[2023] KETAT 165 (KLR)

Samrose Enterprises Limited v Commissioner of Investigations and Enforcement (Appeal 128 of 2021) [2023] KETAT 165 (KLR) (10 February 2023) (Judgment)

Neutral citation: [2023] KETAT 165 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 128 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

February 10, 2023

Between

Samrose Enterprises Limited

Appellant

and

Commissioner Of Investigations And Enforcement

Respondent

Judgment

Background 1. The Appellant is a limited liability Company incorporated in Kenya under the Company's Act whose principal business activity is wholesale trading.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and Kenya Revenue Authority 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 conducted a tax audit on the Appellant's operation in the year 2018 under Samrose International Distributors Ltd (SIDL) and Samrose Enterprises Ltd (SEL) for 2014, 2015, 2016 and 2017 years of income.

4. The Respondent issued initial investigation findings through a letter dated 31st July 2018 for SIDL and SEL.

5. The Appellant sought audience with the Respondent in order to understand the basis of the findings vide a letter dated 27th August 2018.

6. There were several face to face meetings, email communications, letters and telephone discussions with the Respondent's investigation team, who were overseeing the audit on diverse dates between 29th August 2018 and 28th April 2020 when the Commissioner issued his revised findings through a letter dated 28th April 2020.

7. The Appellant responded to the Respondent's finding vide a letter dated 26th May 2020.

8. In the Appellant's letter of 26th May 2020, the Appellant explained that the sales for SIDL and SEL were from one single business and one point of sale and not from a different business. The Appellant requested to have all tax matters consolidated and assessed under SEL which the Respondent accepted.

9. The Respondent issued a notice of tax assessments for Corporation tax and VAT vide a letter dated 24th September 2020 for 2014, 2015, 2016 and 2017 years of income.

10. The Appellant objected to the tax assessments through a letter dated 22nd October 2020.

11. The Respondent wrote to the Appellant on 23rd November 2020 requesting for relevant documents relating to the objection and asking the Appellant to settle the tax arrears under the assessment, which was not in dispute. This was to be done within 2 weeks from the date of the notice.

12. The Appellant being dissatisfied with the Respondent’s decision lodged a Notice of Appeal dated 15th June 2021 and filed on 16th June 2021.

The Appeal 13. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 19th March 2021 and filed on the same date:-i.The Respondent has declined to accept the Gross Profit Rate (GPR) of 3. 6% for wholesale trade based on sample of actual invoices. ·a.The Respondent and the Appellant have agreed taxable income on the basis of banking method.b.The Appellant computed GPR of 3. 6% which closely compares favorably with 4 (50%) of similar business at 4. 78%, 3. 36%, 3. 30% and 3. 38% which information was shared by the Respondent through his letter dated 24th September 2020. c.Based on the GPR of 3. 6% the Appellant computed taxable profit and tax thereon for 2014, 2015, 2016 and 2017 year of income.d.The Respondent computed taxable profit and tax on GPR of 5. 6%.ii.The Respondent has declined to accept all the cheque payments for expenses and computed transport expenses.a.The Respondent has declined to allow the expenses.b.The Appellant submits that these are real expenses and are not claimed twice. The Appellant submits that cheques are sufficient evidence for expenditure incurred.iii.The Respondent has declined to compute and grant credit for input VAT on the same basis that he has computed output VAT, thus denying the Appellant the same due process.a.The Respondent has computed output VAT on the basis of banking method and has declined to compute input VAT on the same basis.b.The Appellant has computed input VAT on the same basis as the Respondent has computed output VAT thus subjecting the parties involved to same "due process" or Fair Administrative Action as per Paragraph 47·of Constitution of Kenya, 2010.

The Appellant’s Case 14. The Appellant’s case is premised on the Appellant’s Statement of Facts dated and fled on 19th March 2021 and the written submissions dated 7th October 2022 and filed on 11th October 2022 together with authorities attached thereto.

15. The Appellant states that the Respondent conducted investigations on the affairs of the Appellant for the period 2014 - 2017 and communicated the findings on 28th April 2020 following the review of the Appellant's self•assessment returns and supporting documents.

16. In its assessment, the Respondent made a number of findings with the following key issues:a.In relation to the applicable Gross Profit Ratio (GPR), the Appellant disagreed with the Respondent's initial GPR of 11%. The Appellant presented schedules of sales and purchases for the months of March, July and December 2018 with a computed average GPR of 3. 6%. The Respondent did not adopt the GPR of 3. 6% and instead computed an average GPR of 5. 6 % based on the GPR of 8 similar companies in the same industry.b.In relation to the proportion of vatable to non-vatable sales, both the Appellant and the Respondent were agreeable to the average proportions of 64% for vatable sales and 36% for non-vatable sales based on actual figures for March 2018, July 2018 and December 2018 as provided by the Appellant.c.The above average proportions were used to compute the vatable and non- vatable sales for the period 2014 to 2017. Subsequently, the expected sales based on banking deposits were compared with the Appellant's self-declared sales on iTax. This resulted to underdeclared sales of Kshs 3,489,013,070. 00. d.The Respondent then allowed for the supported administrative expenses amounting to Kshs. 46,289,886. 00. These expenses included cash in transit services, insurance, fuel, motor vehicle expense, bank charges and security.e.The Respondent disallowed transport expenses and other expenses paid through cheques on the basis that no further support was provided. The amounts disallowed in relation to transport was Kshs. 186,402,111. 00 and Kshs. 64,080,862. 00 in relation to cheque payments.f.In its computation of VAT after using adjusted banking and the vatable proportion of 64% of the total sales, the Respondent did not allow input tax on the basis that input tax could not be claimed since it was time barred and there were no invoices to support the input tax.g.From the investigation findings, the Respondent then computed and demanded taxes as shown below:Corp Tax VAT Total

2014 15,335,591 115,040,898 130,376,489

2015 57,316,601 362,093,039 419,409,640

2016 68,233,997 424,372,669 492,606,666

2017 65,527,637 447,724,314 513,251,951

Total 206,413,826 1,349,230,920 1,555,644,746

Penalties 41,282,765 269,846,184 311,128,949

Total Tax 247,696,59 I 1,619,077,104 1,866,773,695

17. In its submissions, the Appellant contends that there are three issues for determination by the Tribunal as follows:-i.Whether the Respondent was justified to apply a GPR of 5. 6%?ii.Whether the Respondent erred in disallowing input VAT on the basis that it was time barred and no invoices were submitted to support input VAT?iii.Whether the Respondent was justified in rejecting all the cheque payments in relation to transport and other expenses?

i. Whether the Respondent was justified to apply a GPR of 5. 6% 18. The Appellant states that the Respondent, in its initial tax investigation findings dated 28th April 2020, used an average GPR of 11% in arriving at the gross profit on the basis that there was no complete information to be relied on to arrive at the gross profit. That the 11% GPR was derived from the self-assessment returns filed by the Appellant for the period as enumerated below:2015 2016 2017 Average GPR

Sales 149,992,500 128,745,670 168,397,636

Cos 134,233,832 113,456,780 149,790,697

GP 15,758,668 15,288,890 18,606,939

GPR 11% 12% 11% 11%

19. That the Appellant was however not agreeable with the above computation and produced schedules of sales and purchases for the selected months of March, July and December 2018.

20. That from the Appellant’s computation, the GPR was 3. 6% as shown below:March July December Average%

Kshs. Kshs. Kshs.

Sales 318,481,854 542,980,200 526,523,304

Cost of sales

Opening stock 11,911,336 102,872,517 145,126,363

Purchases 545,044,325 529,524,423 460,359,016

Less: Closingstock (92,805,496) (113,459,920) (93,152,221)

Cost of goods sold 564,150,165 518,937,021 512,333,157

Gross Profit (245,668,311) 24,043,180 14,190,147

G.P Margin% -77. 1% 4. 4% 2. 7% 3. 6%

21. That the Respondent did not adopt the above average GPR on the premise that in March 2018, the margins resulted in a negative GPR which does not depict the correct position and that it is not normal for the Appellant's kind of business. That it is important to note that the average of 3. 6% includes 2. 7 % and 4. 4 % {(2. 7+ 3. 6)/ 2} =3. 6 and that this did not include -77. 1 % for the month of March 2018.

22. That the Respondent has argued in their original statement that the Appellant did not support its proposal to use the GPR of 3. 6%. That they have failed to acknowledge that the workings and detailed schedules were provided to the Respondent’s officers namely Mrs. Felistus Sabiri and Mr. Abdul Robow on 13th February 2019.

23. That the Respondent then adopted an average GPR of 5. 6% based on the GPR of 8 similar businesses as shown below:Taxpayer Wholesaler’s LTO 1 2 3 4 5 6 7 8 Sector GPR

3 YR AVG GPR 5. 5% 4. 78% 3. 36% 3. 30% 8. 06% 3. 38% 7. 39% 8. 59% 5. 6%

24. The Appellant states that from the foregoing analysis, a number of issues arise and which need to be addressed so as to establish whether the GPR of 5. 6% is indeed applicable to the Appellant's business:a.That from the onset, the Appellant submits that the Respondent failed to appreciate the nature of business and the type of products the Appellant's business is engaged in. For avoidance of doubt, the Appellant is engaged in the trading of fast-moving consumable food products whose profit margin is very minimal compared to what the Respondent is proposing.b.That having established the Appellant's nature of business, the Appellant wishes to also highlight that they have not been made privy to the identity of the 8 companies, their location, the products which they deal with and ultimately whether the companies actually conduct similar business compared to that of the Appellant.c.That the Respondent hasn't also demonstrated what research or workings were done to confirm the similarity of the 8 businesses to the Appellant's business if any.d.That the Respondent has further not provided the returns, or the audited accounts of the 8 businesses to the Appellant.e.That the Respondent has further not provided detailed workings of the GPR's of the 8 businesses and their identities as empowered by Section 6(2)c of the Tax Procedure Act, 2015 (TPA) in order to demonstrate how the individual GPRs were arrived at.f.That from the 8 businesses averaged, the Appellant notes that three of the GPRs are 3. 36%, 3. 3% and 3. 38% which are below and even at par with the Appellant's computed GPR of 3. 6%. That it is therefore astonishing that the Respondent would reject the Appellant’s GPR of 3. 6% yet in the sample companies chosen, the said GPR is acceptable.

25. That from the above, it is evident that the Respondent resulted in applying an excessive and exaggerated GPR of 5. 6% without giving supporting information required to justify the same.

26. That in the case of Minazini Enterprises Limited vs Commissioner of Domestic Taxes, Appeal No 56 of 2016, at paragraph 50 of the Judgement, the Tribunal stated as follows:“The Tribunal has relied on the following cases in determining that the Respondent must always provide the rationale and clarity while making or arriving at a determination. In the case of the Republic· v Kenya Revenue Authority Ex parte Jaffer Mujtab Mohamed [2015] eKLR the Court held that:‘a taxing authority is not entitled to pluck a figure from the air and impose it upon the taxpayer without some rational basis for arriving at that figure and not another figure. Such action would be arbitrary, capricious and in bad faith. It would be an unreasonable exercise of power and discretion and that would justify the court in intervening’”.

ii. Whether the Respondent erred in disallowing input VAT on the basis that it was time barred and no invoices had been submitted to support the input VAT? 27. That the Respondent in its computation of output VAT has not allowed any input VAT on account that it is time barred and that no invoices were submitted to support the input VAT. That it cannot be overstated that the basis for allowing input VAT is set out under Section 17 of the VAT Act and the failure by the Respondent to allow the same is arbitrary, illegal and a violation of the Appellant's right to fair administrative action protected under Article 47(1) of the Constitution of Kenya, 2010.

28. That in Karshan Limited Vs. Commissioner of Domestic Taxes, Appeal No 123 of 2018, on the issue regarding the right to claim VAT, the Honorable Tribunal pronounced itself as follows at Paragraph 38:-“The Tribunal observes that it is a common principle 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. In the Kenyan VAT system, this principle is found in Section 17(1) of the VAT Act which provides as follows:‘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.’”

29. That the Honorable Tribunal further stated that the right to claim input VAT is an integral part of the VAT scheme and in principle may not be limited. It must be exercised immediately in respect of all the taxes charged on transactions relating to inputs. The European Court of Justice held that this system should apply whether or not there is a missing trader somewhere in the value chain unless the trader had knowledge of the fraudulent actions in the value chain. This was the holding in Optigen Ltd, Fulcrum Electronics Ltd and Bond House Systems Ltd v Commissioners of Customs &. Excise where it was held that:“Under the common system of VAT, the entitleme.nt of a trader to credit for payment in respect of VAT under a transaction should be judged by reference to the particular transaction to which the trader was a party. Transactions of which he has no knowledge of and the fraudulent acts or intentions of other persons in the chain of supply of whose involvement he is unaware do not affect his entitlement”.

30. That the input VAT on the Vatable purchases as computed in the Respondent's Statement of Facts at Paragraph 25 is Kshs. 1,234,998,935. 00. This is computed on the same method as the output tax. That it is not in dispute that the Appellant incurred costs for the purchase of the goods which included VAT for purpose of selling them in its business.

31. That the Respondent has not acted fairly and objectively by acknowledging that the business had incomplete records from which they proceeded to compute the expected output tax but ignored to compute the resultant or expected input tax to be allowed against the output tax.

32. That by not allowing the input VAT tax of Kshs 1,234,998,935. 00 will amount to double taxation as the Appellant had already paid VAT on the same at the point of purchase of the goods for resale.

33. That the amount of input tax disallowed results to demand of taxes that are practically beyond the financial capacity of the business and would only lead to crippling and closing down of the business. The nature of the business industry is characterized by high turnover with very little profit margins.

34. That the Respondent has also undertaken research on the industry from which the VAT payable based on the turnover can well be established from the data. That this is a reasonable and objective scientific approach which is fair to both parties as it would ensure the rightful VAT amount payable is realized without killing the business.

35. That the Appellant therefore believes that it would be in the interest of justice for this Tribunal to compel the Respondent to provide a report on the average VAT payable as a fraction of the turnover by the players in the same industry as the Appellant.

iii. Whether Respondent was justified in rejecting all the cheque payments in relation to transport and other expenses? 36. That the Respondent declined to accept all the cheque payments for expenses and computed transport expenses. That the Respondent's reasoning for rejecting the said expenses is on the basis that the Appellant did not give supporting documents of the expenses paid through the cheque payments and that the said payments included expenses already claimed and allowed.

37. It is the Appellant's submission that the cheques provided to the Respondent are sufficient evidence for the expenditure incurred and thus should be allowed as a legitimate business expense to be factored in the calculation of taxable income.

38. That the Appellant incurs transport expenses to obtain goods from its suppliers and to distribute goods to some of its customers. The consumable commodities which the company trades in are voluminous and they do not have enough vehicles to handle the transport requirements. It is therefore unreasonable to disallow the payments to transporters as this would mean that there were no transport expenses incurred despite the bulky stocks maintained by the business.

39. That from the KRA research on industry players, they did not disclose the findings on net profits. This would have assisted in arriving at the average net profit of the industry and the taxable income for corporation tax purpose. This scientific method will ensure all reasonable allowable expenses are catered for. The Appellant requests the Tribunal to compel the Respondent to avail the same for the fair and just determination of this matter.

40. The Appellant avers that the Tribunal in the case of Afya Xray Centre Limited Vs The Commissioner of Domestic Taxes, Appeal No 70 of 2017, pronounced itself on this issue and stated under Paragraph 43 of its Judgement that even though the Appellant bears the burden to prove that the tax decision is incorrect in accordance with Section 56(1) of the TPA 2015, it contended the following in Paragraphs 44 and 45. “44. ….Given, the Appellant bears the duty of availing records and books of accounts, the Respondent is required to undertake the assessment using all the records provided. The Tribunal’s hands are tied in so far as the intendment and implications into tax statutes are concerned. However, we would remiss if we did not point this conduct of the Respondent relying solely on bank statements is likely to cause prejudice of untold measures to all taxpayers.45. The Tribunal is concerned with the status, or better yet, the validity of an assessment that has relied on bank statements. It is common knowledge that every deposit in an account is not necessarily income to the account owner. The Respondent in this case could have used industrial margins to determine the Appellant’s profits and then subject the figure to 30% rate of corporate tax rather than topline 30% on the bank deposits.”

Appellant’s Prayers 41. The Appellant makes the following prayers to the Tribunal:-a.To be given an extension of time to pay the taxes not in dispute in line with the payment plan submitted to the Respondent on 19th March 2021. b.To allow the use of GPR of 3. 6% which closely compares with (50%) of similar business at 4. 78%, 3. 36%,3. 30% and 3. 38%, (information shared by the Respondent through his letter dated 24th September 2020).c.To allow cheque payments as legitimate business expense and be factored in the calculation of taxable income.d.To allow Input VAT on the grounds of "for equal and fair treatment of the parties involved," as provided for in Paragraph 47 of Constitution of Kenya, 2010.

Respondent’s Case 42. The Respondent’s case is premised on the hereunder filed documents:-i.The Respondent’s Statement of Facts dated 13th April 2021 and filed on 14th April 2021 together with the documents attached thereto.ii.The Respondent’s written submissions dated 6th October 2022 and filed on 11th October 2022.

43. The Respondent identifies two issues for determination by the Tribunal as follows:-a.Whether the Notice of Appeal Lodged is validb.Whether the Commissioner’s decision was valid

a. Whether the Notice of Appeal lodged is valid 44. The Respondent submits that this Appeal is not in compliance with Section 52(2) of the TPA which requires the taxpayer to pay the taxes not in dispute before appealing against an objection decision.

45. Section 52 (2) of TPA provides as follows:“A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice."

46. That the Appellant has admitted to a portion of the taxes and as provided by the above stated law, the Appeal before the Tribunal is therefore bad in law.

47. That in Hewlett Packard East Africa Ltd v Commissioner of Domestic Taxes [2019] eKLR the learned judge held that "In the end it follows that this Court having determined that the Appellant's appeal was not in compliance with Section 52 (2) of Tax Procedure Act grounds Nos. 1, 2 and 3 of this appeal are dismissed.They are dismissed because the appeal before the Tribunal was incompetent in view of Section 52 (2) of the Tax Procedure Act and having been incompetent no appeal can lie on those grounds before this Court."

48. The Respondent submits that the Appellant ought to pay the admitted tax of Kshs. 42,025,059. 00 for Corporation tax and Kshs.111,921,665. 00 with respect to VAT before the hearing of the Appeal.

49. It is the Respondent’s submission that the Appellant has failed to pay these undisputed taxes this far and thus this Appeal is improperly lodged.

b. Whether the Commissioner’s decision was valid. 50. The Respondent submits that the Gross profit ratio of 5. 6% is based on an average GPR of 8 companies doing similar business as the Appellant.

51. It is the Respondent’s submission that it declined to use the Appellant’s proposed GPR as the Appellant's calculation depicted a negative computation for the month of March 2018.

52. The Respondent submits that the Appellant failed to show any stock loss for the period in dispute to explain the loss depicted.

53. Further, the Respondent submits that the Appellant’s desire to use the average of four companies where three have a lower GPR than its proposed 3. 6% shows that the Appellant only seeks to benefit itself in this transaction.

54. That the right to claim input VAT is premised on the assumption that the taxpayer paid VAT during the purchase of his supplies. This is provided for in Section 17(1) of the VAT Act which states that:"Subject to the provisions of this section and the regulations, input tax ona 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.”

55. That Section 17(1) of the VAT Act 2013 is categorical that a taxpayer, in this case the Appellant is only allowed to claim input VAT only to the extent that the supply or importation acquired was used to make a taxable supply.

56. It averrs that in a VAT supply chain, a VAT-registered business which buys and sells goods charges VAT to customers (called output VAT) and· is charged by VAT suppliers (called input tax). That the business can reclaim the input VAT it has paid to its suppliers and remit it to Kenya Revenue Authority the net it collects (output VAT less input VAT or output minus input=VAT Payable). In essence, VAT is output less input to find VAT payable.

57. That Section 62 of the VAT 2013 provides that the person claiming tax has been paid shall bear the burden of proving the same. Additionally, input VAT is to be claimed within 6 months and can only be allowed upon production of documentation.

58. The Respondent submits that Section 17 (1), (2) and (3) of the VAT Act states:“(l)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 to 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.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)a 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); or (e} a debit note in the case of input tax deducted under section 16(5).”

59. That the law clearly states that for deduction of input VAT to be effected one must have the original tax invoice or a copy at the time of claiming input VAT.

60. The Respondent avers that where such documentation is not produced, the input VAT cannot be claimed and even though claimed, it cannot be allowed. The person ought to wait until they hold such documents and then claim the said input within six months from the tax period in which the supply occurred.

61. That the Appellant was expected to have the invoice or a copy of it within 6 months of the supply during which it could claim input VAT. The 6 months to claim input VAT run from the time a supply occurs. The Respondent states that where it is doubtful, it is entitled to ask for additional information to satisfy itself as to the self- assessment made by a taxpayer. This is under Section 59 of the TPA and Section 43 of the VAT Act.

62. That in this context, the claim for input VAT was not supported by valid documentation and as such was fatally defective.

63. Further, that the Appellant was required to adduce documents by way of invoices and evidence of underlying transactions demonstrating that supplies indeed occurred. That the invoices that the Appellant refers to in its Appeal did not meet the legal threshold of a proper invoice as provided for in Paragraph 9 of the VAT Regulations, 2017 which provides as follows:“(l)A registered person who makes a taxable supply shall, at 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 individualized 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; andh.the consideration for the supply and the amount of tax charged.”

64. That further, even if the invoices existed that on its own would not be enough as evidence demonstrating that the underlying transaction indeed took place is important. That assurance needs to exist that indeed the transaction for which the supplies relate to, actually took place. Accordingly, copies of cheques or confirmation from banks that payments were made to the suppliers are material, being the underlying information supporting the supplies made.

65. That in Osho Drappers Limited v. Commissioner of Domestic Taxes, TAT No. 159 of 2018, the Honorable Tribunal noted that:“It is not enough to have the documentation listed in Section 17 of the VAT Act. The documentation must be supported by an underlying transaction and the taxpayer must furnish proof that there was an actual purchase."

66. That further, this principle was emphasized in the case of Mutsimoto Motor Company Ltd -v- Commissioner of Investigations & Enforcement, TAT Appeal No. 42 of 2019 as follows:“64. A reading of this Section shows that it is not just enough for the original tax invoice to be availed, the invoices must themselves relate to an actual supply or importation that was acquired by the trader to make the taxable supply.

65. ........ the right to claim input tax is hinged upon the transaction meeting the requirements set out. According to Section 17(1) of the VAT Act, input tax is deductible where it is incurred on purchases made in making taxable supplies. This means that for a taxpayer to deduct input tax, it must have actually made a purchase. It is not merely enough to possess documentation. The documentation must be supported by an underlying transaction and the taxpayer must furnish proof that there was an actual purchase.”

67. It is the Respondent's submission that the assessment by the Respondent is in accordance with Section 17 of the VAT Act and Regulation 9 of the VAT Regulations which require documentary evidence to be adduced when the Appellant claimed input VAT.

68. It is also the Respondent's submission that in disallowing the Appellant's input tax claim and subsequently issuing the assessment, it established that the Appellant could not prove that indeed purchases were done as there were no documents in support of the same.

69. That it is trite law that the burden of proof is on the taxpayer to show that the tax so assessed is excessive and not due. That this is supported by the following provisions of the law:i.Section 56(1) of the TPA places the burden on the taxpayer to prove that a tax decision is incorrect. In this particular case, the Appellant's objection was a mere statement and without evidence to back it up, the Respondent had no other option than to confirm the· assessments.ii.Section 30 of the Tax Appeals Tribunal Act (TATA) states as follows:-“In a proceeding before the Tribunal, the Appellant has the burden of proving-a.where an appeal relates to an assessment, that the assessment is excessive; orb.in any other case, that the tax decision should not have been made or should have been made differently.”iii.Further Section 107 of the Evidence Act states that:“(a)Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.(b)When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person”.

70. That moreover, Section 59 of the TPA is categorical that the Respondent may require a taxpayer to produce records relating to a tax liability of the taxpayer. That the Appellant failed to reconcile or provide satisfactory explanations and supporting documents, thereby leaving the Respondent no choice but to demand the taxes.

71. That the Respondent disallowed unsupported expenses that the Appellant had claimed but did not provide any documents to support the expenditure. That without supporting the expenses claimed, the Commissioner uses his best knowledge to arrive at the assessment and confirm the same where the Appellant did not support during the objection stage.

72. The Respondent submits that the Commissioner issued a valid objection decision and the Appellant has not sufficiently demonstrated that the Commissioner erred in raising the assessment and confirming the same.

Respondent’s Prayers 73. The Respondent prays that the Tribunal:-a.Finds that the taxes due and unpaid amounting to Kshs. 1,866,773,695. 00 together with interest thereon be paid to the Respondent.b.That this Appeal be dismissed.c.That the Appellant be compelled to pay costs to the Respondent.

Issues For Determination 74. The Tribunal having carefully studied the pleadings and documentation of both parties is of the respectful view that the issues that call for its determination are as follows:-i.Whether there is a valid appeal.ii.Whether the Respondent was justified to apply a GPR of 5. 6%.iii.Whether the Respondent erred in disallowing input VAT on the basis that it was time barred and no invoices had been submitted to support input VAT.iv.Whether Respondent was justified in rejecting all the cheque payments in relation to transport and other expenses.

Analysis And Findings. i. Whether there is a valid appeal before the Tribunal. 75. Though this issue had fallen for determination, the parties subsequently entered a consent dated 18th January 2023 settling the issue in the following terms:-“a)That the Respondent confirms that there is a payment plan between the Appellant and the Respondent on the taxes not in dispute.b.That the Respondent shall abandon its submissions on section 52(2) of the Tax Procedures Act.c.That each party to bear its own costs.”

ii. Whether the Respondent was justified to apply a Gross Profit Ratio (GPR), of 5. 6%. 76. The Respondent argued in its Statement of Facts that the Appellant did not support its proposal to use the GPR of 3. 6%. The Respondent then adopted an average GPR of 5. 6% based on the GPR of 8 similar businesses as shown below:Taxpayer Wholesaler’sLTO 1 2 3 4 5 6 7 8 Sector GPR

3 YR AVGGPR 5. 5% 4. 78% 3. 3% 3. 30% 8. 06% 3. 38% 7. 39% 8. 59% 5. 6%

77. The Appellant on the other hand raised the following issues to establish whether the GPR of 5. 6% is indeed applicable to the Appellant's business:a.That the Respondent failed to appreciate the nature of business and the type of products the Appellant's business is engaged in. The Appellant is engaged in the trading of fast-moving consumable food products whose profit margin is very minimal.b.That it was not privy to the identity of the 8 companies, their location, the products which they deal with and ultimately whether the companies actually conduct similar business compared to that of the Appellant.c.That the Respondent hasn't also demonstrated what research or workings were done to confirm the similarity of the 8 businesses to the Appellant's business if any.d.That the Respondent never provided detailed workings of the GPR's of the 8 businesses and their identities as empowered by Section 6(2)c of TPA in order to demonstrate how the individual GPRs were arrived at.e.That from the 8 businesses averaged, the Appellant notes that three of the GPRs are 3. 36%, 3. 3% and 3. 38% are below the Appellant's computed GPR of 3. 6%.

78. The Appellant concluded that the Respondent resulted in applying an excessive and exaggerated GPR of 5. 6% without giving supporting information required to justify the same.

79. The Appellant relied on the case of TAT 56 of 2016, Minazini Enterprises Limited vs Commissioner of Domestic Taxes where the Tribunal held:-“The Tribunal has relied on the following cases in determining that the Respondent must always provide the rationale and clarity while making or arriving at a determination. In the case of the Republic· v Kenya Revenue Authority Ex parte Jaffer Mujtab Mohamed [2015] eKLR the Court held that:‘a taxing authority is not entitled to pluck a figure from the air and impose it upon the taxpayer without some rational basis for arriving at that figure and not another figure. Such action would be arbitrary, capricious and in bad faith. It would be an unreasonable exercise of power and discretion and that would justify the court in intervening’”.

80. The Respondent did not tender evidence on the identity and the business activities of the 8 businesses it claimed are in the same business as the Appellant. The Tribunal is therefore not able to compare the GPRs indicated for the 8 businesses with that of the Appellant. In their findings dated 31st July 2018, the Respondent used a GPR of 11% and later amended it to 5. 6%. Since 3 of the 8 businesses provided by the Respondent had GPRs lower than the 3. 6% proposed by the Appellant, the Tribunal finds that the Respondent erred in applying a GPR of 5. 6%.

iii. Whether the Respondent erred in disallowing input VAT on the basis that it was time barred and no invoices had been submitted to support the input VAT. 81. The Respondent in its computation of output VAT never allowed any input VAT on account that it is time barred and that no invoices were submitted to support the input VAT. The Appellant submitted that the basis for allowing input VAT is set out under Section 17 of the VAT Act and the failure by the Respondent to allow the same is arbitrary, illegal and a violation of the Appellant's right to fair administrative action protected under Article 47(1) of the Constitution of Kenya, 2010.

82. The Appellant submitted that in Karshan Limited Vs. Commissioner of Domestic Taxes, Appeal No 123 of 2018, on the issue of the right to claim VAT, the Honorable Tribunal pronounced itself as follows at Paragraph 38:“The Tribunal observes that it is a common principle 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. In the Kenyan VAT system, this principle is found in Section 17(1) of the VAT Act which provides as follows:‘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.’”

83. The Appellant also submitted that the Tribunal further stated that the right to claim input VAT is an integral part of the VAT scheme and in principle may not be limited. It must be exercised immediately in respect of all the taxes charged on transactions relating to inputs.

84. The Appellant submitted that input VAT on the vatable purchases as computed in the Respondent's Statement of Facts Paragraph 25 is Kshs. 1,234,998,935. 00. That this is computed on the same method as the output tax. It is not in dispute that the Appellant incurred costs for the purchase of the goods which included VAT for purpose of selling them in its business.

85. The Appellant also submitted that the Respondent has not acted fairly and objectively by acknowledging that the business had incomplete records from which they proceeded to compute the expected output tax but ignored to compute the resultant or expected input tax to be allowed against the output tax. The Appellant asserts that, not allowing the input VAT tax of Kshs. 1,234,998,935 would amount to double taxation as the Appellant already paid VAT on at the point of purchase of the goods for resale.

86. The Appellant submitted that the amount of input tax disallowed results to demand of taxes that are practically beyond the financial capacity of the business and would only lead to crippling and closing down of the business.

87. In reply to the Appellant’s, the Respondent submitted that in a VAT supply chain, a VAT-registered business which buys and sells goods charges VAT to customers (called output VAT) and· is charged by VAT suppliers (called input tax). The business can reclaim the input VAT it has paid to its suppliers and remit it to Kenya Revenue Authority the net it collects (output VAT less input VAT or output minus input=VAT Payable).

88. The Respondent further submitted that Section 62 of the VAT Act 2013 provides that the person claiming tax has been paid shall bear the burden of proving the same. Additionally, input VAT is to be claimed within 6 months and can only be allowed upon production of documentation.

89. It is the Respondent's submission that in disallowing the Appellant's input tax claim and subsequently issuing the assessment, it established that the Appellant could not prove that indeed purchases were done as there were no documents in support of the same.

90. The Respondent submitted that it is trite law that the burden of proof is on the taxpayer to show that the tax so assessed is excessive and not due. This is supported by the following provisions of the law:-i.Section 56(1) of the TPA places the burden on the taxpayer to prove that a tax decision is incorrect. In this particular case, the Appellant's objection was a mere statement and without evidence to back it up, the Respondent had no other option than to confirm the· assessments.ii.Section 30 of the TATA states as follows:“In a proceeding before the Tribunal, the appellant has the burden of proving-a.where an appeal relates to an assessment, that the assessment is excessive; orb.in any other case, that the tax decision should not have been made or should have been made differently.”iii.Further Section 107 of the Evidence Act states that:a)Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.”

91. The Tribunal notes that the Respondent stated in submissions that it “declined to compute and grant credit for input VAT” for the reason that this was time barred and unsupported. The Tribunal agrees with the Appellant that the method the Respondent used to compute the output VAT ought to have been the very one the Respondent should have used to compute the input VAT. The Respondent ought to have first computed the reasonably estimated amount of input VAT prior to determining if any amount thereof was time barred and therefore not capable of being offset against the computed output VAT.

iv. Whether Respondent was justified in rejecting all the cheque payments in relation to transport and other expenses. 92. The Appellant submitted that the Respondent declined to accept all the cheque payments for expenses and computed transport expenses. The Respondent's reasoning for rejecting the said expenses was on the basis that the Appellant did not give supporting documentation of the expenses paid through the cheque payments and that the said payments included expenses already claimed and allowed.

93. The Appellant further submitted that the cheques provided to the Respondent were sufficient evidence for the expenditure incurred and thus should be allowed as a legitimate business expense to be factored in the calculation of taxable income. The Appellant submitted that it incurs transport expenses to obtain goods from its suppliers and to distribute goods to some of its customers. The consumable commodities which the company trades in are voluminous and it does not have enough vehicles to handle the transport requirements. It is therefore unreasonable to disallow the payments to transporters as this would mean that there were no transport expenses incurred despite the bulky stocks maintained by the business.

94. In response to the Appellant’s submission on this issue, the Respondent submittted that Section 59 of the TPA is categorical that the Respondent may require a taxpayer to produce records relating to a tax liability of the taxpayer. That the Appellant failed to provide records to support the cheque payments and that without supporting the transport expenses claimed, the Respondent had no choice but to disallow the expenses.

95. The Tribunal is guided by Section 59 of the TATA which states that:“(1)For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorised officer may require any person, by notice in writing, to-(a)produce for examination, at such time and place as may be specified in the notice any documents (including in electronic format) that are in the persons custody or under the person’s control relating to the tax liability of any person.”

96. The Tribunal notes that the Respondent admits to having received the evidence that cheques were paid to various transporters. The Tribunal was of the view that the Respondent ought to have confirmed whether these cheques were honoured through the bank statements.

97. The Respondent has indicated that the Appellant was working with incomplete records and that is why the Respondent adopted the industry GPR and the banking method to determine the taxes payable by the Appellant. The Tribunal is of the view that the same approach should have been used in determining the allowable transport expenses of the Appellant given that the Appellant had produced evidence in form of cheques and bank statements to support the same. The Tribunal therefore finds that the Respondent erred in rejecting the cheque payments in relation to transport and other expenses.

98. The circumstances of the computation of the tax assessment leading to this Appeal are such that the appropriate recourse to afford the Appellant a fair opportunity in the assessment of its tax liability is to have the matter referred back to the Commissioner to appropriately review the Appellant’s notice of objection upon applying the more realistic, practical and scientific approach applicable in the industry to arrive at a profit margin and ordinary tax exposure for traders in the same trade and situation as the Appellant.

Final Decision 99. The upshot of the foregoing analysis is that the Appeal is to a large extent merited and the Orders that commend themselves to the Tribunal are as follows:-a)The Respondent’s tax decision dated 24th September, 2020 be and is hereby set aside.b)The matter be and is hereby referred back to the Respondent to undertake a further review of the Appellant’s notice of objection taking into consideration the following:-i.The computation of the Appellant’s tax liability to be determined on the basis of Gross Profit Ratio(GPR) of 3. 6%.ii.The computation of input VAT to be undertaken using the same method applied to compute the output VAT assessment with a view of determining any amount that is time barred and such other amount that is otherwise capable of being applied by the Appellant to offset part of the output VAT.iii.The allowable expenses to be recomputed by the Respondent taking into acccount the cheque payments for transport and other expenses as determined under Paragraph 97 of this Judgment.C)Each Party to bear its own costs.

100. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF FEBRUARY, 2023. ERIC N. WAFULACHAIRMAN............................CYNTHIA MAYAKAMEMBER.........................GRACE MUKUHAMEMBER.........................JEPHTHAH NJAGI KIPROTICHMEMBER.........................ABRAHAM K.MEMBER