[2023] KETAT 934 (KLR)

Tononoka Rolling Mills Limited v Commissioner of Domestic Taxes (Tax Appeal 1388 of 2022) [2023] KETAT 934 (KLR) (Commercial and Tax) (8 December 2023) (Judgment)

Neutral citation: [2023] KETAT 934 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal 1388 of 2022

E.N Wafula, Chair, RO Oluoch, AK Kiprotich, Cynthia B. Mayaka, E Ng'ang'a & B Gitari, Members

December 8, 2023

Between

Tononoka Rolling Mills Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private company incorporated in Kenya whose principal business activity is the manufacture of steel for sale and the conversion of waste material scrap into valuable reusable construction material.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act and 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 issue in dispute in this Appeal arose on 26 August 2022 when the Respondent issued the Appellant with Value Added Tax Automated Assessments (VAA) for December 2021, January 2022, May 2022 and June 2022 amounting to Kshs 37,460,084. 17, inclusive of penalties and interest.

4. The Appellant filed a notice of objection to the Respondent’s tax assessment vide a letter dated 31 August 2022 and also objected on i-Tax.

5. The Appellant was requested to validate its objection on 12th September 2022 and it provided the documents requested vide a letter dated 29 September 2022.

6. The Respondent issued an objection decision on 7th October 2022 confirming the VAT assessment of Kshs. 37,460,084. 17 inclusive of penalties and interest.

7. Dissatisfied with the said Objection decision, the Appellant filed a Notice of Appeal with the Tribunal on 4th November 2022.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal filed on 17th November 2022a.The Respondent erred in disallowing valid input VAT and assessing VAT of Kshs. 37,460,084. 17 (inclusive of penalties and interest) on the basis that the appellant claimed input VAT from non-VAT-compliant suppliers contrary to the provisions of 17 of the VAT Act, 2013. b.The Respondent erred in fact and law by disallowing input VAT claimed by the Appellant and failing to consider that the Appellant indeed had all the supporting documentation to support the purchases as stipulated in the VAT Act 2013.

The Appellant’s Case 9. The Appellant supported its Appeal with a Statement of Facts dated and filed on the 17th November 2022 and the written submissions dated the 23rd July 2023 and filed on the 26th July 2023.

10. The Appellant submitted that it had complied with the VAT Act 2013 by filing all its returns and making claims for all its purchase invoices within the stipulated 6-months period as is provided for in Section 17(2) (b) of the VAT Act.

11. The Appellant averred that it had obtained copies of its suppliers’ valid tax invoices at the point of actual purchase of goods and delivery notes for all its purchases. That it also maintained a purchase schedule for VAT purposes for all purchase transactions and payment vouchers and that all these documents which were used to claim input tax were shared with the Respondent.

12. It relied on the case of TAT 187 of 2018. Ukwala Supermarkets vs Commissioner of Domestic Taxes, to assert that it had provided proper documentation for its claim to support its input claim.

13. It asserted that at no point during the Objection review process did the Respondent contest the authenticity of any of the supporting documents that it had shared with it nor did it request for additional documents. It is for this reason that it took the view that the Respondent’s objection was arrived at contrary to the VAT Act 2013 and that it was also unjustified, erroneous and issued in bad faith.

14. The Appellant contended that there are two conditions for deductibility of input VAT as provided for under Section 17(2) of the VAT Act which are linked by a conjunctive “or” and not the term “and”. It averred that a strict interpretation of Section 17(2) of the VAT Act allows the Appellant to claim input VAT at the occurrence of any of the two conditions and not where all the conditions are met. That the term “or” as defined by the Black Law’s Dictionary, Volume 4, 2015 means “a disjunctive particle used to express an alternative or to give a choice among as one among two or more.”

15. It averred that this definition and disjunctive application of the word “or” was confirmed by court in Equity Bank Kenya Limited vs Commissioner of Domestic Taxes 2021.

16. The Appellant affirmed that the Respondent’s contention that its suppliers are non-VAT compliant and did not declare their sales in the VAT returns was baseless and unsupported by the VAT Act because these suppliers are third parties that it cannot compel to declare their sales. That it also lacks visibility into the affairs of these suppliers.

17. That it was punitive for the Respondent to confirm its assessment on this sole condition when it had provided all the documents required under Section 17(2)(a) of the VAT Act.

18. The Appellant further stated that:a.Its suppliers do not share with it their VAT compliance status or valid tax invoices, it, therefore, lacks the internal mechanism to know whether its the suppliers have declared their sales and submitted their VAT returns correctly.b.The is no provision in the VAT Act that allows the Respondent executive unconstitutional power to meet out unfair punishment on the Appellant for the non-VAT compliance status of its suppliers.c.The non-compliant VAT suppliers are legally registered with the Respondent who can independently pursue and enforce compliance on all the taxpayer’s company records and private director details and therefore the decision to transfer its mandate to the Appellant was illegal and an abuse of its governing laws.

19. The Appellant stated that it had made payments to all the suppliers whose tax invoices had been disallowed by the Respondent to prove that these were valid transactions whereof it also deducted and remitted withholding VAT at 2% on all VAT applicable supplies. That the actions of Respondent to disallow input VAT concerning valid tax invoices while accepting WHVAT paid on the same invoices was ridiculous and contrary to fair administration of the tax laws amounting to approbation and reprobation of tax laws by the Respondent at will.

20. The Appellant submitted that its actions to claim input VAT once the documentation was available aligns with a High Court of Kenya judgment delivered on 17 February 2023 in the case of Commissioner of Domestic Taxes Vs Bank of Africa Limited (Civil Appeal E127 of 2020).

21. The Appellant proffered that it discharged its burden of proof by providing all relevant and reasonable evidence to support its claim of input VAT in line with Section 17(2) and 17(3) of the VAT Act 2013. that it was thus unlawful for the Respondent to expect it to produce sales and tax records for independent third parties whom the Appellant has no control over whilst the Respondent has all powers, including the issuance of agency notices to collect taxes that have been paid to the suppliers. It supported this submission with the case of Shreeji Enterprises (K) Limited v Commissioner of Investigations & Enforcement, Tax Appeals Tribunal, Tax Appeals No. 58 and 186 of 2019.

Appellant’s Prayer 22. The Appellant’s prayer to the Tribunal was for orders that, it:a.Annuls and set aside the tax objection decision dated 07 October 2022 in its entirety;b.Allows the Appeal;c.Awards costs of this Appeal to the Appellant; andd.Grants any other remedies that it deems just and reasonable.

Respondent’s Case 23. The Respondent’s case was premised on its Statement of Facts filed on 15th December 2022 and the written Submissions filed on 22nd July 2022.

24. The Respondent identified the following as the singular issue for determination in this Appeal to be whether the Respondent erred in confirming the assessment as issued.

25. It invoked Section 24(2) of the TPA to assert that it was never bound by the tax returns or information provided by, or on behalf as it can assess a taxpayer’s tax liability using any information available to it.

26. It asserted that:a.Its investigation had unearthed that the Respondent had not declared some corresponding sales in its VAT returns and hence the assessment.b.The Appellant did not align its objection with the guidelines of Section 51(3) of the Tax Procedures Act to the extent that it had failed to provide all relevant documents relating to the objection.

27. It invoked Section 7(2) of the VAT Regulation to demand further evidence for a transaction. That its review of the Appellant’s objection had led it to the conclusion that:a.Ngoweni Metallics declares the sales to the Appellant in some of the months under review but the amount was usually Kshs. 1 or non-declaration in some months.b.Tarua Scrap Metal Dealers had not declared sales to the Appellant.c.Shade Systems Limited was NonFiler.

28. Based on the above conclusions, the Respondent stated that it was unable to verify the Appellant’s Input VAT claims.

29. The Respondent supported its position with the following cases:a.Commissioner of Domestic Services V Galaxy Tools Limited [2021] Eklrb.Commissioner of Domestic Taxes Vs. Structural International Kenya Ltd (Income Tax Appeal E089 of 2020) [2021] KEHC 152 (KLR),c.Commissioner of Investigations and Enforcement v Pearl Industries Limited (Tax Appeal E086 of 2020) [2022] KEHC 51 (KLR).d.Total Kenya Limited v Kenya Revenue Authority NRB CA Civil Appeal No. 148 of 2013 [2018] eKLR

30. The Respondent posited that:a.It is empowered under Sections 58 and 59 of the TPA to request the production of documents and information to enable it to ascertain the Appellant’s tax liability of a person. That that was what it did in this case.b.Section 56(1) of the TPA and Section 30 of the Tax Appeals Tribunal Act, placed the burden of proof in this Appeal on the Appellant to show that the the tax decision was incorrect and that this has not been done in this case.c.The onus was on the Appellant to show which information and documents the Respondent omitted in making its decision.

Respondent’s Prayer 31. The Respondent urges the Honourable Tribunal to uphold the Respondent’s Objection decision dated 7th October 2022.

Issues for Determination 32. Having looked at all the documents, pleadings and submissions filed in this Appeal, the Tribunal has concluded that the issue that distils for its determination is whether the Respondent was entitled to VAT input as claimed.

Analysis and Determination 33. The Appellant contends that it met the threshold set out for VAT input claims as provided under Section 17 of the VAT Act. It submitted that it was registered for VAT and made taxable supplies charging VAT thereof, claimed input VAT from its suppliers within the stipulated time and had original tax invoices issued for the supply. According to the Appellant, it was therefore entitled to claim the input VAT.

34. It further argued that despite meeting the requirements for claiming input VAT, the Respondent disallowed its claim allegedly because its investigation established that the suppliers from whom the Appellant purchased had not declared corresponding sales in their VAT returns, some were nil-filers and others were not making declarations in some months; and hence the assessment.

35. The Appellant responded to this assertion by stating that it had indeed purchased the products and incurred input tax on the purchases. That it was not its duty to verify the invoices it was provided with or to supervise the suppliers to ensure that they comply with various components of the VAT as that was the statutory role of the Respondent.

36. The Appellant averred that it indeed bought goods and incurred input tax on the purchase. It argues that its purchase are evidenced by the sales invoices, sales ledgers and other documents that it shared with the Respondent.

37. The Respondent reiterated that the Appellant was involved in a scheme of trading with suppliers who were either under-declaring their sales or declaring nil returns. That in the circumstances, it was not satisfied with the Appellant's input claim. Thus, it disallowed the input tax claim when it failed to provide satisfactory evidence to support its claim for the input tax claim.

38. Section 17 of the VAT Act provides as follows regarding input tax claims:“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),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.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); ore.a debit note in the case of input tax deducted under section 16(5).”

39. A plain reading of Section 17(1) of the VAT Act dictates that input tax is deductible where it is incurred on purchases made in making taxable supplies by a registered person. This means that for a taxpayer to deduct input tax, it must have actually made a purchase and also possessed the documentation enumerated in Section 17(3) of the VAT Act.

40. Section 17(2) and (3) (a) makes it apparent that the document required of the Appellant to make an input claim is an original tax invoice issued for the supply.

41. The Appellant in this Appeal has complied with Sections 17(1), (2) and (3) of the VAT Act by providing the invoices, receipts, bank statements and withholding certificates related to the transactions under Appeal.

42. By providing these documents, the Appellant has managed to shift the evidential burden to the Respondent to provide competent and relevant evidence that had it relied on in disapproving the Appellant's claim and or to show the weakness or inadequacy in the documents provided by the Appellant. This swinging nature of evidential burden in tax cases was enunciated in Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) (Commercial and Tax) (8 July 2022) Judgment where it was held that:“From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner.”

43. The Respondent did not provide any document apart from the Objection decision which was attached to its Statement of Facts. Its assertion that the Appellant did not provide documents remained a mere assertion not supported by evidence.

44. On the contrary, the Appellant has tabled invoices, delivery notes and bank statements affirming that it was supplied and also paid for the goods under contention. No evidence was presented to the Tribunal to show the deficiency, irrelevance or incompetence of these documents. Mere allegations that the statutory documents provided were not sufficient without providing the details of the insufficiency, or that there was an ongoing fraudulent scheme by the suppliers was not enough if such a fraudulent scheme was not known to the Appellant.

45. The Tribunal has held in a previous Appeal that a taxpayer is only required to provide the document prescribed in Section 17 of the VAT Act in support of its supplies, and nothing more. It is not obliged to provides documents that are not in its control or custody. This was the position in TAT 187 of 2018. Ukwala Supermarkets vs Commissioner of Domestic Taxes where the same Tribunal held that:“…All that a taxpayer is required to do is provide proper documentation in support of supplies and sales as original tax invoices, customs receipts, local purchase orders, delivery notes and credit notes among others…”

46. Given the foregoing, the Tribunal hereby finds and holds that that the Respondent erred in disallowing the Appellant’s input tax claim.

FINAL DECISION 47. The Tribunal on the basis of the foregoing analysis finds that the Appeal is merited and accordingly proceeds to make the following Orders:-a.The Appeal is hereby allowed.b.That the Objection decision dated 7th October 2022 be and is hereby set aside.c.Each party is to bear its own costs.

48. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF DECEMBER, 2023. ERIC NYONGESA WAFULA.............CHAIRMANDR. RODNEY O. OLUOCH.......... MEMBERABRAHAM K. KIPROTICH..........MEMBERCYNTHIA B. MAYAKA .................MEMBEREUNICE NG’ANG’A........................MEMBERBERNADETTE GITARI..................MEMBER