[2024] KETAT 37 (KLR)

Unitron Limited v Commissioner of Domestic Taxes (Appeal 1135 of 2022) [2024] KETAT 37 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 37 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1135 of 2022

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

January 26, 2024

Between

Unitron Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and a registered tax payer whose principal activity is the sale of motor vehicle parts and accessories.

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 revenue. Further, 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 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. On 15th November 2019 the Respondent raised additional assessment on VAT of the Appellant for various months from 2015 to 2018 amounting to Ksh.12,846,789. 00.

4. Vide a letter dated 18th March 2021, the Appellant objected to the Respondent's decision which was validated on 7th October 2021.

5. The Respondent issued an Objection decision dated 10th November,2021.

6. Dissatisfied with the Respondent’s objection decision contained in the 10th November 2021 letter, the Appellant lodged this Appeal dated 30th September 2022.

The Appeal 7. The Appeal as contained in the Memorandum of Appeal dated 30th September 2022 and filed with the Tribunal on 7th October 2022 raised the following grounds of appeal:i.The Respondent did not take into accounts the credits or advance payments hence the demanded amount is disputed.ii.Reconciliation is currently being carried out at the station by the Accounts Manager/Debt to come to the actual amount.iii.Urgency Notices issued by the Commissioner should be withdrawn until the reconciliation is completediv.The Tribunal is therefore requested to allow the matter to proceed ADR process.

The Appellant’s Case 8. The Appellant’s case is premised on its Statement of Facts filed on 7th October 2022 and written submissions filed on 22nd May, 2022.

9. The Appellant stated that the Respondent issued it with an Objection decision on the grounds of insufficient documents despite providing all documents requested by the Respondent.

10. The Appellant stated that by not receiving and reviewing the documents provided after an ADR meeting and agreement, the Respondent has infringed on its rights as enshrined in the Constitution and the rights to appeal as provided for under Section 52 of the Tax Procedures Act No. 29 of 2015(hereinafter ‘TPA’).

11. The Appellant submitted that the Respondent failed to realize that the only lawful obligation the Appellant has is to check that it purchases goods from a VAT registered supplier and that the supplier has a registered ETR register.

12. Consequently, the Appellant raised the following issues for determination and went ahead to expound on each one of them separately.i.Whether the Respondent erred in its decision to invalidate objection by the Appellantii.Whether the Respondent’s invalidation dated 10th November, 2021 is proper and in conformity with the lawiii.Whether the Respondent was right to decline an ADR process after agreeing to do so in an ADR meeting without stating any compelling reasons

Whether the Respondent erred in its decision to invalidate objection by the Appellant 13. The Appellant submitted that the Respondent erred in its decision to invalidate an objection submitted in strict adherence to the taxation laws of Kenya.

14. To buttress its case, the Appellant relied on Section 51(3) of the TPA which provides as follows:“... a notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if:(a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; and(b)in relation to the objection to an assessment, the taxpayer has paid the entire amounts of tax due under the assessment that is not in dispute or as an applied for an extension of time to pay the tax not in dispute under sec 33(1)(c)all the relevant documents relating to the objection have been submitted.’

15. The Appellant relied on Section 51 (4) of the TPA, 2015 which provides that:“Where the commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged (within fourteen days) the commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged."

16. The Appellant submitted that it is a common principle that where deadlines are expressly given in the law, no other meaning is to be given to that particular Section of the Act by either the Appellant or the Respondent as was observed by Lord Donovan in Mangin vs. Inland Revenue Commissioner (1971) AC 739 as follows:-“The words are to be given their ordinary meanings. They are not to be given some other meaning simply because their object is to frustrate legitimate tax avoidance devices”

17. The Appellant stated that the Respondent should have issued the assessments on the basis of sound reason and explanation that is provided to the Appellant.

18. It is the Appellant’s submission that the words of the Act are clear and unambiguous and therefore the Respondent can only give an objection decision and not an invalidation notice.

Whether the Respondent's invalidation dated 10th November, 2021 is proper and in conformity with the law? 19. The Appellant averred that at the objections stage, it provided all relevant documents pursuant to Section 51(3)(c) of the TPA, 2015 that provides as follows:-“... all the relevant documents relating to the objection have been submitted..."

20. The Appellant submitted that the Respondent failed to review and or ask for further documentation during review hence the Appellant was convinced that the documentation was sufficient for the review.

21. It is the Appellant’s submission that the Respondent’s failure to review the documents within the stipulated timeline as well as its failure to give compelling reasons deemed the Appellant’s Appeal allowed.

22. The Appellant submitted that the taxation process and even the review process should be consultative in line with the principles of fair administrative action enshrined in the Constitution of Kenya and quoted Article 47(1) and (2) of the Constitution which provides as follows:“(1)Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair.(2)If a right or fundamental freedom of a person has been or is likely to be adversely affected by administrative action, the person has the right to be given written reasons for the action.”

23. The Appellant submitted that the Respondent did not shown in any instant that it informed it of invalidity of its objection even though the Respondent averred that the Appellant failed to provide relevant documents to validate its objection as provided for pursuant to Section 51(3)(c) of the TPA.

24. The Appellant stated that the Respondent erred in asking confirmation of the suppliers through the Appellant as those suppliers are registered taxpayers by the Respondent.

25. The Appellant further relied on Section I07 of the Evidence Act which in particular states as follows:-“(l)Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist. When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person"

26. The Appellant quoted the case of the Republic -Vs- National Land Commission & 2 Other Ex-parte Archdiocese of Nairobi Kenya Registered Trustees (St Joseph Mukasa Catholic Church Kahawa West (2018) eKLR in which Justice G. V. Odunga observed that:-“... In my opinion, the Respondent's action did not meet the tenets of a fair administrative action. This is not to say that the Applicant's action was lawful or valid. That is not a matter for determination by this Court. However, the process of arriving at the Respondent's decision was flawed right from inception …’’

27. The Appellant further relied on the following cases:i.Republic Vs Kenya Revenue Authority Exparte Yaya Towers Limited [2008] eKLR Mungangia Tea Factory Company Limited & Others Vs Commissioner of Domestic Taxes [2020] eKLR,ii.Westminster Corporation Vs London and Northwestern Rail Co. [1906] AC 426 at p 430, Lord Macnaughteniii.Shreeji Enterprises (K)-Vs- Commissioner of Domestic Taxesiv.Ernie Campbell & Co(K) Ltd vs Commissioner of Domestic Taxes

28. The Appellant in concluding its submission averred that the Respondent’s assessment violated express provisions of the Income Tax Act (ITA), and Section 61(4) and (11) of the TPA.

Whether the Respondent was right to decline an ADR Process after agreeing to do so in an ADR meeting without stating any compelling reasons. 29. The Appellant did not analyse this issue for determination in its written submissions.

30. The Appellant's prayer was for the Tribunal to set aside the Respondent’s objection decision.

The Respondent’s Case 31. The Respondent’s case is premised on its Statements of Facts dated and filed on 4th November 2022 and the written submissions dated 22nd March, 2022 and filed 27th April 2022. 1.That it raised automated VAT assessment on 15th November 2019 after iTax detected inconsistencies between the invoices claimed by the Appellant and those declared by its suppliers. That the Appellant objected to this decision late contrary to Section 51 of the TPA vide a letter dated 18th March 2021 which it validated on 7th October 2021.

32. That the Appellant was requested to submit documents to support its objection which it failed leading to the Respondent issuing an objection decision dated 10th November 2022.

33. The Respondent averred that there was no supply of taxable goods from six (6) of the Appellant’s suppliers with the VAT totalling to Ksh. 12,789,870. 54.

34. The Respondent therefore submitted that the main issues for determination are:i.Whether the Respondent erred in its finding that there were no purchases made by the Appellant from the various suppliers mentioned in its demand, for the tax period 2015 to 2017?ii.Whether the Respondent was justified in disallowing the Appellant's input Value Added Tax (VAT)iii.Whether the Respondent erred by confirming assessments as the Appellant did not fully support purchases.

35. The Respondent went ahead to expound on each of the three above issues as detailed below:i.Whether the Respondent erred in in its finding that there were no purchases made by the appellant from the various suppliers mentioned in its objection decision, for the tax period 2015 to 2017.

36. The Respondent submitted that the Appellant was identified as one of the beneficiaries of ‘the missing trader scheme’ which is a major VAT tax fraud scheme and an abuse of the VAT rules that takes various forms around the world depending on the legal regime under which the fraud is being executed.

37. It was the Respondent’s submission that in the fraud dubbed ‘The Missing Trader’, VAT fraud scheme, businesses, which are registered for VAT, obtain fictitious invoices. The invoices are introduced into their business purchase-records with the sole purpose of illegally reducing the rightful VAT payments. The bogus invoices are meant to illegally reduce the VAT payments registered taxpayers are supposed to comply with. The fictitious invoices are invoices generated to depict a business transaction whereas there is no actual supply and or movement of goods and services meaning that there is no commercial transaction or value.

38. The Respondent further averred that it also carried out an i-Tax analysis of the suppliers that the Appellant had purportedly bought supplies from with investigations revealing that they only existed on paper with the sole purpose of milling bogus invoices to sell to various companies at a commission.

39. The Respondent submitted that in this case, X (whose business was in selling fake invoices) would purport to have sold goods to Y and having charged him output VAT. Y would then claim input VAT on the said 'goods' when filing his returns thereby reducing his tax payable. However, since no genuine trade has taken place between X and Y, save for movement of paperwork, X will not declare anything, hence the term 'Missing Trader'. Moreover, X has no known address and is untraceable by the time Y is claiming his input VAT.

40. The Respondent submitted that “missing trader VAT fraud”, is covered by Section 66 of the Value Added Tax Act (VAT), this Section empowers the Respondent to determine the tax liability of the person who obtained such fraudulent tax benefit.

41. The Respondent stated that the Courts in the UK have developed a strong jurisprudence to combat the Missing Trader VAT fraud menace, most famously in Axel Kittel Vs Belgium; Belgium Vs Recolta Recycling Sprl (Joined cases C-439/04 and C-440/04) 2008 [BVC] 559, which is regarded as a leading authority in this area and is often quoted, where the ECJ held in Paragraph 61 of its judgment that:-“…where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.”

42. The Respondent submitted that the Appellant was unable to demonstrate to the satisfaction of the Respondent that indeed it had received the said supplies. In reaching its determination, the Respondent averred that it was guided by using the reasonable man test which is an objective test that the Respondent uses in trying to establish if the Appellant indeed was involved in a legitimate purchase of high value goods.

43. The Respondent stated that an analysis of the 'reasonable man test' (and therefore by inference or by extension a 'reasonable businessman') was offered in Healthcare At Home Limited.Vs. The Common Services Agency [2014] UKSC 49 where the Supreme Court of the United Kingdom observed as follows:-“... the behaviour of the reasonable man is not established by the evidence of witnesses, but by the application of a legal standard by the court. The court may require to be informed by evidence of circumstances which bear on its application of the standard of the reasonable man in any particular case; but it is then for the court to determine the outcome, in those circumstances, of applying that impersonal. standard.”

44. The Respondent contended that if the test is adopted by the Tribunal it will no doubt find that the Appellant was a beneficiary of a Missing Trader Tax Evasion Scheme and that this will lead to a finding that the Appellant did not purchase goods from a supply chain and that the Appellant knew or should have known that the transaction was connected to a fraud.

45. The Respondent further raised number of queries, including:-a.Is it reasonable for the Appellant to enter into a high value deal for supply of goods (stationary) with no formal contractual arrangements?b.Was the supplier newly established with minimal trading history offering to supply the goods (Stationary) cheaper than a long-established supplier?c.Is there additional paperwork to support the invoices that the Appellant sought to rely on in obtaining a tax refund? For example, were there delivery notes? Purchase orders? Inspection reports? Any logs that shows the movement of the goods into their premises?

46. The Respondent averred that the Appellant being an established business entity is highly unlikely to allow such lapses and oversights in their supply chain.

Whether the Respondent was justified in disallowing the Appellant's input value added tax (vat)? 47. It is the Respondent's position that Section 17(2) of the VAT Act provides that input tax is only deductible when a registered person is in possession of a valid document.

48. The Respondent further stated that, the provisions of Section 42(2) (b) of the VAT Act provides that invoices should be issued in respect of supplies only by persons who are registered. The investigations carried out by the Respondent revealed that most of the traders that the Appellant claimed inputs from were not registered persons.

49. The Respondent averred that the Appellant was seeking to abuse the VAT tax regime in the hope of fraudulently claiming a tax refund.

50. The Respondent submitted that under the VAT tax regime, businesses pay tax on the value they add to the goods and services they purchase from other businesses. The VAT liability is typically calculated using what is known as the credit invoice method. Under this method, businesses apply the VAT rate to their sales but claim a credit for VAT paid on purchases of inputs from other businesses (shown on purchase invoices). The difference between the VAT collected on sales and the credit for VAT paid on input purchases is remitted to the Government.

51. The Respondent averred that at the heart of the VAT is the credit mechanism, with tax charged by a seller available to the buyer as a credit against their liability on their own sales and if in excess of the output tax due, refunded to them. This creates opportunities for fraud and abuse of VAT tax regime. The fraud can stem from either underpayment of taxes owed on sales, or overstating taxes paid on purchases, that is, refund fraud and missing trader fraud. The Respondent contended VAT is vulnerable to refund fraud because businesses with taxable sales less than taxable purchases are entitled to refunds.

52. The Respondent relied on Section 59 of the TPA which gives it powers to request production of records and additional information which can fully satisfy it, if it is of the view that the information, they have been given is insufficient.

Whether the Respondent erred by confirming assessments as the Appellant did not fully support purchases. 53. The Respondent submitted that there is a rebuttable presumption in tax matters that an assessment by the Respondent is correct.

54. The Respondent cited the Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR case, in which the court held that Section 56 of the TPA in peremptory terms places the burden of proof in tax cases on the taxpayer.

55. The Respondent submitted that Appellant was uncooperative in the provision of relevant records and failed to respond to the request of documents hence no relevant documents or records were provided to support the objection by the Appellant. As a result, the assessment was made based on the only available information based on the best judgement by the Respondent.

56. In its submission, the Respondent submitted that Section 31 of TPA empowers the Respondent to make alterations or additions to original assessments from available information for a reporting period based on the best judgment. The Section provides; -“31. Amendment of assessments

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 a taxpayer for a reporting period assessment relates.”

57. The Respondent further relied on Dyer & Dyer Limited v Commissioner of Domestic Taxes TAT 1. 39 of 2020, which this Honourable Tribunal held that:-“the Appellant woefully failed in adducing a scintilla of evidence demonstrating that the Commissioner erred in raising the additional assessment in dispute. All the Appellant has been perceived has are perceived notions and imputations of incorrectness of the assessment. This appreciably points to an underwhelming dispensation of the burden placed upon the Appellant in section 56 (1) of the TPA.”

Respondent’s Prayer 58. The Respondent prayed that the Tribunal finds that the assessments and all decisions there to were proper and that the Appeal be dismissed with costs.

Issues For Determination 59. Having gleaned through the submissions and the document submitted by both parties, the Tribunal comes to the conclusion that there is a single issue that call for its determination as follows:Whether the Respondent’s objection decision dated 10th November, 2021 is proper and in conformity with the law.

Analysis And Findings 60. The Respondent submitted that there were no records or documentary evidence adduced by the Appellant to support the said purchases allowing input VAT claim despite requests from the Respondent.

61. The Appellant in its written submission indicated that at the Objection stage, it provided all the relevant documents and at no time did the Respondent ask for further documentation during the review process.

62. The Respondent in its Objection decision indicated the grounds under which it disallowed the Appellant’s input VAT claim had been that there was no supply of taxable goods from six of the Appellant’s suppliers with VAT claim totalling Ksh. 12,789,870. 54, adding that the Appellant did not fully support purchases with VAT claims totalling Ksh. 22,710. 43.

63. The Tribunal notes that the Respondent in Paragraph 17 of its written submission admitted that it reviewed documentation (invoices) from the Appellant and allowed invoices amounting to Ksh. 12,789,870. 54 worth of VAT from six (6) suppliers while disallowing a VAT claim amounting to Ksh. 22,710. 43 since there was nothing to support the latter purchases.

64. Moreover, the Respondent’s demand that the Appellant’s suppliers write and confirm that indeed the purchases concerning Ksh. 12,789,870. 54 VAT claim took place was impractical since it provided invoices which indicate that purchases occurred. This demand by the Respondent is not in line with Section 17 (3) (a) of the VAT Act which lists the documents required to prove that purchases transpired to include an original tax invoice issued for the supply or a certified copy among other documents. This Section does not provide for a letter of confirmation to a tax payer as one of the required documents to prove that a purchase has taken place.

65. Section 56 (1) of the TPA, 2015 places the burden of proof in tax objections on the taxpayer and it provides as follows:-“56 (1) In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

66. The Appellant discharged this burden of proof since it provided the necessary records and documentation to support its purchases of Ksh. 12,789,870. 54 VAT refund claim which the Respondent confesses in its objection decision.

67. From the Respondent’s admission, it is apparent that what is in dispute is a tax liability of Ksh. 22,710. 43 in which the Appellant did not adduce documentary support and not the VAT refund claim of Ksh 12,789,870. 54.

68. It is the considered view of the Tribunal that the Respondent was not justified in disallowing the Appellant's input VAT refund claim amounting to Ksh 12,789,870. 54.

69. From the foregoing, the Tribunal is convinced that the Respondent’s objection decision dated 10th November, 2021 was unjustified.

Final Decision 70. The Tribunal accordingly proceeds to make the following Orders:i.The Appeal be and is hereby allowed.ii.The Respondent’s objection decision dated 10th November, 2021 is hereby set aside.iii.Each party to bear its own costs.

71. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 26THDAY OF JANUARY, 2024. ERIC NYONGESA WAFULACHAIRMANOLOLCHIKE S. SPENCER CHRISTINE A. MUGAMEMBER MEMBERGEORGE KASHINDI DELILAH K. NGALAMEMBER MEMBERMOHAMMED A. DIRIYEMEMBER