[2023] KETAT 510 (KLR)

Powerex Trading Company Limited v Commissioner of Investigations and Enforcement (Tribunal Appeal 272 of 2019) [2023] KETAT 510 (KLR) (18 August 2023) (Judgment)

Neutral citation: [2023] KETAT 510 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 272 of 2019

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

August 18, 2023

Between

Powerex Trading Company Limited

Appellant

and

Commissioner Of Investigations And Enforcement

Respondent

(An Appeal against the Objection decision by the Respondent dated 7th June, 2019)

Judgment

1. The Appellant is a private limited liability company duly incorporated under the relevant provisions of the Companies Act (No. of 2015 of the laws of Kenya) and is part of a unique group of companies duly accredited and licensed by the National Environmental Management Authority (NEMA) to use waste/used oil for refining and re-conditioning processes such as filtration, vacuum distillation, dehydration and bleaching processes to remove contaminants in the used/waste oil.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act [Cap 469 Laws of Kenya] and the Kenya Revenue Authority is responsible for the assessment, collection and accounting of revenue on behalf of the Government of Kenya.

3. The Respondent carried out investigations for the period 2015 to 2017 with a view to establish whether the Appellant was involved in a Value Added Tax (VAT) fraud scheme which required the Respondent to verify whether the input tax claimed by the Appellant was valid and supported.

4. The Respondent was prompted to carry out the investigations because the persons indicated in the Appellant‟s VAT 3 return form as suppliers, were profiled as non-existent or missing traders since the Respondent had investigated and found that the businesses from which the Appellant had claimed local purchase only existed on paper as they were not known to be involved in business or have registered offices.

5. The investigations by the Respondent further revealed that the businesses from which the Appellant had claimed to be purchasing its raw materials were purported to be in a scheme that involved printing and selling invoices with Electronic Tax Register (ETR) receipts to various companies at a commission, with a view to helping these companies reduce their tax liabilities.

6. After an analysis of the documents availed by the Appellant the Respondent issued a notice of VAT assessment for the years 2015 to 2017 through a letter dated 14th January, 2019 and rather than object to the said letter, the Appellant filed Appeal No. 56 of 2019 which was dismissed by the Tribunal on 23rd April, 2021 on the basis that the letter dated 14th January, 2019 did not amount to an appealable decision worthy of judicial resolution by the Tribunal.

7. Upon receiving the Judgement from the Tax Tribunal dated 23rd April, 2021, the Respondent issued agency notices on the Appellant‟s bankers dated 27th April, 2021. The Appellant filed an application to the Tribunal on the same date in which it informed the Tribunal that it had filed Two (2) Appeals namely Appeal Number 56 of 2019 and No. 272 of 2019 which had been consolidated and that in fact it had abided by the provisions of the Tax Procedures Act (No. 29 of 2015) [hereinafter „TPA‟) contrary to the Judgement issued by the Tribunal on 23rd April, 2021.

8. The Tribunal allowed the application dated 27th April, 2021, deconsolidated Appeal case Nos 56 of 2019 and 272 of 2019 but ordered that Tax Appeal No. 56 of 2019 was fully determined. In view of the foregoing, the Appellant having been aggrieved by the Objection decision by the Respondent dated 7th June, 2019, confirming the additional assessment of Corporation tax amounting to Kshs. 59,748,757. 00, filed a Notice of Appeal dated 11th June, 2019 on the same date.

The Appeal 9. In its Memorandum of Appeal dated 17th June, 2019 and filed on 18th June, 2019 the Appellant set out the following grounds of Appeal:i.That the Respondent erred in alleging that invoices amounting to Kshs. 170,129,743. 00 were fictitious yet the Appellant made genuine purchases of waste oil as raw material being the cost of goods in the recycling cycle.ii.That the Appellant has been in the field of recycling, diligently and carrying out its business for a period of Eight (8) years and that it is impossible to generate taxable sales without having incurred a cost on purchase of goods or raw materials.iii.That the Appellant employs not less than 50 Kenyans directly and many other Kenyans indirectly through its supply chain and that killing its business through unfair demands for taxation would kill the business and employment.iv.That the Appellant complied with all tax regulations during the period in question including filing of all tax returns.v.That after the Appellant received goods/raw materials in the form of waste oil, the Appellant proceeds to pay for the said goods to the supplier with or without a physical location but upon receiving an invoice to support the goods delivered.vi.That the Respondent erred in adjudging that the said purchases were fictitious yet the Appellant duly received the goods/raw materials and could have been free.

Appellant's Case 10. The Appellant‟s case is premised on its Statement of Facts dated 17th June, 2019 and filed on 18th June, 2019 together with Submissions filed on 30th September, 2019 and additional Submissions dated 8th June, 2023.

11. The Appellant stated that for the past Eight (8) years it was part of a unique group of companies duly accredited and licensed by NEMA to use waste/used oil for refining and reconditioning processes. The process entails filtration vacuum distillation, dehydration and bleaching processes to remove contaminants in the used/waste oil.

12. The Appellant further submitted that the bulk of the raw materials used in its business comprised waste oil popularly procured from the informal sector and paid for in cash. The Appellant gave the example of a car taken to a garage for service to have its engine oil changed, the engine oil that is drained from the car does not go to waste. The Appellant stated that the „garage people‟ carefully drain the waste oil for resale and since not many persons know of its economic value the few that do including street children resell to a common person who in turn resells to the Appellant. The procurement of the waste oil is therefore done on cash basis and in bulk for the case of the Appellant due to the volumes required.

13. The Appellant submitted that recycling is common place around the world and in Kenya recycling of waste paper and plastic is more popular that recycling of waste oil which is still gaining traction as a proper way of waste management.

14. The Appellant submitted that it had been complying with all tax regulations including filing of all the tax returns to date and that it was unfair for it to be victimized because the Respondent could not match the corresponding VAT in the ledgers of Appellant‟s suppliers yet the Respondent has capacity to reach out to all taxpayers. The Appellant further submitted that since there was a self-assessment tax regime it declared its fair share of tax through its requisite tax returns and penalizing the Appellant due to the omissions of the Appellant‟s suppliers is against the canons of taxation.

15. The Appellant submitted that the Respondent erred in alleging that invoices amounting to KShs. 46,290,505. 00 were fictitious yet the Company made genuine purchases of waste oil as a raw material being cost of goods in the recycling cycle.

16. The Appellant submitted that by a letter dated 14th January, 2019 the Respondent wrote to it making reference to alleged ongoing investigations regarding its assessment for VAT for the years 2015-2017. In the said letter the Respondent alleged that the Appellant had claimed input VAT using invoices the Respondent termed as „fictitious‟ a fact the Respondent alleged to have been corroborated by „some‟ traders who denied issuing the Invoices. An aggregated list of the traders was provided and it was further submitted by the Appellant that the investigations by the Respondent had established that „most‟ of the businesses that the Appellant had done business with only existed on paper and that they did not trade in any goods.

17. The Appellant averred that according to the Respondent those businesses only printed and sold invoices with ETR receipts at a commission to reduce their tax liabilities. The Respondent had further alleged that the companies who issued the invoices declined having transacted with the Appellant.

18. The Appellant submitted that the Respondent concluded that the invoices that the Appellant had used to claim input VAT were „false documents‟ the making and uttering of which was not only a criminal act but also an offence under tax law.

19. The Appellant submitted that the evidence that the Respondent relied on purporting that the suppliers had declined ever having traded with the Appellant were suspicious because the alleged drafters could not be procured for cross-examination as they do not exist. The Appellant further submitted that the Respondent‟s findings regarding the denial by the representatives of the suppliers that they did not issue invoices and ETR receipts were spurious and that all the evidence relied upon by the Respondent to state that the suppliers don‟t exist is purely conjectural.

20. The Appellant averred that the Respondent erred in adjudging that the purchases were invalid yet the Appellant received the goods/raw materials after paying for them.

The Appellant's Prayers 21. Based on the above submissions, the Appellant‟s prayer was for the Tribunal to vacate in full, the assessment by the Respondent amounting to an additional tax of Kshs. 59,748,757. 00 and thereby set aside the Objection decision by the Respondent dated 7th June, 2019.

Respondent's Case 22. The Respondent opposed the Appeal through itsStatement of Facts dated 11th July, 2019 and filed on the same date and Written Submissions dated and filed on 16th September, 2019.

23. The Respondent stated that it had been investigating various tax payers among them the Appellant for involvement in a scheme in which fictitious invoices are generated to depict a business transaction but there is no actual supply of goods and services or at times inflated invoices. The Respondent further stated that the invoices are generated and sold at a fee by the „missing trader‟ to existing companies in a racket that also inflates the cost of sales thereby reducing the tax payable.

24. The Respondent stated that it carried out investigations with a view of establishing whether the Appellant herein was involved in the VAT fraud scheme and to verify whether the input tax claimed by the Appellant was valid and supported. According to the Respondent, the „Missing trader‟ is an entity that only deals in the sale of fictitious invoices so that the traders do not buy the goods they purport to supply. The have no premises to trade from and they are also unknown businesses.

25. The Respondent stated that the disputes arose when on 22nd February, 2018, it received information from an intelligence source that the Appellant was claiming fictitious purchases from non-existent trading companies. The Respondent further stated that its investigations revealed that under the missing trader scheme, the Appellant reduced its VAT liability by claiming input tax from five traders namely Bozco Enterprises, Arav Hardware and Glass Enterprises, Avic Kenya Glass, KATCO Kenya Limited and Ramsa Steel Hardware and Trading. The VAT liability retrieved from the ITAX system amounted to Kshs. 170,129,743. 00 claimed as input tax by the Appellant between the periods 2015 to 2017.

26. The Respondent further stated that the Appellant carried out massive fraud through presenting invoices but there was no evidence that the goods were bought or delivered and that in fact despite the Respondent requesting the Appellant‟s customers to provide supporting documents, none were provided.

27. The Respondent also stated that it invited the Appellant for a meeting on 22nd March, 2018 to discuss preliminary issues and since the Appellant did not attend the meeting, a Notice to Appear was issued to it on 12th April 2018 and the Appellant attended a meeting with the Respondent on 19th April 2018.

28. The Respondent then issued tax investigations findings for the period 2015-2017 issued through a letter dated 27th April, 2018. The Appellant requested additional time to provide supporting documents on 15th May, 2018 and the Respondent approved the request on 25th May, 2018 with the Appellant acknowledging extension on 29th May, 2018.

29. The Respondent stated that the Appellant failed to provide supporting documents and a notice of assessment on VAT was issued on 14th January, 2019 with additional assessments issued in relation to Corporation tax on 5th April, 2019. The assessment issued in relation to Corporation tax was for the amount of Kshs. 59,748,757. 00.

30. The Respondent further stated that on 12th April, 2019 the Appellant objected to the assessment on Corporation tax for the years 2015-2017 and the Respondent then rendered its Objection decision on 7thJune, 2019 pursuant to the provisions of Section 51 of TPA.

31. The Respondent stated and reiterated that the Appellant did not provide proof of payment of purchases to establish that the expenses incurred were wholly and exclusively incurred in the production of income. The Respondent further stated that the documents may have assisted it in ascertaining whether the Appellant made a requisition for the goods and services, that the goods/services were actually provided and that the expenses were wholly and exclusively incurred in the production of taxable income.

32. The Respondent further justified its objection decision in stating that without documentation from the Appellant to ascertain how the purchases were made and/or meant to assist in production of income it was right in its decision of disallowing the expenses.

33. The Respondent also stated that Sections 42(3) and 66 of the VAT Act empowers it to demand tax emanating from tax avoidance schemes and demand underpaid taxes within Seven (7) days or issue assessment for the same. Accordingly, the Respondent confirmed the additional assessment of KShs. 59,748,757. 00.

34. In its written submissions the Respondent urged that its investigations unearthed a major tax evasion scheme by specific companies. According to the Respondent, individuals would register companies and follow all due and statutory processes. That these Companies would have all legitimate documents up to and including the Personal Identification Number (PIN). That however, the companies would not conduct genuine business. That their scheme was to print and sell ETR invoices without actual supplies. That the invoices were then used to support purchases that were never supplied in order to reduce taxes payable.

35. The Respondent submitted that the Appellant acquired these invoices together with ETR receipts without having bought any goods or services. The Appellant then went ahead to use the invoices to claim expenses in its tax returns.

36. The Respondent submitted that pursuant to Section 5(2) (a) of the Kenya Revenue Authority Act (CAP 469 of Kenyan laws) as read together with Section 4 of the TPA it commenced a review for the Appellant‟s tax returns and declarations and made some preliminary findings.

37. The Respondent averred that upon retrieval of the VAT returns by the Appellant from the iTAX system it established that a total of Kshs. 170,129,743. 00 was purchases claimed from suspected missing traders for the period 2015-2017. The Respondent further averred that the Appellant did not attend any meetings until it was issued with a Notice to Appear on 12th April, 2018.

38. The Respondent further submitted that based on the information provided by the Appellant it made a demand for underpaid tax for the period 1st September, 2016 – 30th September, 2017 and notified the Appellant that failure to correctly declare or make payments of taxes was an offense under Section 93(2) of TPA.

39. The Respondent quoted Section 18(2) of the VAT Act (No. 35 of 2013) through which the Commissioner allows a registered person to make an appropriate deduction of relief claimed under subsection (1) from the tax payable on his next return where the Commissioner is satisfied that the claim for relief is justified. The Respondent also submitted that under Section 62 of the VAT Act the person claiming the tax has been paid bears the burden of proving that the tax has been paid.

40. The Respondent‟s further submitted the „Missing trader‟ fraud is a global problem and a sophisticated stratagem of tax theft and quoted Justice Hildyard of the Upper Tribunal (Tax and Chancery Chamber) in the case of Edgeskill Limited vs the Commissioner for Her Majesty‟s Revenue and Customs [2014] UKUT -0038 who stated the following in para 4 of this decision:"MTIC (Missing Trader Intra Community) fraud is by no means uncommon especially in the context of trades in bulk mobile phones and computer chips and causes huge losses of revenue to the United Kingdom (estimated at some 12. 6 billion euros in 2006)."

41. The Respondent submitted that the missing trader VAT fraud is a tax avoidance scheme covered by Section 66 of the VAT Act which empowers the Commissioner to determine the tax liability of the person who obtained such a fraudulent tax benefit. The Respondent further submitted on other cases supporting strong jurisprudence to combat the Missing trader VAT fraud „menace‟ namely Axel Kittel vis Belgium and Belgium vs Recolta Recycling SPRL (joined cases C-439/04 and C-440/04) 2008 [BVC] 559 where ECJ held in para 61 of its judgment:"where it is ascertained, having regard to objective factors, that the supply is to a taxable person who know or should have known that by his purchase he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct"

42. The Respondent further quoted para 37 of the decision in Edgeskill Limited vs the Commissioner for Her Majesty‟s Revenue and Customs [2014] UKUT -0038 [SUPRA] in which it was stated that in considering wither the Respondent was refusing to claim input tax the test is as follows:a.Was there a VAT loss?b.If so, was it occasioned by fraud?c.If so, were the Appellant‟s transactions connected with such a fraudulent loss of VAT Loss?d.If so, did the Appellant know, or would have known of such a connection?‟

43. The Respondent also cited Synective Ltd Vs the Commissioner for HMRC [2018] UKFIT 92(TC) ; THE Upper Tribunal in S&I Electric PLC V HMRC[2015] UKUT 162(TCC) and Healthcare at Home Limited v the Common Services Agency [2014] UKSC 49 in support of its submissions.

44. The Respondent averred that the Appellant contested having not been accorded a fair process and complained that the time stated on the demand notices was too short and was based on a misapprehension of the law since the Appellant was accorded an avenue to challenge the tax decision by registering an objection against the decision of the Respondent. The Respondent further averred that the Appellant was at liberty to challenge the Objection decision of the Respondent in accordance with the TPA.

45. The Respondent submitted that it discharged its statutory obligation and did not part from the spirit of the law guiding these matters but that the Appellant was in clear and wilful breach of Section 17 of the VAT Act with an aim for it to avoid paying the taxes due.

Respondent‟s Prayers 46. The Respondent prays on the basis of its Statement of Facts that the Tribunal finds that:a.The Appellant‟s Appeal be dismissed for lack of merit.b.The Respondent‟s confirmed assessment be upheld.c.The Respondent is awarded the cost of the Appeal.

Issue For Determination 47. The Tribunal has analyzed the pleadings and submissions of the parties and arrived at the conclusion that the issue that falls for determination is whether the basis of the Respondent‟s Objection Decision dated 7th June, 2019 was justified.

Analysis And Findings Whether the basis of the Respondent‟s Objection Decision dated 7th June, 2019 was justified. 48. The Appellant submitted that it provided all the requisite invoices which were legitimate and vehemently denied in its submissions that it was involved in a „missing traders‟ fraud scheme .

49. The Respondent submitted that the assessment was valid and provided three (3) witnesses namely, Godfrey Muthuuri Mwerera, David Kiprotich Koech and Shiraz Daud Ebrahim Sayani. Both David Kiprotich Koech and Shiraz Daud Ebrahim Sayani denied having issued ETR receipts to the Appellant.

50. Section 56 (1) of the TPA places the burden of proof on the Appellant and provides as follows: -“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

51. The Tribunal reviewed the submissions and evidence adduced by both parties and has noted that although the Appellant keeps making reference to TAT No. 56 of 2019, the Tribunal has not and will not refer to the decision in TAT No. 56 of 2019 as it was fully determined.

52. In para 49 of the Tribunal‟s decision in Shreeji Enterprises (k) Limited vs Commissioner of Investigation and Enforcement [TAT No. 58 and 186 of 2019], reliance was placed on the words of Tunoi JA (as he then was) in Vijay Morjaria Vs. Nansingh Madhusingh Darbar and Another [2000] EKLR where he stated as follows:"It is well established that fraud must be specifically pleaded and that particulars of the fraud alleged must be stated on the face of the pleading. The acts alleged to be fraudulent must, of course be set out and then it should be stated that these acts were done fraudulently. It is also settled law that fraudulent conduct must be distinctly alleged and distinctly proved, and it is not allowable to leave fraud to be inferred from the facts"

53. The Tribunal also finds that the burden of proof which rests on the taxpayer can shift to the Respondent at the point that issues of VAT fraud are raised pursuant to Section 107 of the Evidence Act (CAP 80 OF Kenya‟s Laws) which provides as follows:(1)Whoever desires any court to give judgement as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist;(2)When a person Is bound to prove the existence of any fact it is said that the burden of proof lies on that person.‟

54. The Tribunal however notes that the Appellant did not provide invoices to support its claims during the Appeal and did not therefore discharge its burden of proof. To that extent the burden of proof never shifted to the Respondent to address the legal legitimacy of documents held by the Appellant.

55. The Tribunal finds that the basis of the Respondent‟s Objection decision dated 7th June, 2019 confirming the Corporate assessment order amounting to Kshs. 59,748,757. 00 was justified.

Final Decision 56. The Upshot of the foregoing is that the Appeal is not meritorious and the Tribunal accordingly proceeds to issue the following final Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent‟s Objection decision dated 7th June, 2019 confirming the assessment of Kshs. 59,748,737. 00 together with the resultant interest and penalties be and is hereby upheld.c.Each party to bear its own costs.

57. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 18TH DAY OF AUGUST, 2023. ERIC NYONGESA WAFULACHAIRMANDELILAH K. NGALAMEMBERCHRISTINE A. MUGAMEMBERGEORGE A. KASHINDIMEMBERABDULLAHI D. MOHAMEDMEMBERSPENCER S. OLOLCHIKEMEMBER