[2024] KETAT 277 (KLR)

TP Kenya Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal 1389 of 2022) [2024] KETAT 277 (KLR) (Civ) (8 March 2024) (Judgment)

Neutral citation: [2024] KETAT 277 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal 1389 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

March 8, 2024

Between

TP Kenya Limited

Appellant

and

The Commissioner of Legal Services and Board Coordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and a subsidiary of Tanzania printers based in Tanzania, it deals with the supply of labels specifically for soft and alcoholic drinks. The Appellant’s main customers are manufactures located in and out of Kenya.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 of the laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue. Under Section 5(2) of the Act with respect to the performance of its function under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts I and II 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 Appellant deals in taxable supplies for VAT and it charges VAT at 16% for local supplies and 0% for exported goods. The Appellant lodged a VAT refund application for the said period amounting to Kshs 22,036,291. 00 vide reference number KRA202118613626 on 8th September 2021 pursuant to the provisions of Section 17 (5) (a) & (d) of the VAT Act, No. 35 of 2013 (hereinafter ‘VAT Act’).

4. Thereafter, the Appellant was requested by the Respondent to provide copies of sales and purchase invoices and ledgers, copy of contracts. export entries, and certificates of exports to aid in validation of the refunds vide a letter dated 2nd November, 2021.

5. That vide an electronic mail dated 15th November, 2021, the Appellant shared the requested documents with the Respondent through its tax consultant. This resulted in the Respondent requesting for a field visit vide an electronic mail dated 30th November, 2021 so as to understand the Appellant’s business operations. Subsequently, the Respondent visited the Appellant’s premises on 8th December, 2021 when the Appellant took it through its various business processes as well as an overview of the production processes of the labels.

6. In addition, the Appellant provided further clarifications with regards to the lodged VAT refunds and the Respondent requested for additional supporting documents including the certificate of origin for the exports made by the Appellant, import and export documents and the asset schedule for the VAT refund verification procedure which the Appellant provided vide an electronic mail dated 14th December, 2021. However, on 22nd August 2022 through i-tax with an email notification to the Appellant, the Respondent rejected the VAT refund application lodged by the Appellant citing findings of an audit report from its T50 RAC East and South of Nairobi which identified issues of non-compliance with return filing. It also reinstated the VAT credits amounting to Kshs 22,036,291. 00 in the Appellant's VAT returns by issuing credit adjustment vouchers for the tax periods November 2019, March 2020, and January 2021 to June 2021.

7. The Appellant objected to the Respondent’s decision vide a notice of objection dated 21st September, 2020 pursuant to Section 51(2) of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’) and the Respondent issued its objection decision vide a letter dated 3rd October, 2022 advising the Appellant to seek redress at the Tribunal in line with the provisions of Section 47 of the TPA as amended by the Finance Act, 2022.

8. Being dissatisfied with the Respondent’s objection decision, the Appellant filed a Notice of Appeal dated 2nd November, 2022 against the said decision.

The Appeal 9. The Appellant’s Memorandum of Appeal dated 16th November, 2022 and filed on 17th November, 2022 was premised on the following grounds: -i.That the Respondent erred in law and fact by rejecting the VAT refund application and issuing credit adjustment vouchers of KShs. 22,036,291. 00 which was validly lodged;ii.That the Respondent erred in law and fact by insinuating that corporate income tax returns filing is a pre-requisite to allowing a VAT refund application;iii.That the Respondent contravened the provisions of the TPA, the Constitution of Kenya, 2010 (hereinafter ‘the Constitution’) and the Fair Administrative Actions Act, No. 4 of 2015 (hereinafter ‘FAA’) by failing to furnish the Appellant with sufficient reasons for its decision and the findings from the review of refund application; andiv.That the Respondent’s action is prejudicial and unfair to the Appellant.

Appellant’s Case 10. The Appeal is anchored on the Appellant’s Statement of Facts dated 16th November, 2022 and filed on 17th November, 2022.

11. The Appellant contended that being aggrieved by the Respondent's decision, it lodged this Appeal against the entire assessment and had additional grounds of Appeal in its Statement of Facts as follows:-a.That the VAT credits were incurred by the Appellant in furtherance of zero-rated supplies and are therefore due and payable to the Appellant as stipulated under Section 17(5) of the VAT Act and Regulation 8(1) of the VAT Regulations, 2017. b.That the Respondent did not provide findings of its audit and details of the returns not complied with. In fact, the Appellant is compliant with filing all its returns save for Corporate income tax returns for 2020 and 2021 years of income that are in progress. Failure to file Corporate income tax returns is not a requirement for approval of a VAT refund. The criteria of obtaining a VAT refund is clearly stipulated under Section 17(5) of the VAT Act as follows;i.A taxpayer should be in an excess input VAT (VAT credit) position.ii.The excess input VAT ought to have arisen from:making zero rated supplies

tax withheld by appointed tax withholding agentsiii.the registered person lodges the claim for the refund of the excess tax within twenty-four months from the date the tax becomes due and payable.c.That the Respondent invalidly rejected the application for refund of VAT credits by failing to furnish the Appellant with a statement of reasons of rejection of the application pursuant to Section 49 of the TPA but only attributed the rejection to issues of non-compliance with returns filing. The Respondent did not provide further details which is prejudicial and unfair to the Appellant.

12. The Appellant asserted that in the ordinary course of its business, it purchases products, and services such as raw materials, stationery, security services. internet. postage services, professional services etc. The Appellant deposed that it is registered for VAT and makes both standard rated and zero-rated taxable supplies. Pursuant to the provisions of Section 17(1) of the VAT Act, the Appellant claimed input VAT incurred in the making of taxable supplies. The said Section provides, inter alia, 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."

13. Further, Section 17(5) (a) & (d) of the VAT Act provides that where a registered person has accumulated excess input VAT emanating from making zero-rated supplies, the Respondent shall pay the excess tax credits to the registered person, provided that the registered person makes an application for a refund within 24 months from the date the tax became due and payable. The Appellant contended that the excess input tax credits arose from the making of zero-rated supplies from exportation of goods as stipulated under Paragraph 1, Part 1 of the Second Schedule to the VAT Act.

14. That in addition, the Appellant provided the Respondent with the requisite information and documentation supporting the exportation of goods to customers located outside Kenya as stipulated under Regulation 13(2) of the VAT Regulations, 2017 and the Respondent did not dispute any of the support documentation shared for review neither did it dispute the validity of the VAT refund amount. It was stated by the Appellant that the Respondent cited non-compliance with filing of returns as the basis for rejecting its application for tax refund without stating which of the Appellant's returns had a non-compliance issue. Nevertheless, the Appellant acknowledged that it was yet to submit its Corporate income tax returns for the years of income 2020 and 2021 as the statutory audit on which the Appellant’s Corporate income tax self-assessment returns process was based was still ongoing and was scheduled to be completed on 31st December, 2022.

15. That in any event, non-filing of the corporate income tax returns is not part of the requirements/conditions set out under Section 17(5) of the VAT Act that ought to be met for the Respondent to refund VAT credits to a registered person. The Appellant cited the case of Commission of Income Taxes v Madho Prasad Jatia [1976] 105 ITR 179 (SC), and as adopted by various courts in Kenya, where it was held that it is an established position of law that in a taxing statute if the provisions of a taxing statute are clear and unambiguous, full effect must be given to them irrespective of any consideration of equity. One must look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. It further held that "where however, the provisions are couched in a language which is not free from ambiguity and admits of two interpretations, a view which is favourable to the taxpayer should be adopted. The fact that such an interpretation is also in consonance with ordinary notions of equity and fairness would further fortify the court in adopting such a course."

16. That the above case was affirmed in the National Bank of Kenya Limited v the Commissioner of Domestic Taxes, (Income Tax Appeal E55 & 533 of 2020) where the High Court stated as follows;“...tax statutes are to be construed strictly. There is no room for intendment or presumption. In construing tax statutes, the court has to ascertain the clear intention of Parliament. The Court should avoid the construction that will lead to an injustice of absurdity. Further, the construction should use the plain and literal meaning of the words used in the statute to discern the intention of parliament. [Paragraph 48] “

17. The Appellant averred that if it was the intention of the law that a registered person complies with all its tax returns filings to be eligible for a claim of VAT refunds, this would have been explicitly provided within the VAT Act as part of the requirements. Therefore, the Respondent contravened the provisions of the VAT Act in rejecting the refund application on grounds of non-compliance with returns filing. It further averred that Section 49 of the TPA requires the Respondent to issue a notice of refusal of an application under a tax law with a statement of reasons for the refusal.

18. In this case, the Respondent did not provide clear and valid reasons for the refusal of the refund application. The reason provided by the Respondent on non-compliance with filing returns is not supported in law and is thus 'ultra vires'. To this end, the appellant relied on the case of Sceneries Limited v National Land Commission [2017] eKLR, Misc. Constitutional Application No. 1 of 2016 where the High Court emphasized that the right to be heard involves provision of sufficient information, at least that which an administrative body relied upon in making its decision. In light of the foregoing, the Appellant stated that the Respondent had no valid and legal grounds for rejection of the VAT refund application lodged by Appellant.

Appellant’s Prayers 19. The Appellant’s prayed that the Tribunal would: -a.Uphold the objection filed by the Appellant that the Respondent should process the VAT refunds lodged;b.Set aside and annuls the objection decision by the Respondent;c.Award the costs of this Appeal to the Appellant; andd.Any other remedies that the it deemed just and reasonable.

Respondent’s Case 20. The Respondent opposed the instant Appeal vide its Statement of Facts dated and filed on 16th December, 2022. It averred that: -

21. The Respondent averred that in a bid to validate the Appellant’s VAT refund, it requested the Appellant with requisite documents, which the Appellant provided. However, the documents were not sufficient to reconcile the variances noted.

22. The Respondent relied on Section 59 (l) of the TPA which requires the Appellant to provide records to enable the Respondent determine its tax liability. The Respondent was subsequently compelled to reject the Appellant’s VAT refund application because of the Appellant’s failure to avail its records. Section 59 (1) provides as follows:-“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 law, the Commissioner or an authorized 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 person's custody or under the person's control relating to the tax liability of any person;b.furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; orc.attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person.”

23. The Respondent stated that pursuant to Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act, No. 40 of 2013 (hereinafter ‘TAT’) the burden of proof lies on the Appellant to demonstrate that it has discharged its tax liability. The Respondent stated that this burden was never discharged as insufficient evidence was availed to the Respondent for the tax periods in question to enable it render a meritorious decision in the circumstances.

24. The Respondent further relied on the provisions of Section 31 (l) of the TPA which provides as follows:“(1)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…”

25. That the Respondent’s decision was informed by Section 31 of the TPA which requires it to be guided by the information available and best judgment. The Respondent’s decision was in line with Section 42 of the Finance Act, 2022 which repealed Section 47 of the TPA and replaced the same with a new Section.

26. The Respondent stated that the reasons for rejection of refund was given which was indicated as the audit report which identified issues of non-compliance with return filing. That the reason for rejection of refunds by the Respondent was in accordance with Section 47 (4) & (5) of the TPA as amended by Section 42 of the Finance Act, 2022.

27. The Respondent therefore stated that the VAT assessment was proper and should be upheld by this Tribunal.

Respondent’s Prayers 28. In conclusion, the Respondent prayed that the Tribunal would consider the case and:a.Uphold the Respondent’s assessments as proper and in conformity with the provisions of the law; andb.Dismiss the Appeal with costs to the Respondent as the same was devoid of any merit.

Parties’ Written Submissions 29. The instant Appeal was canvassed by way of written submissions, whereas the Appellant’s submissions dated 9th June 2023 were filed on 12th June 2023, the Respondents’ submissions dated 30th June, 2023 were filed on 1st July, 2023.

30. The Appellant submitted that it is registered for VAT and deals in both standard rated and zero-rated taxable supplies. It cited the provisions of Section 17(1) & 17(5) (a) and (d) of the VAT Act and further submitted that it claimed input VAT incurred in the making of taxable supplies, the excess input tax credits arose from the making of zero-rated supplies which included exportation of goods as stipulated under Paragraph 1, Part 1 of the Second Schedule to the VAT Act. The Appellant relied on the case of Alliance One Tobacco (Kenya) Ltd v Commissioner Domestic Taxes TAT No. 258 of 2018 and Regulation 13(2) of the VAT Regulations, 2017 and further submitted that it provided the Respondent with the requisite information and documentation supporting the exportation of goods (printed labels tailormade to the customer's needs) to customers located outside Kenya.

31. That the Respondent did not dispute any of the support documentation shared for review neither did it dispute the validity of the VAT refund amount, but nonetheless proceeded to reject the Appellant’s application on grounds that the Appellant was non-compliant with filing of its returns. In addition, the Respondent failed to furnish the Appellant with a proper statement of reasons of rejection of the Appellant’s application for VAT refund as provided for under Section 49 of the TPA. To this end, the Appellant relied on the case of Sceneries Limited v National Land Commission [2017] eKLR, where the High Court emphasized that the right to be heard involves provision of sufficient information at least that which an administrative body relied upon in making the decision.

32. The Appellant referred to the provisions of Section 17(5) of the VAT Act which provides the criteria for the entitlement of a VAT refund and stated that filing of Corporate income tax returns is not one of the requirements that ought to be met for the Commissioner to refund VAT credits to a registered person. It further referred to the provisions of Section 83 of the TPA which prescribes the penal sanction for the late submission of a return as five per cent of the amount of tax payable under the return or twenty thousand shillings, whichever is the higher and in reliance to the case of Highlands Mineral Water Limited v Commissioner of Domestic Taxes [2021] eKLR it asserted that the Respondent has no power to impose any further penalty against the taxpayer.

33. In submitting that in the interpretation of tax statutes the provisions must be strictly construed, the Appellant cited the case of Cape Brandy Syndicate v l.R. Commissioners [1921] 1KB, Commission of Income Taxes v Madho Prasad Jatia [1976] 105 lTR 179 (SC) and National Bank of Kenya Limited v the Commissioner of Domestic Taxes, (Income Tax Appeal E155 & 533 of 2020). In light of the foregoing, the Appellant submitted that the Respondent erred in law by heading to extraneous considerations in considering a refund application hence its decision should be set aside.

34. The Appellant referred the Tribunal to the Respondent's letter of notice of intention to verify tax refund claim dated 2nd November 2021 and to the Minutes of the physical meeting held at the Appellant's premises on 8th December 2021 and contended that at no point did the Respondent request for stock records. Further, the Respondent did not communicate existence of the variances between the Appellant's customs data and VAT declarations as alleged at Paragraph 6 of the Respondent’s Statement of Facts so as to afford the Appellant an opportunity to respond to it. The Appellant asserted that Section 59 of the TPA is couched in clear and mandatory terms to the effect that the taxpayer’s obligation to produce records is upon the receipt of a notice of request in writing from the Respondent, the taxpayer has no obligation to determine what records would be required by the Respondent.

35. The Appellant relied on the Court’s holding in the case of Commissioner of Domestic Taxes v Bank of Africa Limited (Civil Appeal E127 of 2020) [2023] KEHC 1036 (KLR) where it was held that raising of new issues in the latter stages of the appeal process was prejudicial to the taxpayer and a denial of its right to sufficiently defend its case and stated that it is not only illegal but also unfair and unreasonable for the Respondent to raise issues in the appeal stage that were never raised during the tax decision and objection stages. The Appellant urged the Tribunal to find that it discharged its burden of proof.

36. On its part, the Respondent filed its submissions dated 30th June 2023 on 1st July 2023 wherein it gave reasons for rejecting the Appellant’s VAT refund in its decision as required under Section 47(3) of the TPA. It also relied on the provisions of Section 47 (1), (2), (3) & (5) of the TPA and submitted that the Respondent was well within its mandate in submitting the validity of the refund claim to an audit, and rejecting the refund on grounds that the Appellant was non-compliant with filing of its returns as it is unable to ascertain the amount of payment to be refunded to the Appellant.

37. It was stated by the Respondent that the Appellant’s refund claim was analyzed and recommended for rejection following the audit report findings which examined the structures/agreements governing the related companies, company’s CR-12, asset schedule, certificate of origin (for the relevant exports) and the import and export documents. The Respondent averred that the Appellant submitted some documents but failed to furnish the Respondent with stock records. Further, the Respondent noted variances between exports as per custom data and VAT declarations.

38. In the end, the Respondent relied on the holding by the South African Supreme Court in Metcash Trading Limited v Commissioner for the South African Revenue Services and Another Case CCT 3/2000, the case of Pearson v Belcher CH.M Inspector of Taxes) Tax Cases Volume 38 which was referred to by Justice D.S. Majanja in PZ Cussons East Africa Limited v Kenya Revenue Authority [2013] eKLR, and Section 56 of the TPA which provides that the burden shall be on the Appellant to prove that a tax decision is incorrect and concluded that the Appellant did not furnish sufficient proof to defend its position and to allow the refund application,

39. The Respondent relied on the case of Commissioner of Domestic Taxes v Altech Stream (EA) Limited [2021] eKLR and asserted that it relied on its own best judgement based on information available to it in compliance with Section 31 of the TPA while rejecting the Applicant’s claim for refund.

Issues for Determination 40. Upon consideration of the instant Appeal, the Statements of Facts filed by the parties herein and the written submissions by Counsels for parties, the Tribunal is of the view that the issues that arise for determination are: -i.Whether the Respondent’s notice of refusal of the Appellant’s application complied with the law;ii.Whether the Respondent’s rejection of the Appellant’s application for VAT refund was justified

Analysis And Determination a. Whether the Respondent’s notice of refusal of the Appellant’s application was sufficient. 41. The Tribunal finds that the Appellant’s case is that it had accumulated excess input tax relating to tax periods November 2019, March 2020 and January to June 2021 from making zero-rated supplies due to exported supplies. As a result, vide a letter dated 8th September, 2021 the Appellant lodged a VAT refund application for the said period amounting to Kshs. 22,036,291. 00 pursuant to the provisions of Section 17 (1) and (5) (a) & (d) of the VAT Act.

42. The Tribunal further finds that the Appellant provided the Respondent with additional documents in support of its application as requested by the Respondent such as copies of sales and purchase invoices and ledgers, copy of contracts, export entries, certificates of exports, the certificate of origin for the exports made by the Appellant, import and export documents and the asset schedule for the VAT refund verification procedure to aid in validation of the refunds, and conducted a field visit on 8th December, 2021 during which time it provided the Respondent with further clarification with regards to the lodged VAT refunds.

43. The Tribunal notes that inspite of the foregoing, the Respondent rejected the Appellant’s VAT refund application on 22nd August, 2022 on ground that there were issues of non-compliance with return filing and proceeded to reinstate the VAT credits of Kshs. 22,036,291. 00 by issuing credit adjustment vouchers for the tax periods November 2019, March 2020 and January to June 2021.

44. The Tribunal also finds that although the Appellant objected to the said decision on 21st September, 2021, the Respondent vide an Objection decision dated 3rd October, 2022 advised it to seek redress at the Tribunal.

45. The Tribunal finds it noteworthy from the documents filed by the Respondent that the Respondent neither disputed the validity of the VAT refund amount nor any of the documentation provided by the Appellant in support of its application for VAT refund as requested by the Respondent. The above notwithstanding, the Respondent rejected the Appellant’s refund application for reasons that it was non-compliant with filing of its returns. Section 49 of the TPA makes provision for a statement of reasons it states that –“Where the Commissioner has refused an application under a tax law, the notice of refusal shall include a statement of reasons for the refusal.”

46. The Tribunal finds that upon perusal of the Respondent’s notice for rejection of the Appellant’s VAT refund application which was communicated to the Appellant vide an email sent on 22nd August, 2022, it is noteworthy that it had a Section which read as follows: -“The reason(s) for rejection are;Rejected as per the audit report from TSO RAC East & South of Nairobi, which identified issues of non-compliance with return filing.”

47. In view of the foregoing this Tribunal finds and holds that the Respondent provided clear reasons for the rejection/refusal of the Appellant’s VAT refund application. Further, the Tribunal finds that the Respondent’s notice for rejection was in compliance with the provisions of Section 49 of the TPA. Tax Procedures Act.

b. Whether the Respondent’s rejection of the Appellant’s Application for VAT refund was justified 48. Section 17(5) of the VAT Act, 2013 sets out conditions/requirements precedent for grant of an application for VAT Tax refunds. It states as hereunder:-“Where the amount of input tax that may be deducted by a registered person under subsection (1) in respect of a tax period exceeds the amount of output tax due for the period, the amount of the excess shall be carried forward as input tax deductible in the next tax period:Provided that any such excess shall be paid to the registered person by the Commissioner where -a.such excess arises from making zero rated supplies; orb.such excess arises from tax withheld by appointed tax withholding agents; andc.such excess arising out of tax withheld by appointed tax withholding agents may be applied against any tax payable under this Act or any other written law, or is due for refund pursuant to section 47(4) of the Tax Procedures Act, 2015;d.the registered person lodges the claim for the refund of the excess tax within twenty-four months from the date the tax becomes due and payable; ande.such excess arises from input tax under subsection (8):Provided further that a registered person who, since the commencement of subsection (8) but before the commencement of this provision, has a credit arising from input tax under subsection (8) may apply for the refund of excess tax within twelve months from the commencement of this provision.Provided further that, notwithstanding section 17(5)(d), a registered person who, within a period of thirty-six months prior to the commencement of section 17(5)(b) and (c), has a credit arising from withholding tax, may make an application for a refund of the excess tax within twelve months from the commencement date.”

49. From the foregoing, it is clear that in order to qualify for a VAT tax refund, the tax payer has to demonstrate that its input tax that may be deducted for a certain tax period exceeds the amount of output tax due for the said period, the excess arises from inter alia making zero rated taxable supplies, and the taxpayer lodges the said claim for refund of the excess tax within twenty-four months from the date the tax becomes due and payable. These are the only requirements to be fulfilled by a taxpayer to warrant a VAT tax refund.

50. It is trite that tax statutes must be interpreted strictly, leaving no room for intendment or implication. This view was summarized by Nyamu JA. in Stanbic Bank Kenya Limited v Kenya Revenue Authority CA Civil Appeal No. 77 of 2008 [2009] eKLR as follows -“In my interpretation of the law, it is quite evident that I have not sought any assistance from outside a dictionary in ordinary use. Moreover, I have not strained the meaning of the words in order to achieve any particular result. I have simply adopted the ordinary meaning of the words used in the relevant tax statute. This is because as regards tax law the issue of intention or intendment does not arise. If there is any ambiguity, and I did not detect any in my analysis, the same must be construed in favour of the tax payer. In tax law, the converse is also true that if the meaning is clear, that tax is chargeable, the issue of what was intended is not the function of the court and where tax liability is expressed and located by law the courts must uphold the taxman’s position.”

51. From the foregoing, it is evident that compliance or non-compliance with return filing is not a factor to be considered by the Respondent in determining whether to allow a taxpayer’s application for VAT tax refund made pursuant to the provisions of Section 17(5) of the VAT Act. At this point, it is important to note that the Appellant acknowledged the fact that at that point in time it was yet to submit its corporate income tax returns for the years of income 2020 and 2021.

52. This therefore begs the question of whether the Respondent was justified in rejecting the Appellant’s application for VAT tax refund on ground that the Appellant had not submitted its Corporate income tax returns for the years of income 2020 and 2021 bearing in mind that the Respondent neither disputed the validity of the VAT refund amount nor any of the documentation provided by the Appellant in support of its application for VAT refund.

53. The Tribunal is of the considered view that the Respondent was not justified to do so as it is not one of the consequences provided for under Section 83 of the Tax Procedures Act which provides for late submission penalty as follows –“(1)A person who submits a tax return after the due date shall be liable to a penalty-a.of twenty five percent of the tax due or ten thousand shillings whichever is higher, if it is in relation to a return required to be submitted on account of employment income;b.one thousand shillings if it is in relation to a return required to be submitted under Turnover Tax; orc.five per cent of the amount of tax payable under the return or ten thousand shillings, whichever is the higher, if it is in relation to value added tax or excise duty;d.in any other case-i.five per cent of the amount of tax payable under the return or twenty thousand shillings, whichever is the higher, in respect of a person other than an individual; orii.five per cent of the amount of tax payable under the return or two thousand shillings, whichever is the higher, for an individual:Provided that in the calculation of the late submission penalty for purposes of this section, the amount of tax payable or due under the return shall be reduced by the amounts already paid and withholding tax credits.(2)A person who fails to submit a document, other than a tax return, as required under a tax law by the due date shall be liable to a penalty of one thousand shillings for each day or part day of default but the total penalty shall not exceed fifty thousand shillings…”

54. In the case of Highlands Mineral Water Limited v Commissioner of Domestic Taxes [2021] eKLR cited by the Appellant the Court in addressing the consequences for late submission of tax returns held that –“Neither section 17 nor section 44 of the VAT Act permit the Commissioner to disallow input VAT claim on the ground that the VAT Return was filed outside the period permitted. The Commissioner’s power is limited to allowing an extension of time for filing the return upon an application whose effect is to relieve the Taxpayer from the penalty or accept the return and demand the appropriate penalty.”(Emphasis added)

55. Accordingly, the Tribunal finds that compliance with return filing is not a pre-condition for the grant of VAT refunds. Therefore, the Respondent erred by rejecting the Appellant’s application for VAT refund on this ground.

56. It is now settled law that the burden of proving that an additional assessment is wrong lies with the taxpayer pursuant to the provisions of Section 56(1) of the Tax Procedures Act. The Appellant’s case is that it had accumulated excess input tax relating to tax periods November 2019, March 2020 and January to June 2021 from making zero-rated supplies due to exported supplies. As a result, vide a letter dated 8th September, 2021 it lodged a VAT refund application for the said period amounting to Kshs. 22,036,291. 00 pursuant to the provisions of Section 17 (1) and (5) (a) & (d) of the VAT Act, 2013.

57. Thereafter, the Respondent requested the Appellant to provide copies of sales and purchase invoices and ledgers, copy of contracts, export entries, and certificates of exports to aid in validation of the refunds vide a letter dated 2nd November, 2021 and the Appellant complied by providing the said documents vide an email dated 16th November, 2021 through its tax consultant. The Appellant went a step further and honoured the Respondent’s request for a site visit which was conducted on 8th December, 2021.

58. During this visit, the Appellant provided the Respondent with further clarification with regards to the lodged VAT refunds and additional supporting documents such as the certificate of origin for the exports made by the Appellant, import and export documents and the asset schedule for the VAT refund verification procedure vide an email dated 14th December, 2021 as requested by the Respondent. However, inspite of the foregoing, the Respondent rejected the Appellant’s VAT refund application on 22nd August, 2022 on ground that there were issues of non-compliance with return filing and proceeded to reinstate the VAT credits of Kshs. 22,036,291. 00 by issuing credit adjustment vouchers for the tax periods November 2019, March 2020 and January to June 2021. The Appellant objected to the said decision on 21st September, 2021 but the Respondent vide an objection decision dated 3rd October, 2022 advised it to seek redress at the Tribunal.

59. The Respondent submitted that in a bid to validate the Appellant’s VAT refund, it requested the Appellant to supply it with requisite documents. However, in as much as the Appellant complied with this request and submitted some documents, it failed to furnish the Respondent with stock records. In addition, the Respondent noted variances between exports as per custom data and VAT declarations but the documents provided and/or supplied by the Appellant were not sufficient to reconcile the variances noted. As a result, the Respondent relied on the provisions of Section 59 (l) of the TPA Tax Procedure Act 2015 and stated that it was compelled to reject the Appellant’s VAT refund application for failure to avail records by the Appellant. It was stated by the Respondent that the Appellant did not discharge its burden of proof as provided for under Section 56 of the TPA Tax Procedures Act and Section 30 of the TAT Tax Appeals Tribunal Act,

60. The Appellant on the other hand submitted that at no point did the Respondent request for the stock records neither did it communicate the existence of the variance between the Appellant’s Customs data and VAT declarations so as to afford the Appellant an opportunity to respond to the same. For this reason, the Appellant contended that it not only complied with the provisions of Section 59 of the Tax Procedures Act but it also discharged its burden of proof as provided for under Section 56 of the Tax Procedures Act. Section 59 of the Tax Procedures Act 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 person's custody or under the person's control relating to the tax liability of any person;b.furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; orc.attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person.(2)If the person required to produce documents under subsection (1)(a) is a financial institution-a.the documents shall not, while they are being examined, be removed from the premises of the financial institution or other premises at which they are produced;b.the Commissioner or authorised officer carrying out the examination may make copies of such documents for the purposes of any report relating to the examination; andc.the confidentiality of the information obtained in the course of the examination by the Commissioner or authorised officer shall be maintained and the information shall be used solely for the purposes of the tax laws.(3)The Commissioner or authorised officer may require that the information referred to in subsection (1) be-a.given on oath, verbally or in writing, and, for that purpose, the Commissioner or authorised officer may administer the oath; orb.verified by a statutory declaration or in any other manner that the Commissioner may prescribe…”

61. Upon perusal of the e-mail communication between the Appellant’s tax consultant and the Respondent, and all other documentary evidence annexed to the Appellant’s Statement of Facts, it is clear that at no point did the Respondent request the Appellant to provide stock records neither did it communicate the existence of the variance between the Appellant’s Customs data and VAT declarations to the Appellant for the Appellant to respond to the said allegation. Further, it is evident that the Appellant provided and/or supplied all the documents requested by the Respondent in compliance with the provisions of Section 59 of the Tax Procedures Act thus discharging its burden of proof as provided for under Section 56 of the Tax Procedures Act.

62. The Tribunal is guided by the decision in Commissioner of Taxes v Galaxy Tools Ltd [2021] eKLR where the Court held that: -“With greatest respect, the Tribunal got it wrong. What the Respondent had done by producing the invoices, the delivery notes and payment schedules was only prima facie evidence of purchase. On producing the said documents, the evidentiary burden of proof shifted to the appellant. The appellant in answer not only queried the said documents but informed the Tribunal that; he had carried investigations on the alleged suppliers and concluded that they never existed, that there was no supply of any goods at all. That the documents produced did not contain critical details to support any reasonable commercial transaction. All this was laid before the Tribunal.”

63. Seeing that the Respondent requested the Appellant to provide/avail certain documents at different intervals and the Appellant complied, the Tribunal is of the view that if the Respondent felt that the Appellant should provide stock records to aid in its verification of the Appellant’s refund claims, it should have requested for them. In addition, if the Respondent needed clarification of the variance between the Appellant’s Customs data and VAT declarations, it should have sought for it from the Appellant. As a result of the foregoing, the Tribunal finds that the evidentiary burden of proof shifted back to the Respondent to show that the Appellant failed to comply with its request for production of documents in support of its application for VAT refund, which burden was not discharged by the Respondent.

64. In the circumstances, it is the Tribunal’s finding that the Respondent erred in law and in fact in disallowing the Appellant’s application for VAT refund. Consequently, the Tribunal finds and holds that the Respondent’s rejection of the Appellant’s application for VAT refund was not justified.

Final Decision 65. The upshot of the above is that the Appeal is merited and the Tribunal accordingly proceeds to make the following orders: -a.The Appeal be and is hereby is allowedb.The Respondent’s Objection decision dated 3rd October, 2022 is hereby set aside and its decision dated 22nd August, 2022 disallowing the refund claim of Kshs. 22,036,291. 00 is hereby annulledc.The Respondent to process the Appellant’s refund claim within Ninety (90) days from the date of delivery of this Judgmentd.Each party to bear its own costs

66. Orders accordingly.

DATED AND DELIVERED AT NAIROBI ON THIS 8TH DAY OF MARCH, 2024ERIC NYONGESA WAFULA - CHAIRMANDELILAH K. NGALA - MEMBERCHRISTINE A. MUGA - MEMBERGEORGE KASHINDI - MEMBERMOHAMED A. DIRIYE - MEMBERSPENCER S. OLOLCHIKE - MEMBER