[2024] KETAT 762 (KLR)

Quishlaq Enterprises Limited v Commissioner of Domestic Taxes (Tax Appeal E165 of 2023) [2024] KETAT 762 (KLR) (Commercial and Tax) (9 May 2024) (Judgment)

Neutral citation: [2024] KETAT 762 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal E165 of 2023

Grace Mukuha, Chair, W Ongeti, Jephthah Njagi, G Ogaga & E Komolo, Members

May 9, 2024

Between

Quishlaq Enterprises Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated in Kenya and involved in the business of accommodation and food service industry.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent stated that the Appellant was identified through data received on overclaimed services for the month of July 2022. The Appellant had claimed input VAT from suppliers who did not declare corresponding sales.

4. On 20th August 2022, the Respondent issued an Assessment Order to the Appellant for the period in question in reference to VAT and on 25th January 2023, the Appellant filed a request for an extension of time to file a late objection.

5. The Respondent thereafter reviewed the Appellant’s objection application and issued an Objection decision dated 15th March 2023 confirming the assessment amounting to Kshs. 1,318,031. 66.

6. The Appellant being dissatisfied with the decision issued by the Respondent filed an Appeal on 25th April 2023.

The Appeal 7. The Appeal is premised on the Memorandum of Appeal dated and filed on25th April 2023 raising the following grounds:a.That the Commissioner fell into serious error of fact and law in purporting to issue the Objection decision dated 15th March 2023 when the assessment was excessively high.b.That the Commissioner fell into serious error of fact and law in purporting to issue the Objection decision dated 15th March 2023 and not considering that the receipts issued by the Appellant were genuine.c.That the Commissioner erred in fact and in law in finding that tax of Kshs. 1,318,031. 66 together with penalty and interest was due from and payable by the Appellant, which amount is not premised on any legal, logical or arithmetic correctness or precision.d.That the Commissioner predisposed itself to a position favorable to it in the decision appealed against herein resulting in a manifestly unfair, flawed and unbalanced decision.e.That the Commissioner never communicated to the Appellant as alleged as per paragraph 5 of the letter dated 15th March 2023. f.That in overall regard to the foregoing grounds, the decision of the Commissioner is unconstitutional, illegal, unreasonable, wrong in law and unjust in effect.

Appellant’s Case 8. The Appellant’s case was premised on:a.The Statement of Facts dated 24th April 2023 and filed on 25th April 2023 together with the attachments thereto.b.The Appellant’s Written Submissions dated 4th September 2023 and filed on 11th September 2023.

9. The Appellant averred that it filed Value Added Tax returns for the period of July, 2022.

10. That on 15th March 2023 the Commissioner issued a VAT assessment to the Appellant demanding a total tax amount of Kshs. 1,318,031. 66 inclusive of shortfall penalty relating to the period July 2022.

11. That by a letter dated 26th January 2022, the Appellant objected to the VAT assessment of the Respondent and on 15th March 2023, the Respondent issued the Objection decision to the Appellant fully rejecting the objection.

12. That by the same decision, the Commissioner proceeded to wrongfully, unreasonably and unconstitutionally to demand from the Appellant the sum of Kshs. 1,318,031. 66 together with accrued interest and penalty.

13. That the said principal tax together with penalty and interest demanded are illegal, since the Appellant provided all supporting invoice(s) to the Commissioner’s claim.

Appellant’s Prayers. 14. The Appellant prayed that:a.The Respondent’s Objection decision dated 15th March 2023 be and is hereby set aside in its entirety.b.An order be and is hereby issued restraining the Commissioner, its employees, agents, or other persons purporting to act on its behalf or under its instructions from enforcing and/or collecting the sum of Kshs. 1,318,031. 66 together with penalty and interest from the Appellant.c.An Order be and is hereby issued that the Commissioner do the assessment as per the Appellant’s returns.d.The cost of this Appeal be borne by the Commissioner.e.The Tribunal be at liberty to grant any other or further remedies that it deems just and reasonable to grant in the circumstances.

The Respondent’s Case 15. The Respondent premised its case on the following documents:-a.The Statement of Facts dated and filed on 25th May 2023b.The Written Submissions dated 17th December 2023 and filed on 18th December 2023.

16. The Respondent argued that whereas Section 24 of the Tax Procedures Act allows a taxpayer to submit tax returns in the approved form and manner the Respondent is not bound by the information provided therein and can assess for additional taxes based on any other available information.

17. That in the Appeal herein, while the Appellant applied for input VAT claim within the given timelines, that alone does not justify the payment of the same by the Respondent as the Appellant also has to observe the provisions of Section 17 of the VAT Act. That the said Section is very clear and specific as to when input VAT can be claimed.

18. The Respondent submitted that the Appellant failed to prove that it actually incurred input VAT on taxable supplies made considering that the Respondent determined that the respective suppliers had not declared the purchases claimed.

19. That the Appellant having failed to provide supplier confirmation or statements to support the said declarations, it failed to prove that the input is deductible on taxable supplies that had been made by them. That there was also no evidence of payment or delivery notes provided to prove that the transaction actually took place and the goods were received by the Appellant.

20. The Respondent stated that it requested the Appellant to provide supporting documentation to support its claim for input VAT at the point of allowing the Appellant’s application for an extension of time to lodge its notice of objection but the Appellant did not provide any suppliers’ statements or sufficient proof of payment neither did the Appellant provide proof that its suppliers had declared the output that had been claimed in its returns as provided for in Section 17(2)(b) of the VAT Act and as such the Respondent was justified in upholding its assessment.

21. The Respondent further stated that the Appellant has not provided any evidence before the Tribunal or to the Respondent to show that the Respondent in exercising its statutory mandate did so arbitrarily and without due regard to the law.

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

23. The Respondent also reiterated that the Appellant failed to discharge its burden of proof in proving that the Respondent’s tax decision is incorrect as per the provisions of Section 56(1) of the TPA.

24. The Respondent in support of its case relied on the holdings in Holland v USA 121 [1954], Boleyn International Ltd v Commissioner of Domestic Taxes and TAT No. 70 of 2017 (Afya X-Ray Centre Ltd v Commissioner of Income Tax, amongst others.

25. The Respondent prayed that the Tribunal finds that:a.The Respondent’s objection decision issued on 15th March 2023 on VAT and amounting to Kshs. 1,318,031. 66 be found to be proper in law and be upheld.b.The Appeal be dismissed with costs to the Respondent as the same lacks merit.

Issue For Determination 26. The Tribunal, having reviewed the pleadings filed by both parties, identified the following issue for determination:Whether the Respondent was justified in assessing the Appellant for VAT liability

Analysis And Findings 27. Having identified the issue that fell for its determination, the Tribunal proceeded to analyze it as hereunder.

28. The genesis of this dispute is the Respondent’s rejection of the Appellant’s input VAT tax claim from several transactions in July 2022 involving suppliers who did not declare corresponding sales.

29. The Respondent consequently issued the Appellant with additional assessment in regard to the period of July 2022 declaring that the application for refund of input VAT was not justified as the same was not supported by any documentation.

30. The Appellant objected to the assessment on 26th January 2022 and in the objection notice document did not annex any documents in support of the objection. Consequently, the Respondent rejected the objection notice and made an objection decision requiring the Appellant to pay additional VAT amounting to Kshs. 1,318,031. 66 for the period of July 2022.

31. The law in Section 17 of the VAT Act provides for the claims of input tax and also highlights the obligations of the taxpayer in applying for the same. It provides as follows:“Credit for input tax against output tax1. 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 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.customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction;d.a credit note in the case of input tax deducted under section 16(2); ore.a debit note in the case of input tax deducted under section 16(5)”

32. In determining whether the Respondent’s decision to disallow the input VAT by the Appellant was proper as per the provisions of the VAT Act, 2013 the Tribunal set to establish whether the Appellant had furnished sufficient proof of purchase. The right to claim input VAT is premised on the assumption that the taxpayer had paid VAT during the purchase of its supplies. In this regard, the taxpayer is required to prove that it purchased taxable supplies. The proof is in transaction documents and it is for the taxpayer to discharge this burden.

33. At this point the Tribunal found it appropriate to refer to Judge Krieger in theSouth African Case Metcash Trading Limited –vs- Commissioner for the South African Revenue Service and Another Case CCT 3/2000 reasserted that the onus and burden of proof are on the taxpayer by submitting all the necessary documentation to support their VAT refund claim. He stated that:“But the burden of proving the Commissioner wrong then rests on the vendor under section 37. Because VAT is inherently a system of self-assessment based on a vendor’s own records, it is obvious that the incidence of this onus can have a decisive effect on the outcome of an objection or appeal. Unlike income tax, where assessments can elicit genuine differences of opinion about accounting practice, legal interpretations or the like, in the case of a VAT assessment there must invariably have been an adverse credibility finding by the Commissioner; and by like token such a finding would usually have entailed a rejection of the truth of the vendor’s records, returns and averments relating thereto. Consequently, the discharge of the onus is a most formidable hurdle facing a VAT vendor who is aggrieved by an assessment: unless the Commissioner’s precipitating credibility finding can be shown to be wrong, the consequential assessment must stand.”

34. Furthermore, the Respondent must demolish any evidence furnished by the Appellant. This view was held in Supreme Court of Canada’s decision in(Hickman Motors Ltd- vs- Canada, 1997 CanLII 357 (SCC), [1997] 2 S.C.R. 336 at paragraphs 92 to 94; House –vs- Canada, 2011 FCA 234 (CanLII), 2011 FCA 234, 422 N.R.144 where at paragraph 30 stated, inter alia, that:“The taxpayer’s initial onus of “demolishing” the Minister’s exact assumptions is met where the appellant makes out at least prima facie case… Where the Minister’s assumptions have been “demolished by the appellant, “the onus…. shifts to the Minister to rebut the prima case” made out by the appellant and to prove the assumptions…The law is settled that unchallenged and uncontradicted evidence “demolishes” the Minister’s assumptions; …Where the burden has shifted to the Minister, and theMinister adduces no evidence whatsoever, the taxpayer is entitled to succeed; and even if the evidence contained “gaps in logic, chronology, and substance”, the taxpayer’s appeal will be allowed if the Minister fails to present any evidence as to the source of income.”

35. The Tribunal has perused the documents that the Appellant attached to its Appeal, which included copies of supplier invoices and ETR receipts. Section 17 of the VAT Act requires that the taxpayer holds original invoices or certified copies of the same relevant to the transactions in question to be allowed to deduct input VAT.

36. Section 42 of the VAT Act further clarifies that a person who makes taxable supplies must furnish the purchaser with a tax invoice. The Section provides: -“(1)Subject to subsection (2), a registered person who makes a taxable supply shall, at the time of the supply furnish the purchaser with the tax invoice containing the prescribed details for the supply.2. …3. …4. A registered person shall issue only one original tax invoice for a taxable supply, or one original credit note or debit note, but a copy clearly marked as such may be provided to a registered person who claims to have lost the original.”

37. Regulation 9 of the VAT Regulations 2017 provide the details of a tax invoice as follows: -“9. (l)A registered person who makes a taxable supply shall, a tax invoice the time of supply, furnish the purchaser with a tax invoice containing-(a)the words "TAX INVOICE" in a prominent place;(b)the name, address, and PIN of the supplier;(c)the name, address, and PIN, if any, of the recipient;(d)the individualised serial number of the tax invoice;(e)the date on which the tax invoice is issued and the date on which the supply was made, if different from the date of issue of the tax invoice;(f)the description of the goods supplied including quantity or volume or services provided;(g)the details of any discount allowed at the time of supply; and(h)the consideration for the supply and the amount of tax charged.”

38. The Tribunal’s review of the invoices and ETR receipts provided by the Appellant revealed that the invoices were in contravention of Section 17 and Section 42(1) and (4) of the VAT Act as the tax invoices attached by the Appellant were are not certified copies, and Regulation 9(1)(c) of the VAT Regulations 2017 which provides that the name, address, and PIN, if any, of the recipient must be included in a tax invoice. The invoices provided by the Appellant contained the names, addresses and PINs of recipients that were not the Appellant.

39. Based on the above findings, the Appellant failed to satisfy the legal requirements at the objection stage and at the Tribunal. The documents filed at the Tribunal do not amount to what the law requires.

40. Given the foregoing, the Tribunal finds that the Respondent was justified in disallowing input VAT claimed by the Appellant and the consequential assessment for the Appellant for additional VAT was in order. In the circumstances the Appeal fails as the same lacks merit.}}

Final Decision 41. The upshot of the foregoing is that the Appeal fails. Consequently, the Tribunal makes the following Orders: -a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 15th March 2023 be and is hereby upheld.c.Each party to bear its own costs.

42. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF MAY, 2024GRACE MUKUHA - CHAIRPERSONDR.WALTER ONGETI - MEMBERJEPHTHAH NJAGI - MEMBERGLORIA A. OGAGA - MEMBERDR.ERICK KOMOLO - MEMBER