[2023] KETAT 120 (KLR)

Vimerc Limited v Commissioner of Domestic Taxes (Tribunal Appeal 432 of 2022) [2023] KETAT 120 (KLR) (Civ) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 120 (KLR)

Republic of Kenya

In the Tax Appeals Tribunal

Civil

Tribunal Appeal 432 of 2022

E.N Wafula, Chair, Robert M. Mutuma, Rodney Odhiambo Oluoch & Edwin K. Cheluget, Members

March 17, 2023

Between

Vimerc Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Backgound 1. The Appellant is a limited liability company duly registered under the Companies Actand is a registered taxpayer. Its principal business is in construction works.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority 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 Respondent raised VAT assessments on 9th November 2021 for the months of June, September, October, November 2020, and January February, April, and June 2021 for a principal tax liability of Kshs. 1,626,920. 24.

4. The Appellant objected to the assessments on 25th November 2021. The Respondent issued an Objection decision on 18th March 2022 entirely rejecting the Objection and confirming the principal tax.

5. On receiving the decision the Appellant filed a Notice of Appeal dated 27th April 2022 and filed on 28th April, 2022.

The Appeal 6. In its Memorandum of Appeal dated 27th April 2022 and filed on 28th April 2022, the Appellant premised its Appeal on the following grounds;-a.The Respondent erred in law and fact by wrongfully disallowing valid VAT purchases used in generating the assessed income.b.The Respondent fell in error by not examining the purchase records presented.c.The Respondent erred in law and fact by wrongfully ignoring Section 17 of the VAT Act.

The Appellant’s Case 7. The Appellant set down its case in its Statement of Facts dated 27th April 2022 and filed on 28th April, 2022.

8. It stated that it filed self-assessment returns for VAT for the period, amended its returns per the pre-assessment letter, and held a meeting with the Respondent on the issue. It added that it provided copies of purchase invoices in support of its Objection.

9. It quoted Section 17 of the VAT Act and stated that the purchases incurred in the VAT ought to be allowed.

10. It averred that the Respondent misinterpreted the VAT Act on the 6-month rule and cited the case of Tax Appeal No. E026 of 2020 Highlands Mineral Water Ltd. v KRA where it was held that:-“42. For the reasons I have set out, I allow this appeal only to the extent that I find and hold the Commissioner has no power under section 17 of the VAT Act to disallow an input VAT claim for the reason of late filing as long as the claim is made within 6 months after the end of the tax period within which the supply or importation is made. Consequently, it follows that any input VAT claims by the Appellant made 6 months after the end of the tax period cannot stand irrespective of late filing of the VAT Returns.”

11. It quoted Section 76 of the Tax Procedures Act and maintained that the Respondent requested a list of documents that were availed via email but the Respondent did not acknowledge receipts of the same.

12. It asserted that the Respondent ignored the Appellant’s documents and denied it a fair hearing.

The Appellant’s Prayers 13. The Appellant prayed for orders that the Tribunal:a.Allows this Appeal;b.Annuls the Respondent’s confirmed Assessments; andc.Awards costs of this Appeal to the Appellant.

The Respondent’s Case 14. The Respondent’s case is premised on its Statement of Facts dated and filed on 23rd May 2022 and the written submissions dated and filed 7th December, 2022.

15. The Respondent stated that the assessments which were raised were in relation to undeclared sales that the Appellant made to various State Ministries and that the Appellant did not declare sales from the sample invoices from Mustek E.A. Limited within time to enable it to claim the inputs for the purchases within the statutory periods provided under Section 17 of the VAT Act.

16. It averred that the Appellant failed to declare sales for claiming input VAT in time leaving the Respondent with no choice but to disallow the same and confirm the assessments.

17. It maintained that the input tax is allowable for deduction within six months after the end of the tax period in which the supply was made which the Appellant failed to do thus the Appellant lacks the locus to claim that its right to claim input VAT was violated.

18. It asserted that if the period of six months starts running from the date the supply occurred and that if six months had lapsed after the date of claiming input tax, then the input tax claimed is out of time and cannot be allowed.

19. The Respondent in its written submissions made extensive reference to various legal and judicial decisions in relation to its tax assessment and the objection decision issued.

20. The Respondent submitted that the assessment as confirmed was proper. It relied on Section 17(1) and(2) of the VAT Act and the case of Highlands Mineral Water Ltd v Commissioner of Domestic Taxes [2021] eKLR where the courts held that: “the only conditions provided for a Taxpayer to qualify for input VAT are:a.That the input tax was incurred on a taxable supply made to or on importation made by a taxpayer at the end of the tax period,b.That the input tax is deducted by a registered person on taxable supplies made by him; and c. That the input tax is to be allowable for deduction within six months after the end of the tax period in which the supply or importation occurred.”

21. The Respondent submitted that Section 24(1) and (2) of the Tax Procedures Act allows a taxpayer to file returns however the Commissioner is not bound by the information provided and can determine the tax liability based on any other available information.

22. It argued that since the Appellant failed to properly declare income for VAT purposes, third party data from the Integrated Financial Management Information System (IFMIS) was compared with VAT declarations and the variance was charged output VAT at the standard rate of 16%.

23. It maintained that the disallowed inputs were a result of the Appellant’s failure to demonstrate its purchases and mode of payment for the goods despite several reminders to do so which the Appellant failed to do.

24. It quoted Section 97(a) of the Tax Procedures Act and maintained that the Appellant’s under-declaration constituted a tax offence of knowingly omitting an amount that should have been included in its tax returns.

25. It submitted that it is empowered by Section 31 of the Tax Procedures Act to amend the self-assessment filed by the Appellant and relied on the case of Nairobi TAT No. 25 of 2016 Family Signature Limited v. The Commissioner of Investigations and Enforcement where the Tribunal held:“when the Respondent is prompted to resort to an alternative method of determining the income and assessing the tax liability of a taxpayer, it has the onerous responsibility to act reasonably by exercising best judgement informed by pragmatic and reasonable considerations that do not in any manner result in a ridiculously high income margin.”

26. It further submitted that it exercised its best judgment appropriately and after reviewing the Appellant’s grounds of objection together with the records, the assessments were raised due to undeclared sales made to various State Departments and Ministries. It added that the Appellant did not declare the sales in time to claim inputs under the law.

27. The Respondent contended that the Appellant has failed to discharge its evidentiary burden of proof that the Respondent’s assessment was incorrect or excessive under Section 107 of the Evidence Act.

28. It relied on the case of TAT No. 28 of 2018- Joycott General Contractors Limited v. Kenya Revenue Authority where the Tribunal held that:“we find that the Appellant seems to forget that it bears the burden of proof in law to demonstrate to this Tribunal that the Respondent’s assessment was wrong, especially with regards to the under declarations and variance respect of VAT and income sales. On the contrary, the Appellant had not bothered to substantially traverse the assessments raised. All it has done is to make sweeping and expansive accusations without substantial support.”

Respondent’s Prayers 29. The Respondent therefore prayed for the Tribunal to dismiss the Appeal with costs and for the Respondent’s demand to be upheld.

Issues For Determination 30. Gleaning through the pleadings and submissions as filed by the parties the Tribunal put forth the following issue for its determination:Whether the Respondent erred in disallowing Value Added Tax on purchases used in generating the assessed income.

Analysis And Findings 31. The Tribunal wishes to analyse the issues identified as herein-under.Whether the Respondent erred in disallowing Value Added Tax on purchases used in generating the assessed income.

32. The Appellant contended that the VAT incurred in the purchases made for purposes of making supplies used to generate the assessed VAT ought to be allowed and that the Respondent misinterpreted the VAT Act on the 6-month rule.

33. The Respondent argued that the Appellant failed to properly declare income for VAT purposes thus third party data from the Integrated Financial Management Information System (IFMIS) was compared with VAT declaration and the variance was charged output VAT at the standard rate of 16%.

34. It further contended that the disallowed inputs were a result of the Appellant’s failure to demonstrate its purchases and mode of payment for the goods made to various State Departments and Ministries. It added that the Appellant did not declare the sales in time to claim inputs under the law.

35. Both parties quoted the Highlands Mineral Water Ltd.(supra) case and relied on Section 17 of the VAT Act that states:-“Subject to the provisions of this Act and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person in a return for the period, 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.”

36. The Appellant averred that the Respondent misinterpreted the 6-month rule provided for in the above Section of the VAT Act, as interpreted in the Highlands Case specifically in the wording, “… that section 17(1) and (2) of the VAT Act, permits the taxpayer to claim input tax at any time provided the claim falls within 6 months from period which the supply or importation occurred notwithstanding that the VAT Return is filed late.”

37. Following on this argument, for the Tribunal to find for the Appellant, the Appellant would have to demonstrate that first, there are valid input VAT purchases that are due to be claimed, and secondly that the returns in which those claims are to be made, albeit late, are for the period within 6 months from the period that those purchases were made. In the Appellant’s bundle of documents, the only documents attached in this regard are invoices from Mustek East Africa Limited, without more.

38. The Tribunal observes that the Appellant has not adduced sufficient evidence before it to show that the Respondent’s decision not to allow the claim of input tax was wrong and as thus, the Tribunal will not fault the Respondent.

39. The Appellant bears the legal burden to demonstrate that the tax assessment by the Respondent was erroneous. This is immortalised under Section 30 of the Tax Appeals Tribunal Act which provides that:“In a proceedings before the Tribunal the appellant has the burden of proving:a.where an appeal rates to an assessment, that the assessment is excessive; orb.in any other case, that the tax decision should not have been made or should have been made differently”

Final Decision 40. The upshot to the foregoing is that the Appeal is not meritorious and the Tribunal consequently makes the following Orders;-a.The Appeal be and is hereby dismissed.b.The Objection Decision dated 18th March 2022 be and is hereby upheld.c.No order as to costs.

41. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH, 2023. ERIC N. WAFULACHAIRMANROBERT M. MUTUMAMEMBERRODNEY O. OLUOCHMEMBEREDWIN K. CHELUGETMEMBER