[2023] KETAT 894 (KLR)

Samasource Kenya EPZ Limited v Commissioner of Domestic Taxes (Appeal 1088 of 2022) [2023] KETAT 894 (KLR) (20 December 2023) (Judgment)

Neutral citation: [2023] KETAT 894 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1088 of 2022

Grace Mukuha, Chair, E Komolo, Jephthah Njagi, T Vikiru & G Ogaga, Members

December 20, 2023

Between

Samasource Kenya Epz Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

(An Appeal against the Respondent’s refund decisions dated 16th August 2022 and 31st August 2022)

Judgment

1. The Appellant is a private limited liability company incorporated in Kenya under the Companies Act whose principal business activity is the exportation of artificial intelligence services to Samasource Impact Sourcing (SIS), a company registered in the United States of America.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 460 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. Under Section 5(2) of the Act with respect to the performance of its function under Subsection (1), the Authority is mandated 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 for the purposes of assessing, collecting, and accounting for all revenues in accordance with those laws.

3. On 24th November 2021 the Appellant lodged with the Respondent Value Added Tax (VAT) refund claims of Kshs. 3,685,224. 00 for the period of October 2020 and Kshs. 186,887. 00 for the period of January 2021.

4. The Respondent through iTax partially approved the refund claims for payment and disallowed a total of Kshs. 641,753. 00, being Kshs. 554,796. 00 from the refund claim for October 2020 and Kshs. 86,957. 00 from the refund claim for January 2021.

5. The Appellant appealed against the refund decisions disallowing Kshs. 641,753. 00 of the refund claims through a Notice of Appeal filed on 16th September 2022.

The Appeal 6. The Appeal is premised on the Memorandum of Appeal dated 29th September 2022 and filed on 30th September 2022 which raised the following grounds: -a.That the Respondent erred in law and fact by rejecting the Appellant’s input tax amounting to Kshs. 641,753. 00 that was incurred within the requirements envisaged in Section 17 (5) (1) of the VAT Act.b.That the Respondent erred in law and fact by disallowing the Appellant’s input tax amounting to Kshs. 86,957 that was incurred with the requirements envisaged in Section 17 (2) of the VAT Act.

Appellant’s Case 7. The Appellant’s case is premised on the following documents filed before the Tribunal: -a.Its Statement of Facts dated 29th September 2022 and filed on 30th September 2022, and the documents attached thereto; andb.Its Written Submissions dated and filed on 9th June 2023, and the authorities filed therewith.

8. On 24th November 2021 the Appellant lodged with the Respondent refund claims of Kshs. 3,685,224. 00 for the period of October 2020 and of Kshs. 186,887. 00 for the period of January 2021.

9. The Appellant stated that the Respondent through iTax partially approved the refund claims for payment and disallowed a total of Kshs. 641,753. 00, being Kshs. 554,796. 00 from the refund claim for October 2020 and Kshs. 86,957. 00 from the claim from the refund claim for January 2021.

10. That in light of the foregoing, the Appellant appealed against part of the refund decisions through a Notice of Appeal filed on 16th September 2022.

11. The Appellant addressed its grounds of appeal as here below:

On whether the Respondent erred in law and fact by disallowing the Appellant’s input tax amounting to Kshs. 641,753. 00 that was incurred within the requirements envisaged in Section 17 (1) of the VAT Act. 12. The Appellant stated that its disallowed input VAT claim for October 2020 and January 2021 amounts to Kshs. 641,753. 00 and that it related to expenses it incurred in making of its taxable supply, that is exportation of artificial intelligence services to SIS. The Appellant further stated that annexed to its Statement of Facts as Appendix 3 are detailed schedules of the input VAT for the periods in dispute to ascertain its assertion.

13. The Appellant averred that VAT Act 2013 allows for taxpayers to claim input VAT pursuant to Section 17 (1) which provides for the offsetting of input tax against output tax but only to the extent that the supply or importation was incurred to make a taxable supply. That a taxable supply is defined in Section 2 of the same Act as any supply made in Kenya by a person in the course or furtherance of a business carried on by the person.

14. That Section 17 (1) of the VAT Act prescribes the following: -“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…, 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.”

15. Further, that Section 17 (2) of the VAT Act provides that:“(2)if at the time when a deduction of input tax would otherwise be allowed 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.”

16. The Appellant cited Section 17 (2) and (3) of the VAT Act 2013 and submitted that according to the provisions of law in VAT Act 2013, for one to lodge a valid claim for input VAT, a taxpayer must prove that the supply or importation was acquired to make taxable supplies using an original tax invoice or certified copy, and that the claim was lodged within 6 months after the end of the tax period in which the supply or importation occurred.

17. The Appellant submitted that the claimed input VAT for the periods of October 2020 and January 2021 related to office supplies such as office internet service, professional services such as tax consultancy, legal fees, office tea and office cleaning expenses. That the Appellant buttressed this by providing a schedule detailing supply that was annexed to its Statement of Facts as Appendix 4. That the schedules prove that the input tax claimed is in relation to expenses incurred by the Appellant in the running of its business.

18. The Appellant asserted that the input it claimed for the periods of October 2020 and January 2021 related to office supplies such as office internet service, professional services such as tax consultancy, legal fees, office tea and office cleaning expenses inter alia. That this has been well demonstrated and buttressed by the schedules in Appendix 4.

19. The Appellant submitted that the applicable test in determining whether a deduction is allowable or whether the expenditure was incurred to meet a continuing business demand and generate income was stated in the case of Hancock vs General Reversionary and lnvestment Company (1919) 1 K.B. 25, where the court stated as follows: -“…the proper test to apply is this; was the expenditure incurred in order to meet a continuing business demand, in which case it should be treated as an ordinary business expense and an admissible deduction.”

20. Further, the Appellant submitted that in the case of Income Tax Appeal No. 6 2018 Mars Logistics Ltd vs Commissioner of Domestic Taxes it was held that the applicable test in determining whether a deduction is allowable is determining whether the expenditure was incurred to meet a continuing business demand and generate income was stated in the case. In this case, the court stated as follows: -“All expenses attached to the performance of a business operation bona fide performed for the purpose of earning income are deductible, irrespective of whether such expenses are necessary for its performance or attached to it by chance or are bona fide incurred for the efficient conduct of such business operation, provided they are so closely linked to it that they can be regarded as part of the cost of performing it......In order to determine whether a specific expenditure is incurred in the production of income, it has to pass the following dual test, namely, the expenditure must have been incurred for the purpose of producing income. This is the subjective leg of the test. It should be assessed by considering the stated intention of the taxpayer at the time when the expenditure was incurred. The effect of the expenditure must have been to produce income. This is the objective leg of the test. It requires a direct nexus between the expenditure and the income. The criterium for determining whether expenditure was incurred in the production of income is, in my view, whether the expenditure was connected to the taxpayer's income earning operations, rather than whether the expenditure actually produced income or was directly linked to income.”

21. The Appellant directed the Tribunal to the decision of the Indian Supreme Court in Sasoon J. David & Company P (Ltd) vs CIT 1971 AIR 1441, 1979 SCR 3(878) where the court expressed itself on the meaning of the term 'wholly and exclusively': -“It has to be observed that the expression wholly and exclusively' does not mean necessarily. Ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily, and without any necessity and if it is incurred for promoting the business and to earn profit, the assessee can claim deduction."

22. In addition, the Appellant submitted that the claim for input VAT for both the tax periods was done within six months of the supply as required by Section 17 (2) of the VAT Act. That this assertion is well demonstrated and supported by the schedules annexed to the Appellant's Statement of Facts dated 29th September 2022.

23. The Appellant argued that it is a well-established principle of VAT law that a taxable person who makes transactions in respect of which VAT is deductible may deduct the VAT in respect of the goods or services acquired by him, provided that such goods or services have a direct and immediate link with the output transactions in respect of which VAT is deductible. It was the Appellant's submission that the Appellant has fully complied with the aforementioned principle and thus that the disallowed input tax amounting to Kshs. 641,753. 00 was incurred within the requirements envisaged in Section 17 (1) of the VAT Act as demonstrated above.

24. That based on the foregoing, the Appellant requested the Tribunal to expunge the entire rejection notices by the Respondent for these periods in dispute, as the same lack legal and factual merit.

On whether the Respondent erred in law and fact by disallowing the Appellant’s input tax amounting to Kshs. 86,957. 00 that was incurred with the requirements envisaged in Section 17 (2) of the VAT Act 25. The Appellant stated that it was granted an Export Processing Zone (EPZ) license from 14th October 2020 (enclosed as Appendix 5 of the Appellant’s Statement of Facts) under the provisions of the Export Processing Zones Act 1990. Prior to becoming an EPZ, the Appellant had incurred input tax in generation of taxable supply, that is the exportation of artificial intelligence services to SIS.

26. The Appellant stated that it was granted its license to operate as an EPZ enterprise, by the Export Processing Zone Authority on 14th October 2020 and commenced its operations as an EP on the same date. That this would mean that all taxable supplies to the Appellant by resident suppliers would be deemed as exports and taxed at a zero rate.

27. The Appellant submitted that Paragraph 2 of the Second Schedule to the VAT Act 2013 provides that the supply of goods or taxable services to an export processing zone business specified in the Export Processing Zones Act as being eligible for duty- and tax-free importation shall be zero rated.

28. The Appellant further submitted that the license granted by the EPZ Authority grants the Appellant the benefits in Section 29 of the EPZ Act which provides that: -“(1)The export processing zone enterprises, the export processing zone developers and the export processing Zone operators shall be granted exemption from all existing and future taxes and duties payable under the Customs and Excise Act (Cap. 472) and Value Added Tax Act on all export processing zone imports for use in the eligible business activities of the export processing zone enterprise including machinery and equipment, spare parts, tools, raw materials, intermediate goods, construction materials and equipment, office equipment and supplies, and transportation equipment subject to the limitations on goods specified in the Second Schedule to this Act and according to the conditions specified in the Customs and Excise Act and the Value Added Tax Act.”

29. The Appellant averred that upon receiving its license on 14th October 2020, the Respondent delayed in acknowledging the Appellant's EPZ status on iTax updating the same on 11th December 2020.

30. The Appellant submitted that up and till 11th December 2020 it paid for its supplies against invoices issued with VAT due to the fact that the suppliers could not forgo including VAT in their invoices for their own compliance requirements.

31. The Appellant further submitted that the input VAT deduction in its January 2021 VAT return was in relation to supplies made in prior to 14th October 2020 as demonstrated in the schedule annexed to the Appellant’s Statement of Facts as Appendix 7. That therefore, its status as an EPZ cannot be a valid ground to disallow input VAT claim that had been validly incurred as demonstrated above.

32. The Appellant affirmed that it had incurred input VAT that was used in the generation of taxable supplies prior to the period it received and EPZ license, and that it claimed the input tax amounting to Kshs. 86,957. 00 in the VAT return for January 2021.

33. The Appellant averred that the Respondent fully appreciated the fact that the Appellant lodged valid input VAT claims having fully complied with the requirements of Section 17 of the VAT Act 2013 and that it provided sufficient documentation to support the validity of its claim.

34. That in view of the foregoing, the Appellant finally submitted that the rejection decisions should be vacated in its entirety and the input VAT claimed therein be allowed in its entirety.

Appellant’s prayers 35. The Appellant prayed that: -a.This Appeal is allowed.b.The Respondent’s decision dated 16th August 2022 and 31st August 2022 be set aside in its entirety.c.The costs of and incidental to this Appeal be awarded to the Appellant.d.Any other orders that the Tribunal may deem fit.

Respondent’s Case 36. The Respondent’s case is premised on the following documents:a.Its Statement of Facts dated and filed on 31st October 2022; andb.Its Written Submissions dated 17th April 2023 and filed on 19th April 2023 and the documents attached thereto.

37. The Respondent stated that it carried out a returns review and that during the process, it performed an analysis of purchases claimed by purchasers and sales declared by suppliers on the KRA iTax system for the month of October 2020.

38. That during the said review, it was discovered that there were inconsistencies between the returns filed by the Appellant's suppliers and invoices claimed by the Appellant for the month of October 2020.

39. The Respondent averred that further to the review, the Appellant was informed on the inconsistency of the VAT3 returns, however, that the Appellant failed to resolve the said inconsistencies within the stipulated timeframe and that as a result, the Respondent, based on the existing inconsistencies, raised VAT additional assessments on 16th August 2022 for VAT totaling to Kshs. 641,753.

40. That in light of the above, the Respondent issued a demand for documents in line with objection lodged through email for delivery notes, purchase invoices, delivery notes, supplier statements and bank statements, which the Respondent averred that the Appellant failed to provide in support of its objection.

41. The Respondent stated that the Appellant's VAT was therefore estimated, as this was the only reasonable basis of assessing the VAT and objection decision issued, and that the Appellant filed a Notice of Appeal on 16th September 2022 against the decision of the Commissioner confirming the assessment of Kshs. 641,753. 00.

42. The Respondent stated that the assessments were correctly issued and conform to the Value Added Tax Act. That the Appellant did not provide any evidence that would have altered the assessment.

43. The Respondent submitted that the Tax Procedures Act (TPA) places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent to arrive to a different objection decision. That Section 56(1) of the TPA provides as follows: -“56 (1) In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

44. The Respondent averred that the Appellant was uncooperative in the provision of relevant records and failed to respond to request documents hence no relevant documents or records were provided to support the objection by the Appellant. That as a result, the assessments were made based on the only available information based on the best judgement by the Respondent. That the TPA empowers the Respondent to require production of such documents vide issuance of notice as deemed necessary in determination of tax liability. That Section 59(1) of the TPA provides that: -“For the purpose of obtaining full information in respect of the income of a person or class of persons, the Commissioner may, by notice in writing, require, in the case of the income of a person, that person or any other person, and in the case of a class of persons, any person –(a)to produce for examination by the Commissioner at the time and place specified in the notice, any accounts, books of account, and other documents which the Commissioner may consider necessary; and the Commissioner may inspect such accounts, books of accounts or other documents and may take copies of any entries therein.”

45. The Respondent further averred that an in-depth examination of the records established that there were inconsistencies in the returns filed by suppliers and the invoices claimed by the Appellant and this indicated a variance as per the VAT returns filed and Income tax returns filed. Further to that, the Appellant provided no explanations requested on the variance hence the same was disallowed and additional assessments carried out.

46. The Respondent stated that the Value Added Tax Act empowers the Respondent to disallow such input VAT where the necessary documents are not provided. The Respondent cited Section 17 of the VAT Act which provides that: -“(1)Subject to the provisions of this section and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.(2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1), the person does not hold the documentation referred it in subsection (3), …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.”

47. The Respondent averred that a review of the Appellant's records was carried out due to inconsistencies in the VAT3 returns. The Respondent insisted that not all income earned by the Appellant was declared and hence the variances were brought to charge. That the TPA empowers the Respondent to carry out assessment based on the information available. That Section 24(1) of the TPA provides as follows:-“A person required to submit a tax return under a tax law shall submit the return in the approved form and in the manner prescribed by the Commissioner.”(2)The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

48. The Respondent further referred to Section 50 (1) (a) of the TPA which provides that:“…the production of a notice of an assessment or a document under the hand of the Commissioner shall be conclusive evidence of the making of the assessment and that the amount and particulars of the assessment are correct.”

49. The Respondent submitted that there is a rebuttable presumption in tax matters that an assessment by the Respondent is correct. That in Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR the court held that: -“Section 56 of the TPA in peremptory terms places the burden of proof in tax cases on the Taxpayer. Generally, the taxpayer has the burden of proof in any tax controversy. The Taxpayer must demonstrate that the Commissioner's assessment is incorrect. The Taxpayer has a significantly higher burden. The Taxpayer must prove the assessment is incorrect. The shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the Commissioner's assessments or determinations of deficiency. The Commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer.”

50. The Respondent submitted that the Appellant did not provide any evidence that would have altered the assessment. That the Tax Procedures Act places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different objection decision.

51. The Respondent submitted that Appellant was uncooperative in the provision of relevant records and failed to respond to the request of documents hence no relevant documents or records were provided to support the objection by the Appellant. That as a result, the assessments were made based on the only available information based on the best judgement by the Commissioner.

52. The Respondent reiterated the holding of the court in Janet Kaphiphe Ouma and Another V. Marie Stopes International (Kenya), HCC No. 68 of 2007 that: -“in this matter, apart from filing its statement of defence the defendant did not adduce any evidence in support of assertions made therein. The evidence of the 1st plaintiff and that of the witness remains uncontroverted and the statement in the defence therefore remains mere allegations... sections 107 and 108 of the Evidence Act are clear that he who asserts or pleads must support the same by way of evidence.”

53. That it was evident that the Appellant failed to provide evidence to discredit the assessments by the Respondents and thus the same ought to be deemed correct and proper in law.

54. The Respondent averred that the assessment was issued based on the information provided and in light of the inconsistencies within the Appellant's books of accounts. That the TPA which provides as below, empowers the Respondent to make alterations or additions to original assessments from available information for a reporting period based on the best judgment: -“31 (1)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 a taxpayer for a reporting period assessment relates.(a)in the case of a deficit carried forward under the Income Tax Act (Cap. 470), the taxpayer is assessed in respect of the correct amount of the deficit carried forward for the reporting period;(b)in the case of an excess amount of input tax under the Value Added Tax Act, 2013 (No. 35 of 2013), the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; or(c)in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

55. The Respondent submitted that in Trust Bank Ltd vs Paramount Universal Bank Ltd and 2 others (2009) eKLR it was held that: -“It is trite that where a Party fails to call evidence in support of its case, that Party's pleadings remain mere statements of facts since in so doing the Party fails to substantiate its pleadings. We associate ourselves with the averments of the court and submit the Appellant's request to allow purchases incurred remain to be mere statements with no evidence to substantiate their claim.”

56. The Respondent further submitted that contrary to the assertions made by the Appellant, the Respondent did not receive delivery notes, purchase invoices, delivery notes, supplier statements and bank statements. That the Appellant failed to provide any evidence to support its allegations and its allegations that it availed all relevant documents is false and unfounded.

57. The Respondent submitted that the Appellant knowingly and recklessly committed an offence according to Section 94 of the TPA.“Failure to submit tax return or other documentA person commits an offence if the person without reasonable cause fails to submit a tax return or other document required under a tax law by the due date.”

58. The Respondent further relied on the case of Osho Drappers Ltd Vs Commissioner of Domestic Taxes, TAT No. 159 of 2018] where it was held that the taxpayer has to produce documents to discharge of its burden of proof.

59. That in Miao Yi v Commissioner of Investigations & Enforcement TAT no 441 of 2019 the Tribunal asserted that: -“the burden of proof squarely lay on the Appellant to disprove the Respondent's tax assessment. Section 56 (1) of the TPA provides as follows: In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect". The Appellant has failed to demonstrate to the Tribunal's satisfaction that the money credited into his account was not income.”

60. That the proper way prescribed by law for the Appellant to dispense its burden of proof is by production of documents especially for books of accounts but the Appellant failed to do so thus not substantiating its claim. That the law provides as follows: -“43. Keeping of records(1)Every registered 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.”

61. The Respondent argued that the Appellant in this matter failed to prove that the Respondent's assessments were excessive. That Section 30 of the Tax Appeals Tribunal and Section 56 of the Tax Procedures Act impose the burden of proof on the taxpayer to prove that an assessment is excessive or a tax decision is incorrect. That Section 59 of the TPA and Section 43 of the VAT Act 2013 provide laws on keeping and production of documents when required by the tax authorities.

62. The Respondent referred to the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya 2021] eKLR where the court further held that:“The uniqueness of tax laws is underscored by the fact that even where the constitutionality of such provisions has been challenged, courts have consistently held that placing the burden upon the tax payer is not unconstitutional nor is it contrary to Parliament's intent. This is because there is a distinction between the legal burden of proof and the evidential burden of prove. These are two different concepts. The Evidence Act places the burden of proving the existence any fact in issue on the party who asserts. The evidential burden exists in the form of a tactical onus to contradict, weaken or explain away the evidence that has been led. It is the latter form of burden which may shift from one party to the other.…Placing the burden of proof in tax cases on the tax payer reflects the unique nature of the tax system. This is evident from the three-fold justifications for placing the burden on the tax payer. These are: -(a) the presumption of correctness; (b) the government's need for revenue' and, (c) the taxpayer's possession of evidence. The taxpayer's burden of proof comprises two parts: establishing, with evidence, the underlying facts on which the law is to operate (and in this regard, the standard of proof to which each fact must be proved is relevant); and-that the operation of the law when applied to those facts establishes that the assessment is excessive or erroneous.”

63. It was the Respondent’s submission that the Appellant who possesses the evidence to challenge the Respondent's assessments has not substantiated and proved its case by availing the requisite documents as required by Section 59 (1) of the TPA to furnish or challenge the commissioner with information relating to the tax liability assessed.

64. The Respondent further relied on Dyer & Dyer Limited v Commissioner of Domestic Taxes TAT 139 of 2020, in which the Tribunal held that: -“The Appellant woefully failed in adducing a scintilla of evidence demonstrating that the Commissioner erred in raising the additional assessment in dispute. All the Appellant has, are perceived notions and imputations of incorrectness of the assessment. This appreciably points to an underwhelming dispensation of the burden placed upon the Appellant in section 56 (1) of the TPA 2015. ”

65. The Respondent finally submitted that in light of the foregoing myriad of cases on the ‘burden of proof’ it is evident that the Respondent did not err in determining the tax assessments as the Appellant failed to discharge its burden of proof and challenge the Respondent's assessment with unchallenged and uncontradicted evidence to prove the incorrectness of the tax assessments.

Respondent’s prayers 66. The Respondent prayed that the Tribunal finds:a.That the Respondent’s objection decision be upheld.b.The outstanding tax arrears of Kshs. 641,753. 00 are due and payable by the Appellant.c.The confirmed assessments dated 16th August 2022 were proper in law.d.That the Appeal herein be dismissed with costs to the Respondent.

Issue For Determination 67. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issue for determination as follows:Whether the Respondent’s decision to reject the Appellant’s refund claim of Kshs. 641,753. 00 is proper in law.

Analysis And Findings 68. Having identified the issue that calls for its determination, the Tribunal proceeds to analyse it as hereunder.

69. On 24th November 2021 the Appellant lodged with the Respondent Value Added Tax (VAT) refund claims of Kshs. 3,685,224. 00 for the period of October 2020 and Kshs. 186,887. 00 for the period of January 2021.

70. That the Respondent through iTax partially approved the refund claims for payment and disallowed a total of Kshs. 641,753. 00, being Kshs. 554,796. 00 from the refund claim for October 2020 and Kshs. 86,957. 00 from the refund claim for January 2021.

71. The Appellant appealed against the refund decisions disallowing Kshs. 641,753. 00 of the refund claims through a Notice of Appeal filed on 16th September 2022.

72. The Appellant stated that its disallowed input VAT claim for October 2020 and January 2021 amounts to Kshs. 641,753. 00 and that it related to expenses it incurred in making of its taxable supply, that is, exportation of artificial intelligence services to SIS. The Appellant further stated that annexed to its Statement of Facts as Appendix 3 are the detailed schedules of the input VAT for the periods in dispute to ascertain its assertion.

73. The Appellant averred that the Respondent fully appreciated the fact that the Appellant lodged valid input VAT claims having fully complied with the requirements of Section 17 of the VAT Act 2013 and that it provided sufficient documentation to support the validity of its claim.

74. The Appellant submitted that the input VAT deduction in its January 2021 VAT return was in relation to supplies made prior to 14th October 2020 as demonstrated in the schedule annexed to the Appellant’s Statement of Facts as Appendix 7. That therefore, its status as an EPZ cannot be a valid ground to disallow input VAT that had been validly incurred as demonstrated above.

75. The Appellant affirmed that it had incurred input VAT that was used in the generation of taxable supplies prior to the period it received and EPZ license, and that it claimed the input tax amounting to Kshs. 86,957. 00 in the VAT return for January 2021.

76. The Respondent stated that the Value Added Tax Act empowers the Respondent to disallow such input VAT where the necessary documents are not provided, and argued that the Appellant in this matter failed to prove that the Respondent's assessments were excessive. That Section 30 of the Tax Appeals Tribunal Act and Section 56 of the Tax Procedures Act impose the burden of proof on the taxpayer to prove that an assessment is excessive or a tax decision is incorrect. That Section 59 of the TPA and Section 43 of the VAT Act 2013 provide laws on keeping and production of documents when required by the tax authorities.

77. The Tribunal reviewed all the information and documents adduced by the Appellant and determined that alongside the Statement of Facts and submissions outlined above, the Appellant provided only the following documents in relation to the impugned refund decision:a.The Appellant’s October 2020 refund application acknowledgment receipt dated 24th November 2021. b.The Appellant’s list of purchases which it was charged VAT of Kshs. 3,685,224. 86 claimed in October 2020 VAT return and Kshs. 186,887. 55 claimed in January 2021 VAT return and claimed a refund of, which the Respondent subsequently disallowed Kshs. 554,976. 00 for October 2020 and Kshs. 86,957. 00 for January 2021. c.The Respondent’s assessment order dated 16th August 2022 charging the Appellant VAT of Kshs. 554,795. 00 for the period of October 2020. d.The Appellant’s EPZ licence effective from 14th October 2020 to 13th October 2021. e.The Appellant’s KRA PIN certificate.

78. The Tribunal notes that the VAT Act 2013 and the VAT Regulations clearly prescribe the VAT treatment of EPZ businesses and should be the reference guide on the applicability of VAT to the transactions related to an EPZ business.

79. Section 17 (3) of the VAT Act 2013 provides that the documentation for the purposes of deduction of input tax under Section 17 (2) shall be (a) an original tax invoice issued for the supply or a certified copy…; and Regulation 14 of the Value Added Tax Regulations, 2017 lists the documents relating to supply to an EPZ business or an SEZ as follows: -“14. (l)The documents relating to a supply required as proof of a supply of goods or services to an Export Processing Zone business or Special Economic Zone shall be-(a)a copy of the recipient's export processing zone licence; or Special Economic Zone licence;(b)a certificate signed by the recipient of the supply stating that the goods have been received and are for use in the approved operations of an export processing zone enterprise; and(c)for goods, the export entry duly certified by the proper officer of customs.”

80. The Tribunal notes that the Appellant attached to its Appeal the list of purchases that the Appellant declared to have incurred input tax on and which it claimed in its October 2020 and January 2021 VAT returns. The Appellant, however, did not specify which of the input tax it claimed in its October 2020 and January 2021 VAT returns was disallowed by the Respondent to the sum of Kshs. 641,753. 00.

81. That notwithstanding, the Tribunal reviewed the evidence which the Appellant adduced to prove its claim that the disallowed input VAT was allowable and that it ought to have been refunded by the Respondent.

82. The Tribunal maintains that the Kshs. 641,753. 00 of input VAT which the Appellant incurred and claimed as refundable ought to have been sufficiently supported by the Appellant to enable the Respondent to approve the refund claim. The Tribunal notes that the Appellant failed to demonstrate how the supplies in the schedule it attached were acquired to make taxable supplies as required under Section 17 (1) of the VAT Act 2013, failed to prove that it incurred the input VAT in the making of zero rated supplies as required under Section 17 (5) of the VAT Act 2013, failed to provide original tax invoices issued for the supplies or certified copies of invoices as expressly required under Section 17 (3) of the VAT Act 2013, and failed to provide supporting documents required under Regulation 14 of the VAT Regulations 2017 before the Respondent and the Tribunal for review.

83. The Appellant averred that the purchases were incurred to make taxable supplies and merely provided a list of purchases made and the computed input tax that it deducted in its October 2020 and January 2021 VAT returns.

84. The Tribunal is guided by the decision in TAT 538 of 2021 Greenroad Kenya Limited v Commissioner of Domestic Taxes where the Tribunal cited the holding in the case of Trust Bank Limited vs Paramount Universal Bank Limited and 2 others (2009) eKLR where it was observed that: -“It is trite that where a party fails to call evidence in support of its case, the party's pleadings remain mere statements of fad since in so doing the party fails to substantiate its pleadings.”

85. Accordingly, the Tribunal finds that the Appellant did not discharge its burden of proof to demonstrate that the Respondent’s refund decision on the VAT refund claim for the periods of October 2020 and January 2021 was incorrect as required under Section 56 (1) of the Tax Procedures Act, 2015, and also failed to prove that the tax decision should not have been made or should have been made differently as required under Section 30 (b) of the Tax Appeals Tribunal Act.

86. Based on the foregoing, the Tribunal finds that the Respondent’s decision to disallow the VAT refund claim of Kshs. 641,753. 00 for the periods of October 2020 and January 2021 is proper in law.

Final Decision 87. The upshot of the above analysis is that the Tribunal finds that the Appeal is devoid of merit, and accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s refund decisions dated 16th August 2022 and 31st August 2022 be and are hereby upheld.c.Each party to bear its own costs.

88. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF DECEMBER, 2023. GRACE MUKUHACHAIRPERSONERICK KOMOLOMEMBERJEPHTHAH NJAGIMEMBERTIMOTHY VIKIRUMEMBERGLORIA A. OGAGAMEMBER