[2023] KETAT 534 (KLR)

Urysia Limited v Commissioner of Domestic Taxes (Tax Appeal 843 of 2022) [2023] KETAT 534 (KLR) (18 August 2023) (Judgment)

Neutral citation: [2023] KETAT 534 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 843 of 2022

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

August 18, 2023

Between

Urysia Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company based in Kiserian Nairobi. Its principal business is in wholesale and retail trade, repair of motor vehicles and motorcycles.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act Cap, 469 Laws of Kenya. Under Section 5(1) of the Act, the Respondent is an agency of the Government for collection and receipt of all tax revenue. Further under Section 5(2) of the Act with respect to performance of its functions under subsection (1) the Respondent 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 revenue in accordance with those laws.

3. The Respondent detected inconsistencies between the invoices declared by the Appellant for VAT sales and sales declared by various suppliers in the months of January, 2018 to May 2018. The Appellant was advised to amend its VAT returns in order to regularize the position.

4. Vide a letter dated 15th November 2019, the Respondent issued assessments for the same period, January 2018 to May 2018. The assessment was for Kshs 53,920,382. 32. 00.

5. The Appellant filed its notice of objection on 9th December, 2019. It provided some supporting documents which the Respondent reviewed and partially accepted the objection application. The Respondent then issued an objection decision on 29th June, 2022 for an amended assessment of Kshs 37,407,506. 32.

6. Aggrieved by the Respondent’s decision the Appellant lodged a Notice of Appeal on 29th July 2022.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated the 12th August, 2022 and filed on 19th August, 2022:-a.That the Commissioner erred in law in making the Objection Decision against the pre-emptive and mandatory provisions of Section 51(11) of the Tax Procedures Act, 2015. b.That as a result of the Commissioner’s non-compliance in (a) above, the Appellant’s Objection is allowed by operation of the law.c.That the Commissioner’s decision and subsequent demands for payment of the impugned Objection decision demanding of Kshs 53,920,382. 32 in respect of VAT fly against the principle of legitimate expectation and fair administrative action.d.That the Commissioner misconstrued the documents supplied by the Appellant thereby shooting itself in the foot and erred in arriving at the impugned assessment of Kshs 53,920,382. 32 as the original assessment and Kshs 37, 407, 506. 32 as the disallowed input tax in the Objection decision.e.That as a result of a and c aforesaid the Commissioner is barred from demanding and/or issuing any VAT assessments for the sum of Kshs 53,920,38. 32 as the original assessment and Kshs 37,407,506. 32 being input tax disallowed in the impugned Objection decision.f.That this Honourable Tribunal has jurisdiction to hear and determine this Appeal.

The Appellant’s Case 8. The Appellant’s case is premised on its Statement of Facts dated 12th August, 2022 and filed on 19th August, 2022 and the Affidavit sworn by one Claude Mwende, the Appellant’s Director, on the 12th August, 2022 and filed on 19th August, 2022.

9. The Appellant asserted that it provided the supporting documents requested by the Respondent to support its objection and was surprised that the Respondent only allowed input VAT of Kshs 16,512,876. 00 and issued its Objection decision on 29th June 2022.

10. It contended that the Respondent failed, neglected and/or refused to verify and consider the documents supplied but proceeded to issue the Objection decision on 29th June, 2022. It averred that the law enjoins the Respondent under Section 51 (11) of the Tax Procedures Act to consider the Appellant’s Objection and adjudicate the Objection within sixty (60) days from the date of lodging the Objection, failure of which the objection is allowed by operation of the law.

11. It averred that the Respondent flagrantly breached the mandatory provision of the law in issuing the impugned Objection decision on 29th June, 2022 which is more than two years from the date the Appellant’s objection was lodged on 9th December 2019.

12. As a consequence of the foregoing, the Appellant averred that the Respondent’s action was incurable, defective and that the Appellant’s Objection was deemed to have been allowed by operation of the law. It argued therefore that the Respondent was barred from demanding tax amounting to Kshs 37,407,506. 32 or issuing fresh assessment to the Appellant in relation to VAT for the period under review.

13. It averred that any action to demand or issue any assessment is unlawful harassment and blatant disregard of the principle of legitimate expectation and abuse of the Respondent’s powers as enshrined in the law. It prayed that its Appeal is allowed with costs and that the Respondent be barred from any further action forthwith.

Appellant’s Prayers 14. Reasons wherefore the Appellant prays that this Appeal be allowed and the Commissioner’s original assessment of Kshs 53,920,382. 32 and the resultant objection decision disallowing 37,407,506. 25 input VAT be set aside with costs to the Appellant.

The Respondent’s Case 15. In responding to the Appellant’s grounds of Appeal, the Respondent identified two issues that would adequately counter the Appellant’s grounds through its Statement of Facts dated 16th September, 2022 and filed on even date.SUBDIVISION - a. Whether the Respondent’s Objection Decision contravened Section 51(II) of the Tax Procedures 16. The Respondent argued that its Objection decision was in line with the requirements of Section 51 (II) of the TPA and was issued within the statutory timelines and that based on this, it contended that the Objection decision cannot be nullified and would not breach legitimate expectation.

17. The Respondent made reference to Section 51 (II) of TPA as it were before the amendment by the Finance Act No.22 of 2022 and that by virtue of this provision, it would have remained within the statutory limits if the decision was made 60 days from when the Respondent received any further information it sought. It therefore contended that it was within the statutory limits when the decision was issued on 29th June, 2022.

b. Whether the Respondent erred in raising additional VAT Assessments 18. The Respondent reiterated that by virtue of Section 31(1) of the TPA it is mandated by law to amend an original assessment to reflect the correct tax position. It further argued that Section 17 of the VAT Act and in particular Section 17 (2) and 17(3) established that allowable input is conditional upon providing the documentation outlined in the said Sections. The Respondent averred that the position of the law is therefore that the key requirement is not only that input tax be incurred to make taxable supply but also the same should be supported by relevant documentation. It contended that the Appellant did not have the required documentation and therefore the assessment had basis.

19. The Respondent contended that following the assessment against the Appellant, the burden of proof shifted to the Appellant to show that the Respondent was wrong in its assertion of the amended assessment as per the provisions of Section 56 (I) of the TPA which provides as follows: - “The burden shall be on the taxpayer to prove that a tax decision is incorrect”

20. It contended further that the Appellant was able to partly support its objection resulting to the amendment of the additional assessment from Kshs 53, 920, 382. 32 to Kshs, 37,407, 506. 32. That the Appellant was not able to support the remaining tax liability and the result was therefore a confirmation of the assessment.

21. The Respondent affirmed that the input VAT claim was legally and procedurally issued and that the Appellant’s objection was duly considered and the Objection decision made as per the law. The additional assessment was therefore justified.

Respondent’s Prayer 22. The Respondent therefore prayed that this Honourable Tribunal: -a.Upholds the Objection decision as proper in law and in conformity with the provisions of the law.b.That this Appeal be dismissed with costs to the Respondent as the same is devoid any merit.

Submissions Of The Parties 23. The Appellant’s Written Submissions dated 13th March, 2023 were filed on the 14th March, 2023 wherein it raised three issues for determination.

a. Whether the Respondent erred in making the Objection Decision against the pre-emptive and mandatory provision of Section 51(II) of the Tax Procedures Act 2015. 24. The Appellant submitted that its notice of objection dated 9th December, 2019 was confirmed by the Respondent vide its correspondence dated 11th December, 2019. The Respondent then issued the Objection decision on 26th June 2022 which is almost two years and seven months outside the statutory period in breach of the pre-emptive and mandatory provisions of Section 51(11) of the Tax Procedures Act.

25. The Appellant relied on the holding in the case of Republic vs. Commissioner of Domestic Taxes Judicial Review Application No.152 of 2019 Ex-parte Fleur Investments where Mativo J. held that: -“By virtue of the clear provisions of section 51(8) and (11) of the TPA, the Respondent is deemed to have allowed the Applicant’s Objection. I find backing in Republic VS Commissioner of Customs Services Ex-parte Unilever Kenya Limited in which the court stated that if the Commissioner does not render a decision within the stipulated period, the objection is deemed allowed by operation of the law. The Act requires that where the Commissioner has not made an Objection Decision within 60 days from the date the taxpayer lodged the Notice of Objection, the objection shall be allowed. This means that the issues that the taxpayer has raised in the notice of objection will be accepted. In case of a tax assessment, it will be vacated. On this ground alone the applicant’s application succeeds.”

26. The Appellant therefore submitted that the Commissioner’s Objection decision breached the pre-emptive and mandatory requirement of Section 51 (II) of the TPA and as such the subsequent demand for taxes by the Respondent is tainted with illegalities, is inconsequential and ought to be vacated forthwith.

27. On the Appellant’s second issue on whether its objection was properly lodged, it cited the case of Republic vs. Kenya Revenue Authority Judicial Review Application No.599 of 2017 and submitted that its objection was properly lodged.

b. Whether the Commissioner misconstrued the input tax documents supplied 28. On this issue the Appellant submitted that it furnished the Respondent with an entire bundle of documents in support of its Objection. However, the Respondent, in rejecting some of the documents, stated that the Appellant’s suppliers declared lump sum sales in their VAT returns and that there was invoice number/reference mismatch in the Appellant’s VAT returns and its suppliers VAT returns. The Appellant contended that Section 17 of the VAT Act under Part 6 stipulates the treatment of credit for input tax against output tax. Further that it complied with Section 17(3)(a) of VAT Act and supplied the Respondent’s with copies of all the required documents.

29. The Appellant submitted that the Respondent’s reason for disallowing the invoices for reason that suppliers had declared lump sum sales in their VAT return is alien to the law aforestated and asked the Tribunal to exercise it discretion considering the matter de novo. Further, that the Appellant does not control how the suppliers who are also registered taxpayers for VAT purposes declare their sales in their returns. Whether the suppliers used the lump sum model for declaration or single invoices is not within the control of the Appellant. The Appellant asserted that the Respondent is not disputing the authenticity of the invoices but rather the model under which the supplier declared them in their returns.

30. The Appellant also contended that it has no control over how the suppliers number their correspondence invoices. The Appellant argued that it discharged its burden by providing the documents required which the Respondent did not doubt their authenticity and reiterated that the Appellant’s suppliers are also registered taxpayers for VAT purposes, therefore the burden shifted to them when the Appellant furnished all the required documents.

31. The Appellant submitted that it furnished the Respondent with proof of payment documentation which the Respondent did not interrogate. Further, that all the reasons the Respondent gave were generic in general as it did not itemize the particular invoices that had issues. To buttress its case, the Appellant relied on the following cases:a.Tribus TSG Security Limited vs KRA Appeal No 581 of 2020b.Edgeskill Limited vs Commissioner for the Majesty’s Revenue and customs VLEX 807358877.

32. In its Written Submissions dated 13th March, 2023 and filed on even date, the Respondent has raised two issues for determination.

i. Whether the Appeal was validity lodged 33. The Respondent submitted that the Appellant filed the Appeal 14 days from filing of the Notice of Appeal without seeking leave of the Tribunal, contrary to Section 13 (2) of the Tax Appeals Tribunal Act 2013. It therefore submitted that this Appeal is incompetent.

34. It submitted further that the assessment was issued within the confines of the law and in line with its mandate as provided for under Section 31 (4) of the Tax Procedures Act (TPA). It also relied on the case of Mohamed Ali t/a Top Model Apparel & Others vs. Kenya Revenue Authority (2020) eKLR where Hon. Korir J enumerated the Respondent’s powers in matters assessment as stipulated in the said Section 31(4) of TPA. It contended that it continued to engage with the Appellant as per the objection decision and took into consideration the documentation provided by the Appellant.

35. The Respondent relied on the judgement in Osho Drappers Limited vs. Commissioner of Domestic Taxes. TAT 159 of 2018 where the Tribunal found that various documents were to be produced for Osho Drappers to discharge its burden of proof. It asserted that in the current appeal it relied on the documents supplied by the Appellant which even led to a reduction in the assessment. It therefore averred that the assessment was correct and that it must stand.

36. It was the Respondent’s submission that it acted within the confines of the law in issuing the additional assessment pursuant to Section 24 (2) of the TPA which allows the Respondent to assess a taxpayer’s tax liability using any information availed to him. The onus was therefore on the Appellant to provide all material documents to enable the Respondent ascertain the assessments. The Respondent relied on the following cases in arguing its case: -a.Primarosa Flowers Limited vs Commissioner of Domestic taxes (2019) Eklr.b.Republic vs Kenya Revenue Authority Ex-Parte Bata Shoe Company (Kenya) limited (2014) eKLR.

Issues For Determination 37. Having considered the parties’ pleadings, documentation availed and the submissions made, the Tribunal is of the considered view that this Appeal crystalizes into two issues for its determination:a.Whether the Respondent’s Objection Decision dated 26th June, 2022 is validb.Whether the Respondent’s Assessment is due and payable.

Analysis And Findings 38. The Tribunal will now analyse the identified issues as hereinunder: -

(a) Whether the Respondent’s Objection Decision dated 26th June, 2022 is valid. 39. The Appellant raised the issue of the late Objection decision by the Respondent. It averred that it objected to the Respondent’s demand of 15th November, 2019 on 9th December, 2019. The Respondent then issued its Objection decision on 26th June, 2022 which was more than two years from the date of receipt of the Appellant’s notice of objection dated 9th December, 2019. The Respondent on the other hand argued that its Objection decision was issued in line with the requirements of Section 51 (II) of the TPA and that it was issued within the statutory timelines.

40. Sections 51(2) and 51 (11) provide the timelines within which the Appellant and Respondent ought to lodge notice of objection and issue the objection decision, respectively. It provides as follows: -“51 (2)A taxpayer who disputes a tax decision may lodge a notice of objection, with the commissioner within thirty days of being notified of the decision.”

51 (11)“The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed”

41. From the documentation availed, the Respondent issued the demand for tax on 15th November, 2019, whereas the Appellant issued its notice of objection on 9th December, 2019 which was within the thirty days as provided for under Section 51 (2) of the TPA. The Respondent had sixty days within which to issue the Objection decision or request for documentation in which case the sixty days would count from the date the Appellant avails the requested documents. The Tribunal has gleaned through the documentation availed and has not sighted any communication from the Respondent requesting for documents, the implication of which the Respondent was expected to issue the Objection decision by 9th February, 2020. However, the Respondent issued the Objection decision on 26th June, 2022, more than two years after the receipt of the Appellant’s notice of objection. Although in its Objection decision the Respondent has made reference to the Appellant’s objection of 9th December, 2019 and subsequent engagement with the Appellant, no such evidence has been adduced by the Respondent to confirm those subsequent engagements and the purpose of the engagement.

42. The Tribunal is guided by the decision in the case of Republic vs Kenya Revenue Authority Ex-Parte M-Kopa Kenya Limited (2018) eKLR where the court stated as follows: -“In this case, the applicant had clearly made what was in substance an objection as envisioned under section 51 of the Tax Procedures Act, 2015. Accordingly, the Respondent was required to make a decision in respect thereof within sixty (60) days under section 51 (11) of the said Act. As the Respondent defaulted in making a determination thereon within the prescribed time, the said objection was declared to have been allowed”

43. Consequent to the above, the Tribunal finds that the Respondent’s Objection decision dated 26th June,2022 was not valid as it was issued outside the mandatory statutory timelines as envisioned under Section 51 (11) of the Tax Procedures Act.

ii. Whether the Respondent’s Assessment is due and payable 44. Having determined that the Respondent’s Objection decision is not valid, the Tribunal will down its tools and not proceed further as the second issue has been rendered moot.

Final Decision 45. The upshot of the foregoing is that the Appeal is merited and the Tribunal accordingly proceeds to make the following final Orders:a.The Appeal be and is hereby allowedb.The Respondent’s Objection decision dated 26th June, 2022 be and is hereby set aside.c.Each party to bear its own costs.

46. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 18TH DAY OF AUGUST, 2023ERIC NYONGESA WAFULACHAIRMANDELILAH K. NGALAMEMBERCHRISTINE A MUGAMEMBERGEORGE KASHINDIMEMBERABDULLAHI M. DIRIYEMEMBERSPENCER S OLOLCHIKEMEMBER