[2023] KETAT 124 (KLR)

Sera Steel Limited (Formerly Palak International Limited) v Commissioner of Domestic Taxes (Tribunal Appeal 42 of 2022) [2023] KETAT 124 (KLR) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 124 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 42 of 2022

E.N Wafula, Chair, RO Oluoch, RM Mutuma & EK Cheluget, Members

March 17, 2023

Between

Sera Steel Limited (Formerly Palak International Limited)

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act of the laws of Kenya and its principle activity is manufacture of steel.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under sub Section (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent reviewed the Appellant’s records and iTax returns, and allegedly detected inconsistencies in the months of January to May 2018 between the invoices declared by the taxpayer and its suppliers. It subsequently issued an additional assessment of ksh 26,515,399. 65 on the basis of invoices that were not found in the supplier’s VAT returns as shown below:Month Amount Assessed

January 2018 8,141,351. 01

February 2018 4,664,705. 82

March 2018 4,521,508. 55

April 2018 6,996,025. 38

May 2018 2,191. 808. 89

Total 26,515,399. 65

4. The Appellant lodged an objection to the assessment on 20th November, 2021.

5. The Respondent, on receipt of the said objection advised the Appellant that the same was invalidly lodged for failure to provide supporting documents pursuant to the provisions of Section 51(3) (c) of the Tax Procedures Act which states that:‘A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if: -(c)All the relevant documents relating to the objection have been submitted’

6. The Appellant subsequently provided copies of documents that had been requested. The Respondent thereafter reviewed and issued an objection decision dated the 1st December, 2021, which partially allowed the Appellant’s input VAT claim amounting to ksh 15,909,322. 11 and the unsupported input VAT amount of ksh. 10. 606,077. 54 was rejected as shown in the table below:Tax Period Amount Objected Tax Allowed Tax payable

Jan -2018 8,141,351. 01 2,870,273. 39 5,271,077. 62

Feb-2018 4,664,705. 82 3,458,496. 30 1,206,209. 52

March-2018 4,521,508. 55 2,277,162. 15 2,244,346. 40

April-2018 6,996,025. 38 5,638,117. 15 1,357,908. 23

May-2018 2,191,808. 89 1,665,273. 12 526,535. 77

Total 26,515,399. 65 15,909,322. 11 10. 606,077. 54

7. The Respondent informed the Appellant that the main cause of the inconsistency noted were the lumped sales to consumers who were not registered for VAT and the differences in invoice number and referencing between the Appellant and their suppliers.

8. The Appellant was aggrieved by the objection decision and it lodged a Notice of Appeal dated 31st December, 2021 and a filed an appeal before the Tribunal on the 17th of January, 2022.

The Appeal 9. The Appellant filed its Memorandum of Appeal dated 14th with the Tribunal on 17th January, 2022 and set out the following grounds of Appeal;a.That the Respondent erred in fact and law by disallowing a portion of the input VAT deducted by the Appellant on the basis that Appellant did not adduce the proof of payment by the respective invoices.b.That the Respondent erred in fact and law in asserting that a portion of the input tax deducted by the Appellant was not in accordance with the provisions of the Value Added Tax (VAT) Act, 2013. c.That the Respondent erred in fact and in law by failing to appreciate the nature of the intercompany transactions between the Appellant and one of its suppliers, Palak International Limited where payments were done through set off in the ledgers without having to unnecessarily and inconveniently incur costs in back and forth monetary transactions.d.That the Respondent erred in fact and law by failing to appreciate that the Appellant had provided all the documents required for claiming its input VAT and was not under legal obligation to enforce declaration of output tax by its suppliers during the assessed periods.e.That the Respondent erred in fact and law by unilaterally adjusting the Appellant’s VAT credits downwards prior to the exhaustion of the appeal remedies, thereby infringing on the Appellant’s rights to a fair administrative process and the right to fair hearing.f.That the Respondent erred in fact and law by failing to provide the legal basis for disallowing a portion of the input VAT.

10. By reason of the grounds aforesaid, the Appellant prays that the Tribunal allows the appeal and set aside the Respondent’s objection decision.

The Appellant’s Case 11. The Appellant has set out its case in the Statement of Facts dated 14th January, 2022 and filed on the 17th January, 2022 and its written submissions dated and filed on the 18th of October, 2022, wherein it identified and argued on various legal issues.

i. Whether the Input Tax Deducted by the Appellant was in Accordance with the Provisions of the VAT Act, 2013 12. The Appellant stated as follows under this head:a.That the Respondent had disallowed its input VAT of ksh. 10,606,077. 54 which related to purchase from Palak International Limited on the basis that no proof of payment was adduced for the purchase.b.That the Respondent had grossly misunderstood Section 13 (3) (b) of the VAT Act, 2013 which provides that the consideration for a supply, including of imported services shall be the total of “the open market value at the time of the supply of an amount in kind paid or payable directly or indirectly, by any person for the supply.”In its view, this meant that the VAT Act recognized that consideration of a supply need not be a direct monetary transaction. It could also be a payment in kind. In which case denying the Appellant its claim for input VAT on the sole basis that no proof of payment in cash was availed was in direct contravention of the provision of Section 13(3)(b) of the VAT Act.c.That pursuant to Section 17 (1)(2) & (3) of the VAT Act, 2013, a taxpayer can deduct input tax incurred for the purposes of making taxable supplies during the periods assessed and pre-30th June, 2020. That Section 17 (1) and (2) of the VAT Act, 2013 provides as follows;‘(1)…….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.(1).If, at the time when a deduction for input tax would otherwise be allowable under sub-Section (1), the person does not hold the documentation referred to in sub-Section (3), the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation.’d.That the foregoing provisions of the law affirmed that provided input tax is incurred by a taxpayer for the purpose of making a taxable supply, then the same would qualify for input tax deduction subject to the conditions provided under Section 17 of the VATAct.e.That the Respondent’s objection decision disallowing its input VAT of ksh, 10,606, 077. 54 was thus in error and without legal basis and it should thus be vacated in its entirety.

ii. Whether the Respondent Failed to Appreciate the Nature of Intercompany Transactions Between the Appellant and Palak International Limited. 13. The Appellant argued that:a.The entire disallowed VAT of ksh, 10,606, 077. 54 related to purchases made from Palak International Limited.b.It trades regularly with Palak International Limited by continuously purchasing products from the said entity, while it also sells product to the said entity and that it receives invoices from Palak international Limited and it also invoices Palak International Limited for the goods supplied.c.This continuous trade between it and Palak has resulted in little or no movement of funds between the two entities for efficiency purposes. Therefore, the Respondent’s decision to disallow its claim for input VAT purely on the basis that there was no proof of payment was ignorant of the reality of the transactions between the Appellant and Palak International Limited.d.The act of disallowing its input VAT claim on the purchase made from Palak International Limited is flawed as it ignored the fact its input VAT was Palak’s output VAT. This reality could have been verified by the Respondent by looking at Palak’s VAT returns.e.The foregoing reality shows that there was no loss in VAT as the effect of the trade between the parties was a set off and all parries accounted for their VAT returns.

iii. Whether the Appellant was Under a Legal Obligation to Enforce Declaration of Output Tax by its Suppliers During the Assessed Periods. 14. The Appellant submitted that:a.Section 5(3) and (4) of the VAT Act has placed the onus of charging and accounting for VAT on a taxable supply on the person making a taxable supply. This burden could not be delegated to the recipient of the taxable supply.b.Effective 30th June ,2020, the Finance Act 2020 amended Section 17(2) of the VAT Act for purpose of the claiming input VAT to read 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), orb.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’.c.The import of the above amendment to Section 17(2) of the VAT Act is that the recipient of a taxable supply had no obligation whatsoever to ensure or confirm whether its suppliers had declared output VAT before 30th June, 2020. Therefore, the Respondent’s decision to disallow the Appellant’s input tax claim on the basis that the Appellant’s suppliers had not declared the corresponding output tax for period pre-30th June 2020 lacks legal merit and amounted to retrospective application of the law.d.Its submissions and averments were supported by the Tribunal’s decision in Shreeji Enterprises (K) Limited v Commissioners of Investigations and Enforcement 58 & 186 of 2019 where the TAT held that a taxpayer seeking to claim input was only under obligation to confirm that its purchases were from VAT registered traders who had ETR registers.e.The purchases in respect of which the input tax deduction claim is sought were from VAT registered traders. It also confirmed that the invoices issued to it by the suppliers and for which the input tax deduction claim was made were ETR registered.

iv. Whether the Respondent’s Adjustments of the Appellant’s VAT Credits With Respect to Disallowed Input Tax Amounted to Infringement of Appellant’s Right to a Fair Administrative Process and the Right to a Fair Hearing. 15. The Appellant averred that:a.The simultaneous issuance of the additional assessment orders on 15th November 2020, adjustment of the Appellant’s VAT credits to consider the disallowed inputs amounted to procedural impropriety and a blatant disregard of the Appeal mechanism laid out under the TPA.b.The unilateral adjustment of the VAT credits before exhaustion of the legally available dispute resolution avenues is a complete annihilation of the procedures set out under the TPA since the thirty (30) days window granted to the Appellant to file an appeal had not lapsed. In end this amounted to denying the Appellant the right to get a reasonable opportunity to lodge a notice of appeal against the Commissioner’s decision. This resulted in an infringement of its right to a fair hearing.

v. Whether the Respondent Failed to Provide Legal Basis for the Tax Demand 16. The Appellant averred that the Respondent’s objection decision did not set out the legal basis for disallowing the input VAT of ksh. 10,606,077. 54 on account of lack of proof of payment.

Appellant’s Prayers 17. The Appellant’s prayer to this Tribunal was for Orders that:a.The Respondents decision dated 1st December, 2021 partially disallowing the input VAT of ksh, 10,606,077. 54 be dismissed in its entirety.b.Any other remedies that the Honourable Tribunal deems just and reasonable.

Respondent’s Case 18. The Respondent has set out its response to the Appeal in the Statement of Facts dated 16th February, 2022 and filed on 17th February, 2022 and the written submissions dated and filed on the 22nd August, 2022.

19. The Respondent identified the following issues for determination in this Appeal:a)Whether the Respondent’s decision to disallow the unsupported input VAT amount is right in law?

20. The Respondent submitted that:a.Invoices availed by the Appellant to support its purchase declarations in the VAT returns, did not fully support the claim.b.Its reading of Sections 17(2) and 17(3) of the VATAct required the Appellant to provide it with documents for input VAT to be deductible and this was not done.c.Section 56(1) of the TPA placed the burden of proof that the tax assessed was not payable by the Appellant. This burden was not discharged.d.The Appellant failed to prove that the input VAT was lawfully due as it did not produce invoices for consideration by the Respondent.

Respondent’s Prayer 21. By reasons aforesaid, the Respondent submitted that the objection decision dated 1st December, 2021 is proper and the Appeal ought to be dismissed with costs.

Issues for Determination 22. The Tribunal having considered the pleadings of the parties and submissions made by the parties is of the considered view that the Appeal herein distils into one issue for determination:Whether the Respondent was justified in issuing its Objection Decision dated the 5th October, 2021.

Analysis and Detrmination 23. The Respondent issued it objection decision on 20th November, 2021 in relation to tax assessments that arose from the periods between January to May 2018. The applicable version of the VAT statute would thus be the VAT Act, 2013 as revised in 2018 (the VAT Act).

24. Section 17(1), (2) and (3) of the VAT Act provides thus in regard to credit for input tax against output tax:“17. Credit for input tax against output tax1. 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 sub-Section (1), the person does not hold the documentation referred to in sub-Section (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 sub Section (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); ore.a debit note in the case of input tax deducted under Section 16(5).”

25. Except for exceptional cases that can be determined from case to case, the foregoing provisions offers the following general guidance in regard to credit for input tax against output tax:a.Input tax on a taxable supply to, or importation made by, a registered person may be deducted by the registered person to the extent that the supply or importation was acquired to make taxable supplies.b.The person claiming the credits should be in possession of the documents that are itemized in Section 17(3) of the VAT Act,c.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.

26. The Appellant attached the Respondent’s assessments orders, letter of objection and iTax acknowledgement and the Respondent’s objection decision. The Appellant did not file the documents which show and or prove that its transactions were paid in kind. The Tribunal has also noted that the same allegation, that the transactions in issue were paid in kind was made to the Commissioner but documentary proof of such payment was never provided. This resulted in the denial of the Appellant’s claim for input VAT.

27. Section 30 of the TAT Act provides as follows in regard to who bears the burden of proof in establishing that a tax assessment is erroneous:“Burden of proofIn 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.”

28. There is also Section 56 (1) of the TPA which provides that in proceedings of this nature the burden shall be on the taxpayer to prove that a tax decision is incorrect. As if to underscore the import of the above provision, the legislature deployed the word “shall” in the said Section meaning that the provision is couched in peremptory terms.

29. This means that the burden of proving that the Respondent erred in disallowing a deduction of a portion of the Appellant’s input tax lay with the Appellant. It was thus incumbent on it to provide documents proving that it made some payments in kind and that it was indeed in an intercompany business transaction between it and one of its suppliers, Palak International Limited.

30. The burden would have been discharged by either providing the forwarding letter which was used to forward all the documents that the Respondent had requested; or by filing all the documents that were supplied to the Respondent at the Tribunal. This was not done and hence the reason why the Tribunal has arrived at the conclusion that the Appellant failed to discharge its burden of proof in this Appeal.

31. The burden of proof that is placed on a taxpayer in tax cases was discussed in the case of Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR where the court stated as thus:“A crucial factor adding to the taxpayer's burden in tax cases is 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…. 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.”

32. Indeed, the Appellant in this matter has not placed sufficient evidence before the Tribunal to discharge the presumption of the of correctness which attached to the Respondent’s assessment. The Appellant’s failure to discharge its burden of proof therefore implies that the presumption of correctness of the Respondent’s Objection Decision dated the 1st December, 2021 has not vanished.

33. The effect of such non-persuasion on the Appellant who failed to discharge its burden of proof in this case is that that the Appeal lacks merit.

Final Decision 34. Flowing from the above analysis the Tribunal proceeds to issue the following Orders;a.The Appeal be and is hereby dismissed.b.The Respondent ‘s objection decision dated the 1st December, 2021 be and is hereby upheld.c.Each party to bear its own costs.

35. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH, 2023. ……………………………ERIC N. WAFULACHAIRMAN……………………………RODNEY O. OLUOCHMEMBER……………………………ROBERT M. MUTUMAMEMBER……………………………EDWIN K. CHELUGETMEMBER