[2024] KETAT 355 (KLR)

Tarua Scrap Metal Dealers Limited v Commissioner for Domestic Taxes (Tax Appeal E053 of 2023) [2024] KETAT 355 (KLR) (Civ) (23 February 2024) (Judgment)

Neutral citation: [2024] KETAT 355 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal E053 of 2023

E.N Wafula, Chair, RO Oluoch, AK Kiprotich, Cynthia B. Mayaka & T Vikiru, Members

February 23, 2024

Between

Tarua Scrap Metal Dealers Limited

Appellant

and

Commissioner For Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya whose principal business activity is purchase and supply of scrap metal.

2. The Respondent is a principal Officer appointed under Section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue, and the administration and enforcement of all tax laws set out in Parts 1& 2 of the First Schedule to the Act, for purposes of assessing, collecting, and accounting for all tax revenues in accordance with those laws.

3. The Respondent undertook a review of the Appellant’s VAT returns for the period July 2020 and June 2022 and issued a series of Assessment Orders and demand notices.

4. The Respondent later, vide a letter 6th September 2022, wrote to the Appellant and demanded taxes amounting to Kshs 430,282,687. 00 which claim comprised under-declared sales and wrongly claimed input VAT on purchases.

5. The Appellant objected to the entire additional assessments for VAT vide a notice of objection dated 22nd November 2022.

6. The Respondent rendered its Objection decision on 23rd January 2023.

7. Aggrieved, the Appellant filed a Notice of Appeal at the Tribunal on 21st February 2023.

The Appeal 8. The Appellant in its Memorandum of Appeal filed on 22nd February 2023 and dated 21st February 2023 has set out the following grounds of Appeal:-i.That the Respondent erred in law and fact by raising additional assessments for VAT based on a report of purchases claimed from the Appellant’s PIN contrary to the provisions of Section 17 of the VAT Act, 2013;ii.That the Respondent erred in law and fact by raising additional assessments for VAT based inputs claimed by the Appellant from the suppliers who had not declared the corresponding sales in their VAT returns, contrary to the Provisions of Section 17 of the VAT Act, 2013;iii.That the Respondent erred in law and fact by not considering the six months’ timing difference in VAT input claim by using the “Purchases Claimed from PIN” report in raising additional assessments for VAT; andiv.That the Respondent erred in law and fact by infringing on the Appellant’s legitimate expectation by raising additional VAT of Kshs 19,118,955. 00 for the month of May 2021 on the basis that the iTax Portal had an error in VAT Calculation.

Appellant’s Case 9. The Appellant has grounded its Appeal on its Statement of Facts dated 21st February 2023 and filed on 22nd February 2023 and written submissions dated 1st August 2023 and filed on 8th August 2023.

10. It was the Appellant’s contention that the Respondent failed to consider the provisions of Section 17 of the VAT Act, 2013 in raising additional assessments by disallowing the Appellant’s input VAT. Section 17 of the VAT Act, 2013 provides as follows:(1)Subject to the provisions of this section and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.(2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1), the person does not hold the documentation referred 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).”

11. The Appellant submitted that the basis for claiming input VAT are the above-listed documents and compliance with the following additional requirements:a.The taxpayer is registered for VAT;b.The purchase was for purposes of making a taxable supply;c.The input tax does not relate to the excluded purchases as set out in Section 17 (4) of the VAT Act or exempt supplies; andd.The input tax is claimed within 6 months of receiving the supply.

12. The Appellant submitted that it complied with all the requirements as set out in Section 17 of the VAT Act in respect of its input VAT claims and that all the documentation required by the Commissioner were availed as evidenced in the objection notice which confirms that the documents were delivered during the parties in person meetings.

13. The Appellant stated that declaration of the purchase by the supplier under Section 17 (2)(b) is an alternative to possession of the requisite documents, and that this would not apply where the Appellant holds documentation to support claimed input VAT.

14. The Appellant was of the view that it was entitled to a legitimate expectation that the Respondent would allow its input VAT claims since at the time of claiming the input it held the required documents and or the registered suppliers had declared the sales invoices in their returns.

15. The Appellant pointed out that the Respondent had in Paragraph 11 of its Statement of Facts acknowledged receipt of the supporting documentation as per the notice of objection dated 22nd November 2022. Therefore, the Respondent’s findings are not only inaccurate and unreasonable, but also unfair to the Appellant since the Appellant provided sufficient proof to support purchase of the goods in question.

16. The Appellant also submitted that it had no control over how its suppliers declare the sales in their VAT returns and it is prejudicial for the Respondent to attribute non-compliance of the listed suppliers. This cannot be the basis of disallowing input VAT as provided for under the VAT Act or any other law of Kenya.

17. The Appellant submitted that for input tax to be deductible under the VAT Act, 2013, the VAT must relate to a cost incurred for the purpose of making taxable supplies in the course or furtherance of an enterprise carried on by the taxpayer.

18. The Appellant submitted that it made taxable supplies and that this fact was also confirmed by Respondent.

19. The Appellant also submitted that it accounted for all its output VAT pursuant to the provisions of the VAT Act and there is no dispute that there were vat-able supplies made by the Appellant to its customers. That it also declared and paid out VAT on the withholding VAT from its customers.

20. The Appellant submitted that the Respondent erred by raising additional assessments based on the input VAT claimed against the Appellant’s PIN without making adjustments for the 6 months timing difference.

21. The Appellant stated that the Respondent used the “Purchases claimed from a PIN” report to determine the under-declared sales for the period between 2020 and 2022. However, the Respondent did not make adjustments for the timing differences in its workings.

22. The Appellant averred that Section 17 of the VAT Act allows a taxpayer to claim input VAT within a period of 6 months so that sales made in July 2019, and declared in July 2019 pursuant to the Provisions of Section 12 of the VAT Act could be claimed by the purchaser in January 2020.

23. The Appellant submitted that the Respondent erred by using the input VAT claims report to determine the Appellant’s taxable sales without making adjustments for the timing differences.

24. The Appellant posited that it made all the efforts to co-operate with the Respondent during the review exercise and had legitimate expectation that the exercise would comply with the provisions of the TPA and the Fair Administrative Actions Act, 2015.

25. The Appellant averred that the Respondent started issuing demand and agency notices in the course of the exercise contrary to the provisions of the TPA. The demand notices were issued even before the additional assessments were raised and the Appellant given an opportunity to object.

26. The Appellant contended that the doctrine of legitimate expectation is now a well-established in tax matters in Kenya. That in Kenya Revenue Authority, Commissioner Customs Services & Julius Musyoki-vs-Darasa Investments Limited [2018] eKLR, the Court of Appeal pronounced itself as follows:“Legitimate expectation refers to the principle of good administration or administrative fairness that, if a public authority leads a person or body to expect that the public authority will, in the future, continue to act in a way either in which it has regularly (or even always) acted in the past or on the basis of a past promise or statement which represents how it proposes to act, then, prima facie, the public authority should not, without an overriding reason in the public interest, resale from that representation and unilaterally cancel the expectation of the person or body that the state of affairs will continue. This is of particular importance if an individual has acted on the representation to his or her detriment.”As well as “A person may have a legitimate expectation of being treated in a certain way by an administrative authority even though he has no legal right in private law to receive such treatment. The expectation may arise either from a representation or promise made by authority, including an implied representation, or from consistent past practice”.

27. The Appellant submitted that the Respondent proceeded to raise additional assessments even though discussions were taking place between the parties and the Appellant was in the process of providing supporting documentation to verify the input VAT claimed.

28. The Appellant contended that the Respondent’s actions bordered on procedural impropriety and went against the provisions the Fair Administrative Actions Act, 2015 and Article 47 of the Constitution of Kenya, 2010.

29. The Appellant stated that Article 47 of the Constitution of Kenya 2010 guarantees it a right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair. The right to a fair administrative action entails taking into consideration explanations and information availed by the party against whom an assessment is made.

30. The Appellant supported its Appeal with the following cases:i.Nizaba International Trading Company Limited-vs-Kenya Revenue Authority [2000] eKLR,ii.Republic v Kenya Revenue Authority ex-parte Amsco Kenya Limited [2014] eKLRiii.Kenya Medical Association Housing Cooperative Society Limited-vs-Attorney General & another [2016] eKLR

Appellant’s Prayer 31. The Appellant sought the following orders and reliefs from the Tribunal:i.That the Tribunal allows this Appeal in its entirety;ii.That the Tribunal sets aside the Respondent’s objection decision letter dated 23rd January, 2023;iii.That, in the alternative, the Tribunal allows the VAT input claim that meets the threshold of Section 17 of the VAT Act, 2013;iv.That the Tribunal stays enforcement of assessed taxes until the matter is conclusively determined andv.That the Tribunal be pleased to issue any other orders to the Appellant as it may deem just and expedient.

Respondent’s Case 32. The Respondent has set out its response to the Appellant‘s case vide its Statement of Facts dated 22nd March 2023 and filed on 30th March 20123 together with documents attached thereto, and, submissions dated 9th August 2023 and filled on 10th August 2023.

33. The Respondent submitted that the Appellant failed to sufficiently support its grounds of objection and that the burden was on the Appellant to support the input VAT claimed on the suppliers who had not declared the corresponding sales in their VAT returns.

34. The Respondent averred that the entitlement to input VAT deduction is not an absolute right and is qualified by the provisions of Section 17(2) of the VAT Act. It was therefore a requirement that a taxpayer seeking to claim must prove that they made purchases of taxable supplies and the same can be proven by documentation.

35. The Respondent affirmed that a review exercise established that the Appellant’s input VAT claims were not supported by documentation or proof of taxable supplies as per the provisions of Section 17 and referred to the TAT decision in the case of Osho Drapers Limited-vs-Commissioner of Domestic Taxes [TAT 159/2018] where the TAT held, inter alia, that:-“(57) The Tribunal therefore agrees with the Respondent that for one to claim input VAT, there must be a purchase of a taxable supply. 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.”

36. The Respondent further submitted that its demand for proof of purchases was in accordance with Sections 17 and 43 of the VAT Act and Section 59(1) of the TPA which Sections must be read holistically as per the High Court’s decision in Commissioner of Investigations and Enforcement-v-Pearl Industries Limited eKLR.

37. The Respondent admitted at Paragraph 17 of its Statement of Facts that the Appellant had supplied documents which were lumped up and this made it impossible for it to ascertain the transactions in question.

38. The Respondent also posited that supplier information was not provided to verify the accuracy of the transaction.

39. The Respondent posited that Sections 51 and 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act places the burden of proof on the Appellant. Thus, it was incumbent upon the Appellant to provide the relevant documents in support of its objection.

40. The Respondent submitted that its e-mail correspondence dated 18th January 2023 shows that the Appellant failed to provide documents and crucial information such as copies of invoices, proof of payment for purchases made and detailed sales ledgers despite several reminders.

41. The Respondent stated that decisions in Commissioner of Investigations and Enforcement-v-Pearl Industries Limited and Primarosa-v-Commissioner of Domestic Taxes [2019] eKLR has emphatically stated the onus is upon the taxpayer to prove that the Respondent’s decision was wrong or incorrect.

42. It was the Respondent’s submission that the Tribunal ought to proceed on the assumption that the Respondent’s assessment is correct until the taxpayer produces competent and relevant evidence.

43. The Respondent held the position that objection decisions are issued pursuant to Sections 31, 51, 56 and 59 of the TPA which provides for both duties and responsibilities of the parties before issuance of the decision.

44. The Respondent stated that contrary to the Appellant’s assertions, the Respondent engaged the Appellant way back on 6th September 2022 and therefore the Appellant’s allegations of not being afforded fair administrative action are unfounded.

Respondent’s Prayer 45. The Respondent’s prayer was for orders that:i.The Appeal be dismissed with costsii.The Respondent’s confirmed assessments vide the objection decision dated 23rd January 2023 be upheld.

Issues For Determination 46. The Tribunal having considered the filings and submissions by the parties is of the view that the Appeal herein distils into a single issue for determination, namely;-Whether the Respondent erred by rejecting the Appellant’s input VAT claims and raising Additional VAT Assessments

Analysis And Findings 47. The Appellant argued that the Respondent did not consider the provisions of Section 17 of the VAT Act, 2013 in disallowing the Appellant’s input VAT claims and raising additional assessments.

48. The Appellant submitted that Section 17 of the VAT Act provides the basis for claiming input VAT and lists the documentation required in order to do so.

49. It was the Appellant’s submission that once a taxpayer was in compliance with all the requirements as set out in Section 17 of the VAT Act then it was fully entitled to input VAT claim.

50. The Appellant also submitted that it had no control of how and when its suppliers declare the sales in their VAT returns and that it was unfair for the Respondent to attribute non-compliance of the listed suppliers to it.

51. The Respondent on its part submitted that the entitlement to input VAT deduction is not an absolute right. That this right is qualified by the provisions of Section 17(2) of the VAT Act and a taxpayer seeking to claim must prove that he made purchases of taxable supplies and the same can be proven by documentation.

52. The Respondent stated that its review exercise established that the Appellant’s input VAT claims were not supported by documentation or proof of taxable supplies as per the provisions of Section 17.

53. The Tribunal is of the view that the dispute herein arose when the Respondent compared VAT data from the Appellant’s suppliers and VAT returns filed by the Appellant (“VAA”) as shown in its VAA findings in the letter dated 6th September 2022 and the objection decision dated 23rd January 2023.

54. In as much as the Respondent has every right to analyse and take into account data obtained from third parties in the course of undertaking its duties, the Tribunal holds the view that the data obtained from such an exercise should not be applied in a carte blanche manner to disenfranchise a taxpayer by disallowing its input VAT claims and raising additional VAT assessments thereof.

55. The correct position is that the information obtained from such data ought to be subjected to the law, to affirm whether the Appellant had complied with provisions of the VAT Act when it filed its returns.

56. If the taxpayer has complied with the applicable law, then the information obtained from the VAA exercise should not be used to forcefully bring it within the tax dragnet because there is never an intendment or equity presumption about tax. A taxpayer should only be taxed based on the textual reading of the applicable statute, and nothing more, as was held in the case of Cape Brandy Syndicate vs. Inland Revenue Commissioner [1921] 1 KB where the court held:“In a taxing Act one has to look merely at what is clearly stated. There is no room for any intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used”

57. Based on the above analysis the Respondent was thus required to subject the information obtained from its VAA exercise to the rigours of Section 17 of the VAT Act before it could arrive at the conclusion on whether to raise additional assessment against the Appellant. Information obtained from third parties without application of the law to that information cannot be the primary reason for raising an assessment against the Appellant.

58. The Tribunal reiterates that the primary basis for input VAT deduction is Section 17 of the VAT, and a registered taxpayer is entitled to deduction of input VAT to the extent of its compliance with the said Section.

59. At the heart of the dispute is the interpretation and application of Section 17 of the VAT Act which states as follows regarding claim for input tax:(1)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.(2)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.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).”

60. The plain and unambiguous language of Section 17 (1)(2) and (3) of the VAT Act is clear that the only conditions provided for a taxpayer to qualify for input VAT are:a.That the input tax was incurred on a taxable supply made to or on importation made by a taxpayer at the end of the tax period,b.That the input tax is deducted by a registered person on taxable supplies made by him,c.That the input tax is to be allowable for deduction within six months after the end of the tax period in which the supply or importation occurred, andd.That the taxpayer shall have the relevant documentation,

61. The Appellant in this case complied with all these 4 requirements when it submitted documents to the Respondent. The Respondent has also not addressed or rebutted the averments by the Appellant that it was supplied with the documents required during their physical meetings.

62. The Tribunal has looked at Section 17 of the VAT Act and its plain reading does not require the Appellant or any other party to present its documents to the Respondent in a specific format or that it must separately provide information that can help the Respondent to verify the transactions.

63. Moreover, even if the Appellant was expected to provide some documents arising from this VAA exercise, the The Tribunal has noted that in all its communication with the Appellant in the emails attached to its Statement of Facts, the Respondent never advised the Appellant on the specific shortfall or the specific documents that it required from the Appellant to help it validate its objection.

64. The excuse proffered by the Respondent for its failure to consider the documents provided by the Appellant to support its claim is unknown to Section 17 of the VAT Act. As it is, the Respondent was required to consider the Appellant’s VAT claim and could only refute the input claim if the Appellant had failed to comply with the provisions of Section 17 of the VAT Act or any other relevant provision of the VAT Act.

65. Moreover, Section 17 of the VAT does not place a burden on the Appellant to confirm whether its suppliers actually filed their returns or documents as directed by the Respondent. It was thus improper for the Appellant to place a burden on the Appellant to look for its suppliers and request the said suppliers to un-bundle their documents as a condition precedent for allowing the Appellant’s Appeal. Section 17 of the VAT Act has not placed such a burden on the taxpayer.

66. The Tribunal has also noted that in all its communication with the Appellant in the emails attached to its Statement of Facts, the Respondent never advised the Appellant on the specific shortfall of its documents, or the specific documents that it required from the Appellant to help it make its objection decision.

67. Consequently, the Respondent’s decision to disallow the Appellant’s input VAT claim and to also raise additional assessment against it on the premise that its suppliers, against whom it lacked control, had supplied lumped up documents or failed to submit their tax returns or that no supplier confirmation was availed to verify the accuracy of the transaction was not a requirement under Section 17 of the VAT Act. The objection decision dated 23rd January 2023 which based its additional assessment on these alien requirements was thus invalid and unlawful.

68. The Tribunal’s position that the Appellant was entitled to claim input VAT arising from these transactions upon meeting the prescribed legal requirements was affirmed in Commissioner of Domestic Taxes v Ramco Printing Works Limited (Income Tax Appeal E108 of 2020) [2022] KEHC 16062 (KLR) (Commercial and Tax) (24 November 2022) (Judgment), where it was held as thus:-“In its impugned judgment, the TAT noted that the Respondent duly provided the requisite documents and held that the Respondent had established that it conducted business with one Zulma Trading and was therefore within its right to claim the input VAT in respect of Zulma Trading on account of the documentation provided.My finding is that the TAT made the correct finding that the Respondent was entitled to claim input VAT upon satisfying itself that the Respondent had established its case to the required standards.”

69. For the above reasons, the Tribunal finds and holds that the Respondent erred in disallowing the Appellant’s input VAT claims and also raising additional VAT assessments against the Appellant.

Final Decision 70. The upshot of the above is that the Appeal is merited and succeeds. The Tribunal will therefore proceed to make the final orders s follows:a.The Appeal be and is hereby allowedb.The Respondent’s objection decision dated 23rd January 2023 is hereby set aside.c.Each party to bear its own cost.

71. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 23RD DAY OF FEBRUARY, 2024ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBER.ABRAHAM K. KIPROTICH - MEMBER.CYNTHIA B. MAYAKA - MEMBER.TIMOTHY B. VIKIRU - MEMBER.