be faulted for exercising its mandate within the law.

Respondent’s prayers 60. The Respondent prayed: -a.That this Appeal be struck out/dismissed with costs to the Respondent.b.The Respondent’s Objection decision dated 24th July 2023 be confirmed.

Issues for Determination 61. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issues falling for determination as follows:a.Whether there is a valid Appeal on record.b.Whether the Respondent was justified in issuing its objection decision dated 24th July 2023.

Analysis and Findings 62. The Tribunal analysed the issues that call for its determination as hereunder, having reviewed all the pleadings, information and documents adduced by the Appellant and the Respondent concerning the impugned objection decision.

a. Whether there is a valid Appeal on record. 63. The Respondent filed a Preliminary Oobjection averring that the Appeal herein is fatally defective as it is based on a defective Notice of Appeal contrary to the mandatory provisions of Section 13 of the Tax Appeals Tribunal Act.

64. The Tribunal notes that the procedure for appeal provided in Section 13(1)(b) of the Tax Appeals Tribunal Act (TAT Act) requires that a Notice of Appeal be submitted to the Tribunal within thirty (30) days upon receipt of the decision of the Commissioner.

65. The record of appeal at the Tribunal shows that on 21st August 2023, the Appellant filed its Notice of Appeal in respect of the Respondent’s objection decision dated 24th July 2023, which was within thirty (30) days of receiving the Respondent’s objection decision as provided in law, and that the document was not filed out of time as alleged by the Respondent.

66. Further, the Tribunal notes that for an Appeal to be deemed as competently filed, it ought to be filed within the timelines set out under Section 13(2) of the TAT Act which provides that: -“The appellant shall, within fourteen days from the date of filing the notice of appeal, submit enough copies, as may be advised by the Tribunal, of—(a)a memorandum of appeal;(b)statements of facts; and(c)the tax decision.”

67. The Tribunal observes from the documents on record, that the Appellant filed its Appeal, being its Memorandum of Appeal and Statement of Facts and the Objection Decision on 25th August 2023 which was within fourteen (14) days from the date of filing the Notice of Appeal, and that the documents were not filed out of time as alleged by the Respondent.

68. Based on the foregoing, the Tribunal finds that this Appeal is validly lodged.

b. Whether the Respondent was justified in issuing its objection decision dated 24th July 2023 69. The Respondent averred that it noted variances between VAT and income tax declarations for the years of income ending December 2016 and 2017 and undeclared income from imports for the year of income 2018 and issued assessment orders.

70. The Appellant objected to the assessments in their entirety and provided the Respondent with documents and information in support of its objection.

71. The Respondent stated that from the documents provided by the Appellant in support of the objection, the Respondent partially allowed the objection, and the additional assessment was partially vacated in the objection decision dated 24th July 2023 to the extent of the amount proved by the Appellant.

72. The Respondent stated that the Appellant failed to provide sufficient supporting documents to enable it to vacate the entire assessments.

73. The Tribunal considers the key issues in the present case to be the documentation to substantiate that the Appellant accurately accounted for and remitted the tax on undeclared sales and the soundness of the Respondent’s assessments of tax.

c. VAT and Income Tax Assessments Based on Turnover Variances 74. Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal (TAT) Act place the burden of disproving the Commissioner upon the taxpayer. To satisfy this burden, a taxpayer ought to submit all the relevant evidential material in its possession.

75. The substantive laws under which the Respondent assessed the Appellant income tax is the Income Tax Act and for VAT, the VAT Act.

76. Section 62 of the VAT Act provides as follows regarding burden of proof in tax disputes: -“In any civil proceedings under this Act, the burden of proving that any tax has been paid or that any goods or services are exempt from payment of tax shall lie on the person liable to pay the tax or claiming that the tax has been paid or that the goods or services are exempt from payment of tax.”

77. The Tribunal refers to the case of Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) where the Court held at paragraph 26 that: -“From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner. I have emphasized and underlined ‘competence’ and ‘relevance’ because it is only evidence that meets these two tests that demolishes presumption of correctness and swings the burden to the Commissioner. This means that even if one avails evidence but then it is found that the same is incompetent or irrelevant, then the burden continues to remain with the tax payer.”

78. Section 43 of the VAT Act, 2013 envisions that a person carrying on a business must keep certain records and documents and avail the same to the Commissioner for inspection. It provides as follows: -“(1)A person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein.(2)The records to be kept under subsection (1) shall include—(a)copies of all tax invoices and simplified tax invoices issued in serial copies number order;(b)of all credit and debit notes issued, in chronological order;(c)…;(d)details of the amounts of tax charged on each supply made or received and in relation to all services to which section 10 applies, sufficient written evidence to identify the supplier and the recipient, and to show the nature and quantity of services supplied, the time of supply, the place of supply, the consideration for the supply, and the extent to which the supply has been used by the recipient for a particular purpose;(e)tax account showing the totals of the output tax and the input tax in each period and a net total of the tax payable or the excess tax carried forward, as the case may be, at the end of each period;(f)copies of stock records kept periodically as the Commissioner may determine;(g)details of each supply of goods and services from the business premises, unless such details are available at the time of supply on invoices issued at, or before, that time; and(h)such other accounts or records as may be specified, in writing, by the Commissioner.(3)Every person required under subsection (1) to keep records shall, at all reasonable times, avail the records to an authorised officer for inspection and shall give the officer every facility necessary to inspect the records.

79. Section 23(1) of the Tax Procedures Act also provides that a taxpayer is required to keep records as follows: -“A person shall—(a)maintain any document required under a tax law, in either of the official languages;(b)maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; and(c)subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.”

80. Section 54A(1) of the Income Tax Act envisions that a person carrying on a business must keep certain records and documents which in the opinion of the Commissioner are adequate for computing tax. It provides as follows: -“A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”

81. In the absence of relevant documentation to facilitate the assessment of a tax liability, the Respondent is empowered under Section 31(1) of the Tax Procedures Act (TPA) to use its best judgement in making its tax assessment.

82. The Tribunal notes that the Respondent assessed additional VAT for the period December 2016 at the general rate of 16% of the taxable value on undeclared sales of Kshs. 816,650,793. 40 as established from the sales turnover variance analysis it conducted on the Appellant’s declarations in the VAT and income tax returns for the year 2016. The Appellant did not contend that the sales were underdeclared in its VAT returns for 2016; instead, the Appellant argued that the sales variance related to rice importation which according to the Appellant, were exempt supplies, thus not subject to VAT.

83. The Tribunal observes that the Respondent assessed additional Income tax for the year of income 2017 on undeclared sales of Kshs. 49,864,200. 00 as established from the sales turnover variance analysis it conducted on the Appellant’s declarations in the VAT and income tax returns for the year 2017. The Appellant claimed that its staff submitted the VAT return for February 2017 using a sales report for January 2017, thus overstating the February 2017 turnover by the amount of the variance, and that its director was not aware of the error as according to the Appellant, all the sales that were declared were exempt in nature and did not have any tax implication.

84. The Tribunal notes that the Appellant failed to adduce source documents required of it under Section 43 of the VAT Act, Section 54A of the Income Tax Act and Section 23 of the Tax Procedures Act, including records of all goods sold and accounts, books, importation documents, sales invoices, a VAT account, general ledgers, and other relevant records to support its averments on how it had accounted for and settled the VAT and Income tax on the taxable values determined from the turnover variances established by the Respondent in 2016 and 2017.

85. The Tribunal finds that despite the law under Section 62 of the VAT Act, Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act expressly placing a burden on the Appellant to prove its case, the Appellant in this case failed to discharge this burden to the extent that it did not provide any evidence to support its transactions that gave rise to the turnover variances in 2016 and 2017 for VAT and income tax returns.

86. The Appellant thus failed to prove that its supplies in 2016 were exempt from VAT and that the declaration in the 2017 VAT return was an erroneous.

VAT and Income Tax Assessments based on Undeclared Imports 87. The Tribunal also observes that the Respondent assessed additional income tax for the year of income 2018 after establishing that the Appellant failed to declare imports in its income tax return for the year. The Respondent stated that it computed the taxable value for the additional income tax, by applying a gross margin of 5% to the value of imports and deducting 40% of the grossed-up amount as allowed expenses.

88. In its contention of the 5% gross margin applied by the Respondent, the Appellant averred that it normally operates on a slim profit mark-up of between 2. 5% to 3%, subject to the prevailing market conditions for a given year.

89. The Appellant argued that while the Respondent used the total value of imported goods in deriving the estimated taxable income, it does not make sense for the Respondent to disallow 60% of the importation value/expenditure in the name of lacking validity in as far as its documentation is concerned. The Appellant stated that the Respondent was in custody of the Appellant’s customs data and that is why it derived an estimated taxable sales figure upon which a margin of 5% was imposed. The Appellant stated that the Respondent should allow the purchase cost 100% and not 40% as in this case.

90. In its contention of the 5% gross margin applied by the Respondent on the undeclared imports, the Appellant averred that it normally operates on a slim profit mark-up of between 2. 5% to 3%, subject to the prevailing market conditions for a given year. The Tribunal notes that the Appellant did not support its alleged profit margin, and thus did not disprove the Respondent’s profit estimate.

91. The Tribunal notes that by the Respondent stating that it had established that the Appellant made some imports in the year 2018 which were not declared in the income tax and VAT returns, the Respondent confirmed that the Appellant incurred costs of importation to make the taxable supplies on which gain the Respondent computed Income tax.

92. The Tribunal refers to Section 15(1) of the Income Tax Act which provides as follows:“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.”

93. Based on uncontroverted pleadings by both parties, the Tribunal is persuaded that the Respondent’s assessment failed to consider the importation costs that it had established from the importation records in its possession. For this reason, the Tribunal finds that the Respondent’s computation of the income tax assessment for 2018 is defective.

94. The Tribunal takes note that the Respondent assessed additional VAT for the period December 2018 based on what it established that the Appellant failed to declare imports in its VAT returns for the year 2018. The Appellant submitted that the input VAT it incurred for the purchases made in 2018 should be allowed as the same was incurred by the Appellant and had been paid directly to the Respondent.

95. Guided by the provisions of Section 17(1), (2) and (3) of the VAT Act 2013, the Tribunal reviewed the Appellant’s pleadings and evidence to establish whether the Appellant discharged its burden of proving that the Respondent’s VAT assessment for the period of December 2018 was incorrect, as required under Section 56(1) of the TPA and Section 30 of the Tax Appeals Tribunal Act.

96. Section 17(1), (2) and (3) of the VAT Act 2013 provides that: -“(1)Subject to the provisions of this Act 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 in a return for the period, 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.(2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1),(a)the person does not hold the documentation referred to in subsection (3), or(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.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.(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)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); or(e)a debit note in the case of input tax deducted under section 16(5).”

97. As provided under Section 17(1) of the VAT Act, 2013, the right to deduct input VAT is premised on the assumption that a registered taxpayer acquired a supply or importation to make taxable supplies subject to provisions of the VAT Act, 2013 and VAT Regulations, 2017.

98. Section 17(2) of the VAT Act 2013 provides parameters within which the right by a registered person to deduct input VAT can be exercised as summarised below: -a.A deduction for input tax shall not be allowed until the first tax period in which the person holds documentation referred to in Section 17(3) of the VAT Act, 2013. b.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.c.A deduction for input tax allowable under Section 17(1) of the VAT Act, 2013 shall be allowed when the person holds the documentation referred to in Section 17(3) of the VAT Act, 2013.

99. The Tribunal is further guided by the decision in Tax Appeal No. E026 of 2020 Highlands Mineral Water Limited v Commissioner of Domestic Taxes where Majanja J. at paragraph 39 held that: -“39. I therefore find and hold that section 17(1) and (2) of the VAT Act, permits the taxpayer to claim input tax at any time provided the claim falls within 6 months from period which the supply or importation occurred notwithstanding that the VAT Return is filed late. In other words, the fact of late filing does not preclude a taxpayer from claiming input VAT and that this claim ought to be allowed as long as Return is filed and claimed within six months from the date of supply or importation.”

100. The Tribunal holds the view that the Appellant was required to prove that it satisfied the parameters set in Section 17 of the VAT Act 2013 to have the Respondent reduce the VAT it assessed for the period December 2018 from the turnovers it established from the undeclared imports.

101. Having reviewed the pleadings, submissions and documents adduced by the Appellant, the Tribunal holds and finds that the Appellant merely made averments in its pleadings regarding the Respondent’s failure to consider deductions of input tax in ascertaining the net VAT payable, but did not adduce any relevant source documents or VAT returns to support its claim of input tax deductions to reduce its net VAT payable for the period of December 2018.

102. Accordingly, the Tribunal finds that the Appellant did not discharge its burden of proof to demonstrate that the Respondent’s additional assessment of VAT for December 2018 was incorrect, erroneous or excessive as was required of it under Section 62 of the VAT Act, Section 56(1) of the TPA and Section 30 of the TAT Act.

103. The Tribunal in the circumstances finds and holds that the objection decision dated 24th July 2023, except for the computation of the Income tax assessment for the year of income 2018, was justified.

Final Decision 104. The upshot of the foregoing analysis is that the Tribunal finds that the Appeal is partially merited and accordingly proceeds to make the following Orders:a.The Appeal be and is hereby partially allowed.b.The Respondent’s objection decision dated 24th July 2023 be and is hereby varied as follows:i.The income tax assessment for 2017 be and is hereby upheld.ii.The VAT assessment for December 2016 be and is hereby upheld.iii.The VAT assessment for December 2018 be and is hereby upheld.iv.The Respondent to review the income tax assessment for 2018 that is to be recomputed at the rate of 30% of the 5% gross margin on the value of imported goods for that year.c.Each party to bear its own costs.

105. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 6TH DAY OF SEPTEMBER, 2024. ERIC NYONGESA WAFULA - CHAIRMANGLORIA A. OGAGA - MEMBERDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERCYNTHIA B. MAYAKA - MEMBER