[2024] KETAT 27 (KLR)

Orbit Products Africa Limited v Commissioner Domestic Taxes (Tax Appeal 1153 of 2022) [2024] KETAT 27 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 27 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1153 of 2022

E.N Wafula, Chair, E Ng'ang'a, RO Oluoch, Cynthia B. Mayaka, AK Kiprotich & B Gitari, Members

January 26, 2024

Between

Orbit Products Africa Limited

Appellant

and

Commissioner Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private company incorporated in Kenya that deals in manufacture of soap and detergents, cleaning and polishing preparation, perfumes and toilet preparations.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act and is an agency of the Government for the collection and receipt of all tax revenue.

3. The Appellant was issued with a VAT Automated assessment based on VAT inconsistencies that arose from the input taxes claimed by the Appellant in VAT returns filed for the month of January, February, March, April and May 2018.

4. On 19th November 2019, the Appellant lodged an on-line objection to the assessment.

5. The Respondent issued the Appellant with an objection decision dated 18th August 2022 rejecting the Appellant’s input VAT of Kshs. 44,883,677. 3f0 adjusted under the VAT Automated Assessment (VAA) for the period February 2018 to May 2018.

6. The Respondent in its objection decision submitted that it allowed input tax on invoices that were fully supported and disallowed input tax on those that were either prohibited or not fully supported amounting to an amendment assessment of Kshs.44,883,677. 30 being disallowed input VAT.

7. The Appellant being aggrieved and dissatisfied with the decision of the Respondent’s decision to reject its input VAT adjustment for the period February 2018 to May 2018 dated 18th August, 2022 subsequently filed this Appeal.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 7th October 2022 and filed on the same date:a.That the Respondent erred in law and fact in disallowing input VAT validly claimed by the Appellant pursuant to Section 17 (3) of the Value Added Tax Act andb.The Respondent has failed and or neglected to take into account the supporting documents provided by the Appellant.

Appellant’s Case 9. The Appellant’s case is premised on:a.The Appellant’s Statement of Facts dated 7th October 2022 together with the documents attached thereto.

10. That the Respondent issued the Appellant with an objection decision dated 18th August 2022 rejecting the Appellant’s input VAT of Kshs. 44,883,677. 30 adjusted under the VAT Automated Assessment (VAA) for the period February 2018 to May 2018.

11. That the Respondent in its objection decision submitted that it allowed input tax on invoices that were fully supported and disallowed input tax on those that were either prohibited or not fully supported amounting to an amended assessment of Kshs.44,883,677. 30 being disallowed input VAT.

12. The Appellant submitted that sometime in May 2022 a meeting was held with the Respondent at the Respondent’s premises to discuss matters arising from the Respondent’s decision.

13. That the Respondent via email dated 26th May 2022 requested the Appellant to share bank statements to demonstrate proof of payment in order to enable the Respondent conclude on matters in dispute. The Appellant shared a response with the Respondent and promised to share the documents by 31st May 2022.

14. That the Appellant shared a list of invoices with the Respondent via email dated 13thJune 2022 relating to copies of invoices shared earlier with the Respondent for processing.

15. That the Appellant via email dated 15th June 2022, shared a comprehensive breakdown of VAT Auto Assessed invoices with the Respondent including the documentation shared for each transaction categorized by the suppliers accompanied with additional bank statements to further support its position.

16. That the Respondent via email dated 15th June 2022, stated that following a review of the documents submitted by the Appellant, the Respondent resolved to disallow input VAT claimed for incomplete or untraceable proof of payment and missing invoices from the original sample list of invoices shared by the Respondent based on the information provided to the Respondent.

17. That the Appellant via email dated 20th June 2022 shared further information on the invoice numbers of the invoices the Respondent claimed had not been submitted including further information accounting for each invoice listed in the Respondent’s excel sheet listing disallowed input tax on sample invoices relating to February 2018.

18. That the Appellant via email dated 24th June 2022 shared additional information on the Appellant’s offset process for suppliers highlighted in the Respondent’s reconciliation shared on the 15th June 2022 as having not shared either invoices or proof of payments, or both.

19. That despite the foregoing, it is clear that the Respondent issued its objection decision dated 18th August 2022 without review or consideration of the supporting documentation shared by the Appellant throughout June 2022 being additional invoices and bank statements proving payments for supplies made to the Appellant.

20. The Appellant submitted that a majority of the disallowed input tax on Appellants invoices relating to February 2018 to May 2018 relate to related party transactions with Orbit Chemical Industries Limited who supply the Appellant with imported raw materials used by the Appellant to manufacture chemical products as a finished product.

21. The Appellant further submitted that with regard to inter-company transactions, proof of payment would not exist however it explained the offset mechanism used to account for the respective related party transaction with KRA via email dated 24th June 2022.

22. That the Respondent via email dated 4th July 2022, requested information on invoices and proof of payment for related party transactions. The Appellant affirmed that invoices were shared with the Respondent.

23. The Appellant stated that the Respondent’s rationale for disallowing input tax on related party transaction was that no supporting documents were submitted to support the objection to the Respondent disallowing input VAT of Kshs. 36,090,165. 18 of the total assessed amount of Kshs. 44,883,677. 30

24. That the Respondent alleged in its objection decision that the main cause of inconsistency in the disallowed invoices was that the Appellant's suppliers declared lump sum sales in their VAT returns and that there was a mismatch of invoice number references in the VAT returns and the suppliers VAT returns.

25. The Appellant asserted that it had all the invoices relating to the February 2018 to May 2018, copies of which were availed to the Respondent.

26. That the Appellant submitted that it justified the mismatch noting that a review of the invoices will reveal a clerical error was made when quoting the invoice number, where the delivery note number or other document identification was incorrectly quoted instead of the invoice number.

27. The Appellant further stated that it explained this position when responding to the Respondent's disallowed list, giving an explanation for each mismatched invoice.

28. That the Appellant submitted that despite making reasonable efforts to support the inconsistencies raised by the Respondent, the Respondent issued its objection decision, without reviewing the documents provided by the Appellant to support invoices which the Respondent claimed were not fully supported.

29. That the Appellant confirmed that it provided all the supporting documentation required under Section 17(3) of the Value Added Tax Act and that the Respondent failed and or neglected to take into account the supporting documents provided by the Appellant.

30. The Appellant averred that it made a valid claim for input VAT as per Section 17 of the VAT Act, which provides that;“(1)Subject to the provisions of this Ad 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 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 impartation was acquired to make taxable supplies.”

31. The Appellant further averred that it had all requisite documentation to make a claim as stipulated by Section 17 which provides that;“(3)The documentation for the purposes of subsection (2) shall be-(a)an original tax invoice issued for the supply or a certified copy;”

32. The Appellant posited that it complied with the requests of the Respondent starting from May 2022 when the first request for documentation was made and up to 24th June 2022.

33. The Appellant further averred that it provided the Respondent with clarifications and all the disputed tax invoices as requested throughout the objection and appeal stage.

34. The Appellant averred that the Respondent in its objection decision, concluded that documentation was not provided and further that the inconsistency was based on the Appellant's suppliers declaring lump sales in their VAT returns and the mismatch in the Appellant's VAT returns and its suppliers VAT returns.

35. The Appellant submitted that it cannot be held liable for the actions of its supplier who wrongly declared lump sales in their VAT returns and the mismatch in their respective returns.

36. The Appellant further stated that after its own analysis of the objection decision, a majority of the disallowed input tax on the Appellant’s invoices related to Orbit Chemical Industries (OCIL), a related party to the Appellant herein.

37. The Appellant submitted that Orbit Chemical Industries Limited (OCIL) supplied the Appellant with imported raw materials used by the Appellant to manufacture chemical product as finished products resulting in inter-company transactions between the two entities.

38. The Appellant noted that the reasons for the above transaction were the inter-company transactions and the symbiotic relationship was borne from a business point of view where the Appellant solely manufactured chemical products for its related sister company Orbit Chemical Industries Limited (OCIL) who on the other side dealt with importation of raw materials used in manufacture of the chemical products and dealt with customer orders. This was as a result of the Respondent not approving an Excise License transfer from Orbit Chemical Industries Limited (OCIL) that would have allowed the Appellant to import raw materials on its own behalf and manufacture chemical products for its related sister company.

39. The Appellant averred that the Respondent was made aware of this symbiotic relationship and the Appellant’s way of handling inter-company transactions was through its offsetting mechanism derived from an accounting perspective.

40. The Appellant further stated that the offsetting mechanism with regards to inter-company transactions, resulted in lack of proof of payment in the traditional accounting sense as there was no movement of cash, however vouchers were generated internally to keep track and support the transactions.

41. The Appellant averred that the off-setting model is an acceptable way of settling debts between parties in accounting, similar to the one employed by the Respondent where in circumstances where a taxpayer is in a refund position and has a pending liability. The Respondent issued out a set-off order that served as proof that payment had been done.

42. The Appellant averred that even the VAT input output model is itself an offset mechanism, where taxpayers are allowed to claim input against output, to the extent where credit in one month is carried forward to offset future payables.

43. The Appellant averred that it explained all this to the Respondent through the discussions and documentation that it provided.

44. The Appellant claimed that the actions of the Respondent in issuing an objection decision disregarding the shared relationship and off-setting mechanism shows a deliberate lack of applying themselves to the already stated facts in coming up with its objection decision.

45. The Appellant averred that it cannot comprehend the reason as to why its related company's (Orbit Chemical Industries Limited) explanation in respect to the off-set mechanism and use of its voucher system during its VAT Auto Assessment for the period in question was allowed yet the Appellant’s was disallowed.

46. The Appellant stated that the symbiotic relationship between the two parties allowed them to forsake cash payments between themselves as consideration for services rendered to each other, as a result

47. The Appellant averred that consideration needed not be adequate but is sufficient as set out in the famous case of Carlill v Carbolic Smoke Ball Company [1893] 2 QB 256 and the Appellant is consequently allowed to determine its own relationship with its related company and how it settles its own internal affairs.

48. The Appellant submitted that despite making reasonable efforts to support the inconsistencies raised by the Respondent, the Respondent issued its objection decision, insisting that proof of payment was not provided yet there was sufficient explanation and documentation provided by the Appellant to support invoices which the Respondent claimed were not fully supported.

49. The Appellant averred that the Respondent verified all the other documents and noted that sales and purchases actually existed.

50. The Appellant confirmed that it provided all the supporting documentation required under Section 17(3) of the Value Added Tax Act and that the Respondent has failed and or neglected to take into account the supporting documents and explanations on the offset mechanism provided by the Appellant

51. That the Appellant submitted that unless this Honorable Tribunal intervenes the Appellant will suffer irreparable economic loss at the hands of the Respondent.

52. That the Appellant prays that in the interest of justice that this Honorable Tribunal intervenes in this matter to safeguard the interest of the Appellant.

Appellant’s Prayers 53. That the Appellant prayed for orders, that:a.The Respondent’s objection decision dated 18th August 2022 for Kshs. 44,883. 677. 30 be set aside;b.The Appeal be allowed with costs to the Appellant, andc.Any other orders that the Honourable Tribunal may deem fit

Respondent’s Case 54. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The Respondent’s Statement of Facts dated and filed on 7th November 2022 together with the documents attached thereto.ii.The Respondent’s written submissions dated 4th April 2023 and filed on 6th April, 2023.

55. The Respondent asserted that it issued the Appellant with VAT Automated Assessments based on VAT inconsistencies that arose from input taxes claimed by the Appellant in VAT returns filed for the months of January, February, March, April and May 2018.

56. That subsequently, the Appellant lodged an on-line objection application on 19th November, 2019 and the same was received by the Respondent on even date.

57. That the Respondent wrote to the Appellant vide email dated 26th May 2022 requesting the Appellant to avail documents in support of the objection particularly, proof of payments against the disallowed invoices pursuant to the provisions of Section 51 (3) (6) & (7) of the Tax Procedures Act.

58. That from the foregoing request, the Appellant did avail the supporting documents on various dates with the last batch being received on 21st June 2022 and upon review by the Respondent, it was established that the Appellant had not availed the essential records for the month of January, 2018 and hence failed to support the claim fully.

59. That subsequently, the Respondent partially accepted the claim. The above decision was then issued to the Appellant on 18th August, 2022.

60. That aggrieved by the Respondent's objection decision, the Appellant preferred this Appeal.

61. That the Respondent relied of the following statutes:i.Section 17 of The VAT Act,ii.Section 42 of VAT Act, as read with Regulation 9 VAT Regulations 2017. iii.Section 51 of the TPA Act 2015.

62. That the Respondent in response to the grounds contained in the Memorandum of Appeal reiterated its finding as captured in the Objection decision dated 18th August 2022.

63. The Respondent averred that it requested the Appellant to share bank statements as evidence and proof of payments for the months where input tax was disallowed. The Appellant on various dates did indeed avail the said documents with the last batch being on 21st June, 2022, however, upon review it was established that the documents failed to support the claim wholly.

64. That the Respondent made further efforts to obtain more documents relating to related party transactions, however the efforts bore no fruit and thus the Respondent opted to review the claim as it was.

65. That consequently, the Respondent partially accepted the objection in regard to input tax that was fully supported while disallowing input tax that was improperly deducted amounting to Ksh.44,883,677. 30

66. The Respondent stated that Section 59 of the Tax Procedure Act 2015 requires the Appellant to provide records to enable the Commissioner determine its tax liability.

67. The Respondent stated that the Appellant partly failed to avail such documents/records for examination compelling the Respondent to reject the amount of Ksh. 44,833,677. 30.

68. That the Respondent stated that pursuant to Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act, the burden of proof lies on the Appellant to demonstrate it had discharged its tax liability. The Respondent stated that this burden was partially discharged as no documentary evidence was availed to the Respondent for the month of January, 2018 to enable it render a meritorious decision in the circumstances.

69. The Respondent affirmed that it relied on the provisions of Section 31 (1) of the Tax Procedures Act 2015 which provides that:“Subject to this section, the Commissioner may amend an assessment (referred to in this section as the "original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of an Appellant for a reporting period.....”

Respondent’s Prayers 69. The Respondent’s prayed to this Tribunal for orders that:(a)The Respondent’s review decision dated 18th August 2022 is proper in law and the same be affirmed.

ISSUES FOR DETERMINATION 70. The Tribunal having evaluated the pleadings and submissions of the parties is of the view that there is one issue that calls for its determination being:Whether the Respondent’s objection decision was justified in disallowing the input VAT claimed by the Appellant

Analysis And Findings 71. The Tribunal having determined the issue falling for its determination proceeds to analyse it as hereunder.

72. The Respondent issued the Appellant with VAT automated assessments based on VAT inconsistencies which it alleged arose from input taxes claimed by the Appellant in VAT returns filed for the months of February, March, April and May 2018.

73. The Tribunal however notes that the period covered by the assessment was February to May 2018. The Respondent in his pleadings has mentioned the month of January 2018 which in the Tribunal’s view fall out of the assessment period in question. It shall consider this as an error because the objection decision dated 18th August 2022 clearly states the assessment period for purposes of VAT was February, March, April and May of 2018.

74. Subsequently, the Respondent vide an email dated 26th May 2022, wrote to the Appellant requesting for documents in support of the objection particularly, proof of payments against the disallowed invoices pursuant to the provisions of Sections 51(3) of the Tax Procedures Act.

75. The Respondent asserted that the Appellant availed the supporting documents on various dates with the last batch being received on 21st June 2022.

76. Upon review of the supporting documents, the Respondent established that the Appellant had not availed the essential records for the period in question and had therefore failed to support its claim fully.

77. The Respondent reiterated that following the issuance of VAT automated assessments to the Appellant and the Appellant's objection to the assessments, the Appellant was requested to provide bank statements as evidence for proof of payments for the months of February, March, April and May 2018 where input tax was disallowed.

78. The Respondent acted in accordance with Section 59(1) (a) & (b) of the Tax Procedures Act 2015 which empowers the Respondent to request for any documentation and information that relates to the tax liability of the Appellant. Section 59(1) (a),(b) provides as follows:“For the purpose of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the commissioner or an authorized officer may require any person, by notice in writing, to-a.Produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;b.Furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice."

79. The Respondent relied on the case of Commissioner Of Domestic Taxes Vs One Stop Trading Limited [2021] wherein the court held that in line with Section 17(3) of the Value Added Tax Act, the taxpayer bears the burden of producing documentation to support its claim for VAT.

80. The Tribunal is guided by Section 17 (2) and 3(a) of the VAT Act which provides as follows:“(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;”

81. The Tribunal states that the burden of proof in tax matters lies on the Appellant and is further anchored in statute as envisaged in Section 56(1) of the Tax procedures Act 2015 and Section 30 of the Tax Appeals Tribunal 2013. Section 56(1) provides as follows:-“In any proceeding under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect."

82. Section 30 provides as follows:“In any proceeding before the Tribunal, the Appellant has the burden of probing-(a)Where an appeal relates to an assessment, that the assessment is excessive; or(b)In any other case, that the tax decision should not have been made or should have been made differently.”

83. The Tribunal also relies on the case of Commissioner of Domestic Taxes Vs One Stop Trading Limited (2021) wherein the Court held that in line with Section 17 (3) of the Value Added Tax, the taxpayer bears the burden of producing documentation to support its claim for VAT.

84. The Tribunal is further guided by the decision in the case of Kenya Revenue Authority V Maluki Kitili Mwendwa [2021] Eklr where Mativo J, held that:-“The pertinent issue in this appeal as I see it the question of the taxpayer's burden of proof in tax cases. The party with the obligation of persuasion-what Wigmore termed the risk of non-persuasion-is said to bear the burden of proof. The effect of non-persuasion on a party with the burden of proof is that the particular issue at stake in the litigation will be decided against the party. Generally, the taxpayer has the burden of proof in any tax controversy. The tax payer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorect. This position enjoys statutory backing courtesy of section 56(1) of the TPA which provides that in any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect. As if to underscore the import of the above provision, the legislature deployed the word “shall" in the said section meaning that the provision is couched in peremptory terms.”

85. The burden to prove that it had provided the documents required to support a claim for VAT lay with the Appellant. Nothing was tabled before the Tribunal to show that it had shared the documents that are itemised in Section 17 (2) and (3) of the VAT Act with the Respondent.

86. The Tribunal further finds that the claim for input tax amounting to Kshs. 44,883,677. 30 did not meet the requirement of Section 17 (2) and (3) of the VAT Act because it was not supported by any of the requisite documents including invoices that have been itemised in Section 17 (2) and (3) of the VAT Act.

87. The fact that the Appellant dealt with a related party does not in any way exempt it from the provisions of Section 17(2) and (3) of the VAT Act. The offsetting mechanism assumed by the Appellant, in the absence of the requisite documents stipulated under statute cannot form a basis for claim of input VAT.

88. The Tribunal is fortified in its holding by the decision of the court in Commissioner Investigations & Enforcement Vs Sangyug Enterprises K Limited [2022] Eklr where the court held that:-“Section 17 provides the statutory basis to deduct and claim input VAT.A registered tax payer is entitled to deduct input VAT on taxable purchases but that the same can only be allowed If the taxpayer holds such documentation which documentation Includes "an original tax Invoice issued for the supply or a certified copy".

89. From the foregoing, the Tribunal finds and holds that the Appellant did not furnish the necessary documentation to fully support its objection as required by Section 17(2) & (3) of the VAT Act. In the circumstances, the Respondent’s objection decision in disallowing the input VAT claimed was justified.

Final Decision 90. In view of the foregoing, the Tribunal finds that the Appeal is unmeritorious and accordingly makes the following Orders:-a.That the Appeal be and is hereby dismissed.b.That the Objection decision dated 18th August 2022 be and is hereby upheld.b)Each party to bear its own costs.

91. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024ERIC NYONGESA WAFULA - CHAIRMANEUNICE NG’ANG’A - MEMBERDR RODNEY O. OLUOCH - MEMBERCYNTHIA B. MAYAKA - MEMBERABRAHAM K. KIPROTICH - MEMBERBERNADDETTE GITARI - MEMBER