[2024] KETAT 109 (KLR)

Samasource Kenya EPZ Limited v Commissioner of Domestic Taxes (Tribunal Appeal 1084 of 2022) [2024] KETAT 109 (KLR) (Civ) (2 February 2024) (Judgment)

Neutral citation: [2024] KETAT 109 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tribunal Appeal 1084 of 2022

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

February 2, 2024

Between

Samasource Kenya EPZ Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

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.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. 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 18th April 2017, 17th July 2019 and 22nd October 2021, the Appellant lodged with the Respondent Value Added Tax (VAT) refund claims amounting to Kshs. 52,378,397. 00 for the periods of May 2016 to March 2017, January 2019 to May 2019, and April 2020 respectively.

4. The Respondent stated that it reviewed the refund claims and rejected Kshs. 12,164,136. 00 of the refund claims for various reasons. The Appellant objected to the refund decision on 25th August 2022.

5. In a letter dated 5th September 2022, the Respondent issued an objection decision advising the Appellant to escalate its grievance to the Tribunal stating that the Independent Review of Objections lacks the jurisdiction to review the objection.

6. The Appellant, dissatisfied with the objection decision, filed its Notice of Appeal on 29th September 2022.

The Appeal 7. The Appeal is premised on the Memorandum of Appeal dated and filed on 29th September 2022 which raised the following grounds: -a.That the Respondent erred in law and fact by rejecting the Appellant’s application for refund of Kshs. 11,556,711. 00 validly lodged under provisions of Section 17 (5) (d) of the Value Added Tax Act, 2013 (VAT Act) owing to an additional assessment of Kshs. 9,360. 00. b.That the Respondent erred in law and fact by disallowing the Appellant’s input tax amounting to Kshs. 12,164,136. 00 that was incurred within the requirements envisaged in Section 17 (1) of the VAT Act.c.That the Respondent erred in law and fact by failing to provide reasons for rejecting the Appellant’s refund claim of Kshs. 502,572. 00 as envisaged under Section 49 of the Tax Procedures Act 2015.

Appellant’s Case 8. The Appellant’s case is premised on the following documents filed before the Tribunal: -a.Its Statement of Facts dated and filed on 29th September 2022 and the documents attached thereto; andb.Its Written Submissions dated and filed on 9th June 2023 and the documents attached thereto.

9. The Appellant lodged with the Respondent Value Added Tax (VAT) refund claims of Kshs. 52,378,397. 00 on 18th April 2017, 17th July 2019 and 22nd October 2021 covering various VAT periods

10. The Appellant stated that the Respondent through iTax partially approved the refund claim for payment and disallowed Kshs. 12,164,136. 00 which comprised Kshs. 104,853. 00 claimed for the VAT periods from May 2016 to March 2017, Kshs. 502,572. 00 claimed for the VAT periods from January 2019 to May 2019 and Kshs. 11,556,711. 00 for the VAT period of April 2020.

11. The Appellant objected to the refund decision vide a notice of objection dated 24th August 2022 and lodged on 25th August 2022.

12. The Appellant referred to the objection decision dated 5th September 2022 wherein the Respondent advised the Appellant to seek redress on the disallowed refund claim at the Tribunal.

13. The Appellant expressed an intention to appeal against part of the refund decision through a Notice of Appeal filed on 29th September 2022.

14. The Appellant summarised its issues for determination by the Tribunal as below: -a.Whether the Respondent erred in law and fact by rejecting the Appellant's application for refund of Kshs. 11,556,711. 00, validly lodged under the provisions of Section 17 (5) of the VAT Act owing to an additional assessment of Kshs. 9,360. 00. b.Whether the Respondent erred in law and fact by disallowing the Appellant's input tax amounting to Kshs. 12,164,136. 00 that was incurred and claimed within the requirements envisaged in Section 17(1) of the VAT Act.c.Whether the Respondent erred in law and fact by failing to provide reasons for rejecting the Appellants refund claim for tax period January 2019 to May 2019 as envisaged in Section 49 of the Tax Procedures Act 2015 (TPA).

a. On whether the Respondent erred in law and fact by rejecting the Appellant's application for refund of Kshs. 11,556,711. 00, validly lodged under the provisions of Section 17 (5) of the VAT Act owing to an additional assessment of Kshs. 9,360. 00. 15. The Appellant stated that on 29th September 2021 the Respondent issued it with a VAT additional assessment of Kshs. 9,360. 00 for the period of April 2020 and a debit adjustment voucher of the Kshs. 9,360. 00. The Appellant averred that the additional assessment arose from an invoice it had duplicated in its April 2020 VAT return.

16. The Appellant averred that it incorporated the debit adjustment voucher of Kshs. 9,360. 00 in its September 2021 VAT return, and that this effectively reduced its VAT credit by Kshs. 9,360. 00.

17. The Appellant stated that the Respondent issued it with a credit adjustment voucher of Kshs. 11,556,711. 00 dated 25th July 2022 which was the entire refund claimed but disallowed for the VAT period of April 2020 on account of the VAT additional assessment of Kshs. 9,360. 00.

18. The Appellant averred that the Respondent did not contest the validity of the Appellant's refund application because, according to the Appellant, its claim was validly lodged pursuant to Section 17 (5) of the VAT Act 2013 which provides: -“(5)Where the amount of input tax that may be deducted by a registered person under subsection (1) in respect of a tax period exceeds the amount of output tax due for the period, the amount of the excess shall be carried forward as input tax deductible in the next tax period:Provided that any such excess shall be paid to the registered person by the Commissioner where—SUBPARA (a)such excess arises from making zero rated supplies;”

19. The Appellant stated that the Respondent grossly erred by rejecting the Appellant's refund application for the period of April 2020 due to an additional assessment of Kshs. 9,360. 00 which the Appellant claimed could easily have been set off from the refundable amount of Kshs. 11,556,711. 00.

20. The Appellant cited Section 47 (5) of the Tax Procedures Act, 2015 (TPA) stating that it is envisaged that the Respondent would apply a refund in a particular order. That the legislation provides: -“(5)Where the application is for a refund of tax under subsection (1)(b), the Commissioner shall apply the overpayment in the following order—(a)in payment of any other tax owing by the taxpayer under the specific tax law;(b)in payment of a tax owing by the taxpayer under any other tax law; and(c)any remainder shall be refunded to the taxpayer.”

21. The Appellant submitted that based on the foregoing, the Respondent ought to have deducted the April 2020 Kshs. 9,360,00 additional assessment from the Appellant’s April 2020 refund of Kshs. 11,556,711. 00 and refunded the balance to the Appellant.

22. The Appellant decried that the Respondent’s rejection of the entire refund claim for April 2020 owing to an additional assessment is without merit and not hinged on any tax law.

b. On whether the Respondent erred in law and fact by disallowing the Appellant’s input tax amounting to Kshs. 12,164,136. 00 that was incurred within the requirements envisaged in Section 17 (1) of the VAT Act. 23. The Appellant stated that the disallowed refund amount for the period in dispute being May 2016 to March 2017, January 2019 to May 2019 and April 2020, amounts to Kshs. 12,164,136. 00. That the input VAT related to expenses incurred by the Appellant in making of its taxable supply, exportation of artificial intelligence services to Samasource Impact Sourcing, a company registered in the United States of America. That the input claimed by the Appellant related to office supplies such as water, office tea and other staff welfare related inter alia expenses such as team building for the staff. The Appellant submitted that this has been well demonstrated and buttressed by the detailed schedules attached to this appeal.

24. The Appellant submitted that the 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 Section 17 (1) of the VAT Act provides 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.”

25. 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 v General Reversionary and lnvestment Company (1919) 1 K.B. 25. That in this case, 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...”

26. The Appellant also referred 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 held the following regarding 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.”

27. That a taxable supply is defined in Section 2 of the VAT Act as any supply made in Kenya by a person in the course or furtherance of a business carried on by the person.

28. 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.”

29. That Section 17 (3) of the VAT Act provides that for a taxpayer to offset any input tax against output tax, it must provide an original tax invoice issued for the supply or a certified copy.

30. The Appellant averred that according to the provisions in the VAT Act 2013 espoused above, for one to lodge a valid claim for input VAT, a taxpayer must prove that:a.The supply or importation was acquired to make taxable supplies using an original tax invoice or certified copy; andb.That the claim was lodged within 6 months after the end of the tax period in which the supply or importation occurred.

31. That in the case of Income Tax Appeal No. 6 2018 Mars Logistics Ltd v 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, That 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 ieg 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 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.”

32. Further to the above, the Appellant submitted that the claim for input VAT for the tax periods under dispute 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 as Appendix 7 to the Appellant's Statement of Facts dated 29th September 2022.

33. It was the Appellant's submission that the 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. That this threshold has been met by the Appellant as illustrated in the arguments above.

34. The Appellant submitted that the Respondent has to fully appreciate the fact that the Appellant lodged valid input VAT claims having fully complied with the requirements of Section 17 of the VAT Act and provided sufficient documentation to support the validity of its claim.

35. The Appellant requested the Tribunal to expunge the entire rejection notices issued by the Respondent for the periods in dispute, as the same lack legal and factual merit.c.On whether the Respondent erred in law and fact by failing to provide reasons for rejecting the Appellant's refund claim of Kshs. 502,572. 00 for the tax periods from January 2019 to May 2019 as envisaged in Section 49 of the TPA.

36. The Appellant submitted that upon receipt of the Respondent's refund rejection notice for the claim periods of January 2019 to May 2019 amounting to Kshs. 502,572. 00, the Appellant, through its tax agent, sent several emails and made a physical visit to the Respondent's premises requesting for a schedule of the disallowed input VAT as well as the reasons for the Respondent's decision. The Appellant alleged that the Respondent provided no response to the requests as required under Section 49 of the TPA which provides: -“Where the Commissioner has refused an application under a tax law, the notice of refusal shall include a statement of reasons for refusal.”

37. The Appellant submitted that failure to provide reasons for any decision by the Respondent violates the Appellant's Constitutional right to fair administrative action under Article 47 (1) and (2) of the Constitution of Kenya 2010 and Sections 4 and 6 of the Fair Administrative Actions Act, 2015. That the principle of fair administrative action requires that if a right or fundamental freedom of a person has been or is likely to be adversely affected by administrative action, the person has the right to be given written reasons for the action.

38. Further, that the High Court in Sceneries Limited v National Land Commission [2017] eKLR, Misc. Constitutional Application No. 1 of 2016 emphasised that the right to be heard involves provision of sufficient information, at least that which the administrative body relied upon in making the decision. That the court held: -“The right to be heard requires not only that the party concerned be given prior notice of the precise purpose of the inquiry or hearing but also that the person be given sufficient information to prepare his/her case. As to the disclosure of information, this implies that the party concerned be apprised of reports and documents in the body's possession that may be prejudicial to his/her case. He/she should at least have access to all the information the tribunal or body relied upon when it made its decision. That information should also be disclosed in due time since the party must have sufficient time to prepare for the hearing.”

39. The Appellant averred that the failure to provide a reason and explanation as to why the refund application was rejected is an incurable defect in the Respondent’s decision. That accordingly, it is the Appellant’s submission that the rejection notice lacks legal merit and should be vacated in its entirety.

Appellant’s prayers 40. The Appellant prayed that the Tribunal: -a.Allows the Appeal.b.Partially sets aside the Respondent’s assessment order dated 5th August 2022 and credit adjustment voucher dated 25th July 2022. c.Awards the costs of and incidental to this Appeal.d.Any other orders that the Tribunal may deem fit.

Respondent’s Case 41. The Respondent’s case is premised on the following documents:a.Its Statement of Facts dated and filed on 26th October 2022 and the documents attached thereto; andb.Its Written Submissions dated 26th June 2023 and filed on 27th June 2023.

42. The Respondent stated that the dispute arose from some assessments done disallowing some inputs that are not allowed for refunds claim.

43. The Respondent reiterated its position as stated in the rejection order communicated to the Appellant and responded to the Appellant’s grounds of Appeal as hereunder.

44. The Respondent stated that the Appellant had claimed input tax that is not allowable as per Section 17 of the VAT Act for claim reference no. KRA201702625585 for May 2016 to March 2017 whose amount disallowed was Kshs. 104,853. 00.

45. That the Appellant had claimed input tax that is not allowable as per Section 17 of the VAT Act and that the system also prompted the Respondent to disallow input tax claimed from suppliers with inactive PINs for claim reference no. KRA201910619576 for January 2019 to May 2019 whose amount disallowed was Kshs. 502,572. 00.

46. That claim reference no. KRA202120493460 for April 2020 of Kshs. 11,556,711. 00 had an assessment/objection in progress and the system prompted the Respondent to reject the same.

47. The Respondent rebutted the Appellant’s allegation that it had erred in law and fact by failing to provide reasons for rejecting the Appellant’s refund claim of Kshs. 502,572. 00 by stating that it had emailed the Appellant with the schedule of disallowed input tax and the reasons why it was disallowed.

48. The Respondent made reference to Section 50 (1) (a) of the TPA which provides:-“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. It was the Respondent’s submission that there is a rebuttable presumption in tax matters that an assessment by the Respondent is correct.

50. The Respondent submitted that Section 17 (1) of the VAT Act states that: -“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.”

51. The Respondent reiterated that its position on refund claim no. KRA201702625585 for May 2016 to March 2017 whose amount disallowed was Kshs. 104,853. 00, is that the acquisition of the said items does not qualify to be acquired to make taxable supplies.

52. That Section 17 (2) of the VAT Act states as follows: -“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.”

53. The Respondent further submitted that for claim no. KRA201910619576 for January 2019 to May 2019 whose amount disallowed was Kshs. 502,572. 00, included input from inactive PINs. That this reason was highlighted in the schedule of disallowed input.

54. The Respondent averred that the Appellant sought to be allowed deduction of input VAT from suppliers who have inactive PINs. That it is expected that when the Appellant makes a purchase that the corresponding supplier is a business entity that will charge VAT pursuant to Section 5 (1, (2), (3) and 4 of the VAT Act.

55. That Section 56 (1) of the TPA provides that in any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.

56. That in the alternative, the Appellant had an opportunity to support its input claim by providing the documents under Section 17 (3) of the VAT Act.

57. The Respondent cited Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR where the court held that Section 56 of the TPA in peremptory terms places the burden of proof in tax cases on the taxpayer and that: -“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 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.”

58. The Respondent submitted that it is evident that the Appellant has failed to provide evidence to discredit the assessments by the Respondent and thus the same ought to be deemed correct and proper in law.

59. 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 its burden of proof.

60. That in Miao Yi v Commissioner of Investigations & Enforcement TAT No. 441 of 2019 this 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.”

61. The Respondent asserted 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 in the VAT Act that: -“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.” 93. Failure to maintain documents

(1)A person commits an offence f the person fails to keep, retain or maintain a document that may be required to be kept, retained or maintained in accordance with a tax law without reasonable excuse during a reporting period.”

62. The Respondent referred to Dyer & Dyer Limited v Commissioner of Domestic Taxes TAT 139 of 2020, in which the Tribunal held: -“…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 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. ”

63. The Respondent averred that in light of the foregoing cases on the ‘burden of proof’ it is evident that the Respondent did not err in determining the tax assessments as the Appellant has 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 64. The Respondent prayed that the Tribunal finds:a.The Respondent’s assessment order dated 5th August 2022, and credit adjustment voucher dated 25th July 2022 be upheld.b.The Appeal be dismissed with costs.

Issue for Determination 65. 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. 12,164,136. 00 is proper in law.

Analysis and Findings 66. Having identified the issue that calls for its determination, the Tribunal proceeds to analyse it as hereunder.

67. On 18th April 2017, 17th July 2019 and 22nd October 2021, the Appellant lodged with the Respondent Value Added Tax (VAT) refund claims amounting to Kshs. 52,378,397. 00 for the periods of May 2016 to March 2017, January 2019 to May 2019, and April 2020.

68. The Respondent stated that it reviewed the refund claims and rejected Kshs. 12,164,136. 00 of the refund claims for various reasons. The Appellant objected to the refund decision on 25th August 2022.

69. In a letter dated 5th September 2022, the Respondent issued an objection decision advising the Appellant to escalate its grievance to the Tribunal stating that the Independent Review of Objections lacks the jurisdiction to review the objection.

70. The Appellant, dissatisfied with the objection decision, filed its Notice of Appeal on 29th September 2022.

71. The Respondent stated that for claim reference no. KRA201702625585 for May 2016 to March 2017 whose amount disallowed was Kshs. 104,853. 00, the Appellant had claimed input tax that is not allowable as per Section 17 of the VAT Act as the acquisition of the items does not qualify to be for making taxable supplies.

72. The Respondent also stated that the Appellant had claimed input tax that is not allowable as per Section 17 of the VAT Act and that the system also prompted the Respondent to disallow input tax claimed from suppliers with inactive PINs for claim reference no. KRA201910619576 for January 2019 to May 2019 whose amount disallowed was Kshs. 502,572. 00.

73. The Appellant argued that the input VAT related to expenses incurred by the Appellant in making of its taxable supply, exportation of artificial intelligence services to Samasource Impact Sourcing, a company registered in the United States of America. That the input claimed by the Appellant related to office supplies such as water, office tea and other staff welfare related, inter alia, expenses such as team building for the staff. The Appellant submitted that this has been well demonstrated and buttressed by the detailed schedules attached to this Appeal.

74. The Appellant submitted that upon receipt of the Respondent's refund rejection notice for the claim periods of January 2019 to May 2019 amounting to Kshs. 502,572. 00, the Appellant, through its tax agent, sent several emails and made a physical visit to the Respondent's premises requesting for a schedule of the disallowed input VAT as well as the reasons for the Respondent's decision. The Appellant alleged that the Respondent provided no response to the requests as required under Section 49 of the TPA.

75. The Tribunal reviewed the evidence adduced by the Respondent in response to the Appellant’s allegation that it failed to adhere to the requirements of Section 49 of the TPA with regard to the disallowed input of Kshs. 502,572. 00 for the claim period of January 2019 to May 2019. Section 49 of the TPA provides that: -“Where the Commissioner has refused an application under a tax law, the notice of refusal shall include a statement of reasons for refusal.”

76. The Tribunal notes that the Appellant requested in emails to the Respondent, for the list of disallowed items for the period January 2019 to May 2019 on 27th July 2022, 12th August 2022 and 22nd August 2022. The Tribunal also notes that on 25th August 2022, the Respondent shared this list that the Appellant had requested, and that the list included reasons why some of the input tax was disallowed and refund claim rejected. The Appellant on the other hand, did not challenge the authenticity of this communication from the Respondent. Based on the foregoing, the Tribunal finds that the Respondent discharged its obligation of providing reasons for refusal of the refund claim.

77. The Tribunal reviewed the information and documents adduced by the Appellant and determined that the disallowed input tax for the periods of May 2016 to March 2017 and January 2019 to May 2019 related to the purchase of a refrigerator, televisions, tea urns, snacks, accommodation, meals, cakes, water, tea leaves, drinking chocolate, footballs, rugby balls, teambuilding facilitation fees, milk and sugar.

78. The Tribunal is guided by Section 17 of the VAT Act 2013 on what is deductible input tax. Section 17 (1) of the VAT Act 2013 provides that: -“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.” (our emphasis supplied)

79. Section 17 (4) (b) of the VAT Act 2013 outlines some of the exceptions to deduction of input VAT as provided below: -“A registered person shall not deduct input tax under this Act if the tax relates tothe acquisition leasing or hiring of—(b)entertainment, restaurant and accommodation services unless—(i)the services are provided in the ordinary course of the business carried on by the person to provide the services and the services are not supplied to an associate or employee; or(ii)the services are provided while the recipient is away from home for the purposes of the business of the recipient or the recipient’s employer:”

80. The burden of proving that a tax decision is incorrect and that the tax decision should not have been made or should have been made differently rests on a taxpayer according to Section 56 (1) of the Tax Procedures Act, 2015 and Section 30 (b) of the Tax Appeals Tribunal Act.

81. The Tribunal tested the Appellant’s explanations intended to discharge its onus of demonstrating the excessiveness and incorrectness of the Respondent’s decision to disallow the input VAT of Kshs. 104,853. 00 for the refund claim period of May 2016 to March 2017 and Kshs. 502,572. 00 for the refund claim period of January 2019 to May 2019 and made the following observations:a.That there was no link between the supplies acquired and the supply of the Appellant’s self-declared principal activity of exportation of artificial intelligence services. The Tribunal was unable to establish how the items that the Appellant purchased were primarily used for the supply of artificial intelligence services.b.That the Appellant deducted input tax incurred on items that are expressly excluded from deduction of input tax under Section 17 (4) of the VAT Act 2013. Input tax incurred on entertainment, restaurant and accommodation services are expressly prohibited as non-deductible input tax unless it is incurred in the exceptional circumstances provided under Section 17 (4) of the VAT Act 2013. The Tribunal finds that the Appellant did not demonstrate that its purchases complied with these exceptional circumstances.

82. The Tribunal is of the considered view that as regards the disallowed input tax for the claim period of January 2019 to May 2019, the Appellant failed to controvert the Respondent’s finding that the Appellant had deducted input tax on supplies acquired from suppliers with inactive PINs. As such, the Appellant did not discharge its burden of proof to persuade the Tribunal to set aside the Respondent’s decision.

83. 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 v 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.”

84. Based on the foregoing, the Tribunal finds that the Respondent was justified in disallowing the input tax and corresponding refund claims of Kshs. 104,853. 00 for the period of May 2016 to March 2017 and Kshs. 502,572. 00 for the period of January 2019 to May 2019.

85. The Respondent stated that claim reference no. KRA202120493460 for April 2020 amounting to Kshs. 11,556,711. 00 had an assessment/objection in progress and that the system prompted the Respondent to reject the same.

86. The Appellant submitted that the Respondent ought to have deducted the April 2020 Kshs. 9,360,00 additional assessment from the Appellant’s April 2020 refund of Kshs. 11,556,711. 00 and refunded the balance to the Appellant in accordance with Section 47 (5) of the TPA.

87. The Tribunal has considered the pleadings and submissions of both parties on the matter of the April 2020 VAT refund claim and recognises that the Respondent rejected the refund claim on the basis of the existence of an additional assessment in the same period without due regard of the merits of the refund claim.

88. The Tribunal observes that Section 47 (5) of the TPA clearly enumerates the sequence of how the Respondent should apply the overpayment in relation to an application for a refund of tax as provided below: -“Where the application is for a refund of tax under subsection (1)(b), the Commissioner shall apply the overpayment in the following order—(a)in payment of any other tax owing by the taxpayer under the specific tax law;(b)in payment of a tax owing by the taxpayer under any other tax law; and(c)any remainder shall be refunded to the taxpayer.”

89. The Tribunal notes that the Respondent’s rejection of the entire refund claim of April 2020 without due consideration of the merits of the refund claim was inordinate and in contravention with Section 47 (5) of the TPA.

90. Consequently, the Tribunal finds that the Respondent erred in rejecting the VAT refund claim of Kshs. 11,556,711. 00 for the period of April 2020.

Final Decision 91. Based on the foregoing analysis, the Tribunal finds that the Appeal is partially merited, and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby partially allowed.b.The Respondent’s objection decision dated 5th September 2022 be and is hereby varied as follows:-i.The disallowed input tax and corresponding refund claim of Kshs. 104,853. 00 for the period of May 2016 to March 2017 be and is hereby upheld.ii.The disallowed input tax and corresponding refund claim of Kshs. 502,572. 00 for the period of January 2019 to May 2019 be and is hereby upheld.iii.The refund claim of Kshs. 11,556,771,00 for the period of April 2020 be and is hereby returned to the Respondent to review the refund claim on its merits and make a decision on it within Sixty (60) days of the date of delivery of this Judgment.c.Each party to bear its own costs.

92. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF FEBRUARY, 2024. GRACE MUKUHACHAIRPERSONDR ERICK KOMOLO JEPHTHAH NJAGI MEMBER MEMBERTIMOTHY VIKIRU GLORIA A. OGAGA MEMBER MEMBER