[2024] KETAT 840 (KLR)

Saxon Investments Ltd v Commissioner of Domestic Taxes (Tax Appeal 333 of 2023) [2024] KETAT 840 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 840 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 333 of 2023

RM Mutuma, Chair, M Makau, EN Njeru, B Gitari & AM Diriye, Members

June 28, 2024

Between

Saxon Investments Ltd

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited company incorporated under the Companies Act and a registered taxpayer.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the 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 genesis of this appeal is that the Respondent on 20th July 2021 raised VAT additional assessment for the period June, August, November and December 2021 amounting to Kshs. 55,514,899. 00 by disallowing the input VAT claimed by the Appellant in month of July 2022. The Appellant lodged a Notice of Objection against the assessments on 26th July 2022.

4. Consequently, the Respondent rendered its Objection Decision dated 23rd September 2022.

5. The Appellant being aggrieved by the Respondent’s decision lodged the Notice of Appeal dated 25th April 2023 and filed on 10th May 2023.

The Appeal 6. The Appellant in its Memorandum of Appeal filed on 11th May 2023 raised the following grounds of appeal:a.That the Respondent erred in fact and in law by disallowing the input tax relating to VAT claimed for the year 2021 amounting to Kshs. 55,514,899. 00 on the basis that the input tax related to missing traders.b.That the Respondent erred in fact by failing to take into consideration the fact that the Appellant has all the documents to support the transactions.c.That the Respondent erred in law by failing to consider that the supplier had declared the output sales and there was no inconsistency in that regard.

The Appellant’s Case 7. In support of the appeal, the Appellant filed its;i.Statement of Facts filed on 11th May 2023 together with the documents attached thereto.

8. The Appellant stated that the Respondent conducted an audit and made an assessment dated 20th July 2022 to which the Appellant objected the online on 26th July 2022.

9. The Appellant averred that the Respondent requested for the proof of purchase and records for payments to suppliers against the disallowed invoices. The Appellant alleged that it provided the requested documents on 19th August 2022 through its Tax Representative. Consequently, the Respondent issued its objection decision on 23rd September 2022 confirming the assessed amount of Kshs. 55,514,899. 00.

10. According to the Appellant, the decision was arrived at on grounds that the Appellant did not provide invoices to support the objection. In the contrary, the Appellant asserted that it has the tax invoices and is ready to provide them.

11. The Appellant asserted that there is no possibility of using missing traders’ concept in this Appeal. It alleged that it managed to gather client confirmations from its suppliers. It also argued that it is fair that the Respondent confirms that the Appellant’s suppliers had done sales declarations of the invoices after which the Respondent will discover that there was no inconsistency.

12. Finally, the Appellant requested that there be a relook at the case. It asserted that the taxes being demanded are extreme and severely punitive for the size of the Appellant’s operations.

Appellant’s Prayers 13. Consequently, the Appellant prayed as follows:a.That the Respondent’s decision to disallow the Appellant’s input VAT for the year 2021 of Kshs.55,514,899. 00 as outlined in the Objection Decision be struck out in its entirety;b.The Respondent, its employees, agents or other person purporting to act on its behalf be barred and or estopped from disallowing or taking any further steps towards enforcement or recovery of the disallowed VAT; and,c.Any other remedies that the Honourable Tribunal deems just and reasonable.

The Respondent’s Case 14. The Respondent case is based on its;i.Statement of Facts dated and filed on 9th June 2023 together with the documents attached thereto.; and,ii.Written submissions dated 18th January 2024 and filed on 19th January 2024.

15. The Respondent argued that a right to claim input VAT is premised on the assumption that the Appellant paid VAT during the purchase of its supplies as 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 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.”

16. According to the Respondent, Section 17 (1) of the VAT Act is categorical that a taxpayer is only allowed to claim input VAT only to the extent that the supply or importation acquired was used to make a taxable supply. It argued that in order to prove the foregoing, it is imperative that the Appellant produces documents which when referred to, would inevitably lead the Respondent to believe that there was a commercial transaction. The Respondent pointed out that Section 17 (3) of the VAT Act provides for the documents required for one to be entitled to claim a refund. The Respondent asserted that the Appellant did not prove the documents as required under the said provisions.

17. In addition, the Respondent maintained that the Appellant’s claim for input VAT was not supported by valid documentation and as such was fatally defective. It also stated that a review of the invoices and receipts produced by the Appellant revealed that the Appellant traded severally with different suppliers who did not declare their corresponding VAT sales.

18. The Respondent averred that the Appellant was required to adduce documents such as invoices, delivery notes, proof of payment and supplier confirmations transactions to demonstrate that the supplies indeed occurred but the Appellant failed to produce them.

19. Further, the Respondent stated that although the Appellant provided invoices, the same were manifestly insufficient to support the Appellant’s Objection. It argued that the Appellant thus had a burden to avail further supporting documents demonstrating that the underlying transaction indeed took place. It relied on the provisions of Section 51 (3) of the Tax Procedures Act 2015 which provides thus: -“(3)A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-(a)The notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; and(b)In relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute(c)All the relevant documents relating to the objection have been submitted.’’

20. Apart from the foregoing, the Respondent relied on Section 59 of the Tax Procedures Act 2015 which requires the Appellant to provide documents to enable it determine tax liability but the Appellant failed to provide sufficient supporting documents even upon request. The Respondent also relied upon Section 56 of the Tax Procedures Act and Tax Appeals Tribunal Act to argue that the Appellant herein bears the burden to demonstrate that the Respondent’s decision is incorrect but the Appellant failed to discharge the burden.

21. The Respondent averred that it considered all documents and information provided by the Appellant and acted to the best of its judgment in arriving at the objection decision as per Section 31 of the Tax Appeal Tribunal Act which provides that;“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 an Appellant for a reporting period….’’

22. Finally, the Respondent averred that the documents annexed in the Appellant's Memorandum of Appeal and statement of facts have been presented before the Tribunal in the first instance and the Respondent has not had an opportunity to review the same. Consequently, the Respondent asserted that the allegations of the Appellant as laid out in its Memorandum of Appeal are unfounded.

23. In further opposition to the Appeal, the Respondent filed written submissions on 19th January 2024 wherein it identified two issues for determination.i.Whether disallowing the Input VAT was legal and justifiable; and,ii.Whether the Appellant discharged its burden of showing that the assessments were excessive.

24. On the first issue, the Respondent submitted that the Appellant failed to provide documents that are provided for under Section 17 (3) and Section 43(1) - (3) of the VAT Act therefore, the Appellant failed to support its objection. To further support the preposition that the Appellant ought to provide evidence to support its objection, the Respondent cited the case of Holland vs. United States of America 121 (1954), wherein the Supreme Court held that:“To protect the revenue from those who do not render true accounts, the government must be free to use all legal evidence available to it in determining whether the taxpayer's books and records accurately reflect his financial history" and that the indirect method used need not be exact, but must be reasonable in the light of the surrounding facts.’’

25. On the second issue, the Respondent submitted that the Appellant failed to provide any supporting documentation to support the objection hence the input VAT claim was disallowed. It cited the cases of Boleyn International Limited versus Commissioner of Domestic Taxes TAT No. 55 of 2019, Afya X-ray Centre Limited vs. Commissioner of Domestic Taxes TAT No. 70 of 2017, to submit that the Appellant has a legal duty to provide evidence to support notice of objection failure to which the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents.

26. The Respondent also placed reliance on the case of Ngurumani Traders Limited vs. Commissioner of Investigations and Enforcement, TAT No.125 of 2017 wherein it was held that failure to comply with Section 51 (3) of the Tax Procedures Act renders the Objection invalid.

Respondent’s prayers 27. The Respondent prayed that this Honourable Tribunal do find and hold that:a.The Appeal be dismissed with costs to the Respondent as the same offends the mandatory rules of procedure is fatally defective and devoid of merit; and,b.The Respondent's Decision dated 23rd December 2022 be deemed as proper and in conformity with the provisions of the law.

Issues For Determination 28. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts and submissions, puts forth the following issue for determination:Whether the Respondent’s Objection Decision is erroneous.

Analysis And Findings 29. The Tribunal wishes to analyse the issues as hereunder.

30. The Appellant has asked this Tribunal to strike out the Respondent’s Objection Decision. To find in favour of the Appellant on this issue, the Appellant has to discharge burden of proof imposed against it pursuant to Section 30 of the Tax Appeals Tribunal Act and Section 56(1) of the Tax Procedures Act.

31. Section 30 of the Tax Appeals Tribunal Act provides that;“the appellant has the burden of proving—(a)where an appeal relates to an assessment, that the assessment is excessive; or(b)in any other case, that the tax decision should not have been made or should have been made differently.’’

32. Additionally, Section 56 of the Tax Procedures Act provides that:“56. (1)in any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

33. To discharge the statutory burden of proof, the Appellant has a duty to provide positive documentary evidence. Some of the documents are provided for under Section 17 (3) of the VAT Act. The said section provides as follows:“(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).(f)in the case of a participant in the Open Tender System for the importation of petroleum products that have been cleared through a non-bonded facility, the custom entry showing the name and PIN of the winner of the tender and the name of the other oil marketing company participating in the tender:Provided that the input tax that may have been incurred by an oil marketing company participating in the Open Tender System before the coming into force of this provision shall be claimed within twelve months after this provision comes into force.’’

34. Further, Section 43 of the VAT Act requires a taxpayer to keep records. In particular, it provides that;“a 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 for a period of five years from the date of the last entry made therein.’’

35. Under Section 43 (2) of the Act, some of the records to be kept include copies of all tax invoices and simplified tax invoices issued in serial number order; copies of all credit and debit notes issued; purchase invoices, copies of customs entries, receipts for the payment of customs duty or tax, and credit and debit notes received, to be filed chronologically either by date of receipt or under each supplier’s name among other documents.

36. Apart from the foregoing provisions, Section 13(2) (b) of the Tax Appeals Tribunal Act requires an appellant to file Statement of Facts. The Statement of Facts ought to support and expound the contents of the Memorandum of Appeal. The Statement of Facts should explain why and how the Respondent’s decision is incorrect. Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 explains how a taxpayer is supposed to deal with Statement of Facts and documentary evidence when lodging an appeal before this Tribunal.

37. Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 provides as hereunder:“(1)Statement of fact signed by the appellant shall set out precisely all the facts on which the appeal is based and shall refer specifically to documentary evidence or other evidence which it is proposed to adduce at the hearing of the appeal.

(2)The documentary evidence referred to in paragraph (1) shall be annexed to the statement of fact.’’

38. This Tribunal in Deep Forest Hardware Limited v Commissioner of Investigation and Enforcement (Tax Appeal E291 of 2023) [2024] KETAT 702 (KLR) stated as follows:“Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act squarely place the burden of proof upon a taxpayer to discredit any tax assessment or decision.’’

39. Further, in Commissioner of Domestic Taxes vs. Metoxide Africa Limited (Tax Appeal E121 of 2021) [2022] KEHC 14613 (KLR) the Court emphasised that the burden is upon the taxpayer to prove that the Respondent’s decision is in correct.

40. The Tribunal has perused the Appellant’s Appeal bundle in light of the forestated provisions of law and did not find therein documents that would have aided the Tribunal to determine whether or not the documents provided were sufficient to cause the Respondent to allow the same for input VAT. Consequently, the Tribunal is of the view that the Appellant has failed to demonstrate that the Respondent’s Objection Decision is erroneous.

Determination 41. Pursuant to the analysis herein above, the Tribunal finds and the appeal lacks merit and makes the following orders:i.The Appeal is hereby dismissed;ii.The Respondent’s Objection Decision dated 23rd September 2022 be and is hereby upheld; and,iii.Each party to bear its own cost.

42. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 28TH DAY OF JUNE 2024ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERELISHA N. NJERU - MEMBERBERNADETTE M. GITARI - MEMBERABDULLAHI DIRIYE - MEMBER