REPUBLIC OF KENYA
IN THE HIGH COURT OF KENYA AT NAIROBI COMMERCIAL AND TAX DIVISION
INCOME TAX APPEAL NO E057 OF 2024
COMMISIONER OF DOMESTIC TAXES ……………….APPELLANT
VS
UNITRON LIMITED ……………………………………….RESPONDENT
JUDGMENT
(Being an appeal from the judgment of the Tax Appels Tribunal delivered on 26 th January 2024)
1. The appellant is the commissioner of domestic taxes appointed under section 13 of the Kenya Revenue Authority Act 1995. Under section 5(1), the Kenya Revenue Authority is an agency of the government for the collection and receipt of all revenue. Further under section 5(2) 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 and 2 of the first schedule to the Act for the purposes of assessing collecting, and accounting for all revenues in accordance with those laws.
2. The respondent is a limited liability company incorporated in Kenya. The respondents principal activity is sale of motor vehicle parts and accessories. The Respondent was registered for VAT obligation on 21 st July 2009 and has been filing VAT returns on iTAX since August 2014.
3. On 15 th November 2019 the appellant raised additional assessment on VAT of the for respondent for various months from 2015 to 2018 amounting to Kenya shillings 12, 846,789. The respondent objected to the appearance decision through a later dated 18 March 2021 which was validated on 7 th of October 2021. On 10 th of November 2021 The appellant issued an objection decision. That decision the commissioner stated that it had established there was number supply of taxable goods from six of the respondents suppliers with VAT claims totaling to ksh 12,789,870.54. The Commissioner further stated that the taxpayer had not fully supported purchases with VAT claims totaling to ksh 22, 710/43. It also stated that the taxpayer had not responded to their request to help the supplier confirm that indeed the supplies were made a schedule was made up there six suppliers and what was outstanding as A missing trader claims and other unsupported claims the commissioners confirmed the assessments as issued with a total sum coming to 12, 812,580.97 Inclusive of penalty and interest.
4. The tax payer was dissatisfied with the respondents objection decision and filed an appeal at the tribunal dated 30 th September 2022. The grounds for that appeal were contained in the memoranda move appeal dated 30 th September 2022 and filed on 7 th October 2022 On the following grounds.
5. That the appellant did not take into account the credits or advance payments hence the demanded amount was disputed; that the reconciliation was currently being carried out at the station by the accounts manager/debt to come to the actual amount. That urgency notices issued by the commissioner should be withdrawn until the reconciliation is completed; that the tribunal was therefore requested to allow the matter to proceed to ADR.
6. Upon considering the submissions by each party the tribunal was of the view that there was a single issue to be determined which was whether the respondent’s objection decision dated 10 th November 2021 was proper and in conformity with the law.
7. The Tribunal found that the respondent had discharged its burden of proof as required by section 56(1) of the TPA 2015 by providing the necessary records and documentation to support its purchases of 12,789,850.54 VAT refund claim which the respondent confessed in its objection decision that from the respondent’s admission it was apparent that what was in dispute was a tax liability of Ksh 22,710/43 which the respondent did not adduce documentary support. The Tribunal found that the respondent was not justified in disallowing the appellant’s input VAT refund claim and therefore the respondent’s objection decision of 10 th November 2021 was unjustified. The tribunal allowed their appeal and set aside the respondent’s objection decision dated 10 th November 2021.
8. The appellant was aggrieved and filed this appeal on the following grounds’; That the tribunal erred in law and fact by not taking into consideration that in order to claim input VAT there must be a purchase of a taxable supply as it is not enough to have the documentation listed in section 17 of the VAT Act the documentation must be supported by an underlying transaction and the taxpayer must furnish proof that there was actual purchase. Section 17(1) of the VAT Act embodies the well established principle of VAT law that a taxable person who makes transactions in respect of the goods or services acquired by him, provided that such goods or services have a direct and immediate link with the output transaction in respect of which VAT is deductible.
9. That the tribunal erred by not finding that the respondent did not discharge its burden of proof as the appellant did not get an opportunity to scrutinize the documents requested including proof of payment, invoices, stock cards and delivery notes as claimed by the appellant
10. That the tribunal erred in fact by stating that paragraph 17 of the appellant’s submission filed at the Tribunal admitted that the appellant had provided documentation (invoices) yet the paragraph is on reasonable man test.
11. In the circumstances the appellant seeks that the judgment of the Tribunal made on 26 th January 2024 and the consequential orders be set aside, that the review decision dated 10 th November 2021 be upheld that the appeal filed be allowed and the costs of the appeal be awarded to the appellant.
12. Parties filed written submissions.
13. The appeal and framed issues for determination
i. what does the objection decision state?
14. It was submitted that the tribunal made an error by stating that their apparent had confessed in its objection decision that the respondent discharged the burden of proof since it proved the necessary documents to support purchases of Kenya shillings 12789870.54 VAT refund claim. The court was referred to the objection decision in the record of appeal
ii. Whether the respondent discharge its burden of proof
15. It is submitted that the respondent did not adduce any documents to demonstrate that they discharged the burden of proof. That it is not correct that at paragraph 17 of its submissions before the tribunal the appellant admitted to reviewing documents from the respondent or that it allowed the invoices amounting to Ksh 12,789,870/59. That there was no evidence before the tribunal that there were purchases of taxable supplies and the tax payer did not furnish any proof that there was actual purchases. To that end the respondent did not comply with section 56 (1) of the tax procedures act to the effect that it is the burden of the tax payer to prove that a tax decision is incorrect, or section 30 of the tax appeals tribunals act to show that the assessment was excessive or the tax decision should not have been made or should have been made differently. The appellant relied on commissioner of domestic taxes versus Socabelee East Africa limited [2024] KEHC 3319 (KLR) where the high court held that the tribunal found that their appellant ought to have produced more evidence to prove that the trade balance of Kenya shillings 13 136 399 was owed to SA ADURJAU Exploration and the transactional net balance of Kenya shillings 32,163,801 was owed to Kenyan entities and not nonresidents. I am inclined to agree with the appellant that the tribunal erred in this respect. The correct position is that the burden of proving that an assessment is wrong or excessive is upon the taxpayer as set out under section 30 of the tax appeals Tribunal Act and section 56 of the tax procedures act.
16. Relies on section 31 the tax procedures act on the powers of the commissioner to amend an assessment by making alterations or additions from the available information, 59 nine of the same act which empowers their appellant to request the tax payer to produce documents to satisfy the appellant if is of the view that information the taxpayer has given is insufficient.
17. The appellant cited commissioner of domestic taxes versus Trical and hard limited tax appeal E146 of 2020 [2022] KEHC 9927 (KLR). In that matter the court found that the tribunal had erred in its interpretation and application of sections 56 and 59 of the tax procedures act section 17 and 43 of the VAT Act 2013 section 30 of the tax Appeals tribunal act and had arrived at the wrong conclusion in the matter; that they misapprehended the evidence and facts on record and arrived at a decision that was perverse which warrants the intervention of the court.
18. It is submitted that that case is similar to the case at hand as there is an issue of missing trader where the six companies were flagged by their appellant ; That the appellant in its decision stated that there was no supply of taxable goods from the six companies and that it was at that moment the burden of proof upon the respondent came into play to prove the findings by the Commissioner was wrong.
19. The appeal is opposed by the respondent Through their submissions. It is submitted that the appellant claims the respondents input claim of Kenya shillings 12,789 ,870.54 Is none allowable for the reason that the goods were supplied by entities which the appellant claims participated in a missing trader fraud.
20. They responded frames the issues whether the honorable court has jurisdiction to determine matters of facts in this appeal And whether the appellant made out a case of missing trade or fraud against the respondent as alleged under ground one of the memorandum of appeal, And whether they’re honorable tribunal rightly found that the appellant had erred in disallowing the respondents VATdeductions.
21. It is submitted that the respondent provided all the necessary documents required to show that there was a vertical supply made to it It is submitted that this is admitted in the objection decision and the appellant statement of fact and submissions filed at the tribunal.
22. That two and three of the memoranda move appeal as framed invite this quote to dig deep into the evidence and facts to determine whether certain documents were availed or not And whether the respondent made any supplies among others that this is an act of conferring jurisdiction to this court through pleadings it is submitted that this is outside this vulnerable course scope and jurisdiction.
23. The respondent relies on Delmonte Kenya Limited versus county government of Muranga and another [2019] eKLR where the court stated :
68. “By jurisdiction is meant the authority which a Court has to decide matters that are litigated before it or to take cognisance of matters presented in a formal way for its decision. The limits of this authority are imposed by the statute, charter or commission under which the Court is constituted, and may be extended or restricted by like means. If no restriction or limit is imposed, the jurisdiction is said to be unlimited. A limitation may be either as to the kind and nature of the actions and matters of which the particular Court has cognisance or as to the area over which the jurisdiction shall extend, or it may partake both these characteristics…. Where a Court takes upon itself to exercise a jurisdiction which it does not possess, its decision amounts to nothing. Jurisdiction must be acquired before judgment is given”.
69. Black’s Law Dictionary, 9th Edition, defines jurisdiction as the Court’s power to entertain, hear and determine a dispute before it. 70. The significance of jurisdiction cannot be gainsaid. Any court acting without jurisdiction would be employing its energy, time and resources in futility. The issue of jurisdiction is so critical that it can be raised at any stage of the proceedings. In Jamal Salim v Yusuf Abdulahi Abdi & another Civil Appeal No. 103 of 2016 [2018] eKLR the Court of Appeal stated: “Jurisdiction either exists or it does not. Neither can it be acquiesced or granted by consent of the parties. This much was appreciated by this Court in Adero & Another vs. Ulinzi Sacco Society Limited [2002] 1 KLR 577, as follows; “1) …….. 2) The jurisdiction either exists or does not ab initio … 3) Jurisdiction cannot be conferred by the consent of the parties or be assumed on the grounds that parties have acquiesced in actions which presume the existence of such jurisdiction. 4) Jurisdiction is such an important matter that it can be raised at any stage of the proceedings even on appeal.”
24. It is submitted that this coach jurisdiction is limited to matters of law as provided by section 56)2) of the tax procedures act 2015 which says that an appeal to the high court or to the Court of Appeal shall be on a question of law only.
25. It is submitted that the Supreme Court in Gatirau Peter Munya v Dickson Mwenda Kithinji & 3 others [2014] eKLR d id set out what matters of law entail thus;
[75] The Supreme Court of the Philippines has had occasion to distinguish between “a question of fact” and “a question of law” in the case of Republic v. Malabanan, G.R. No. 169067, October 632 SCRA 338, 345. Citing another case, Leoncio v. De Vera, G.R. No. 176842, 546 Filed on: - No Paid- - BY: Mola Kimosop Advocates - Reference: E4GRBZ9Y - KSH. 0.00 SCRA 180, 184 the Court thus remarked: “A question of law arises when there is doubt as to what the law is on a certain state of facts, while there is a question of fact when the doubt arises as to the truth or falsity of the alleged facts . For a question to be one of law, the same must not involve an examination of the probative value of the evidence presented by the litigants or any of them . The resolution of the issue must rest solely on what the law provides on the given set of circumstances. Once it is clear that the issue invites a review of the evidence presented, the question posed is one of fact . Thus, the test of whether a question is one of law or of fact is not the appellation given to such question by the party raising the same; rather, it is whether the appellate court can determine the issue raised without reviewing or evaluating the evidence, in which case, it is a question of law; otherwise, it is a question of fact.”
26. The Court further stated;
“…We reiterate the distinction between a question of law and a question of fact. A question of law exists when the doubt or controversy concerns the correct application of law or jurisprudence to a certain set of facts; or when the issue does not call for an examination of the probative value of the evidence presented, the truth or falsehood of facts being admitted. A question of fact exists when the doubt or difference arises as to the truth or falsehood of facts or when the query invites calibration of the whole evidence considering mainly the credibility of the witness, the existence and relevancy of specific surrounding circumstances, as well as their relation to each other and to the whole, and to the probability of the situation . This Court cannot adjudicate which party told the truth… by reviewing and revising the evidence adduced at the trial court. Neither verbal sophistry, nor artful misinterpretations of supposed facts can compel this Court to re-examine findings of fact which were made by the trial court…. absent any showing that there are significant issues involving questions of law.” [82] Flowing from these guiding principles, it follows that a petition which requires the appellate Court to re-examine the probative value of the evidence tendered at the trial Court, or invites the Court to calibrate any such evidence, especially calling into question the credibility of witnesses, ought not to be admitted. We believe that these principles strike a balance between the need for an appellate Court to proceed from a position of deference to the trial Judge and the trial record, on the one hand, and the trial Judge’s commitment to the highest standards of knowledge, technical competence, and probity in electoral-dispute adjudication, on the other hand.
27. This court is urged to be guided by this authority to decline jurisdiction and to dismiss all the grounds of appeal.
28. That the appellant admitted to having received all the documents , and nothing stopped the appellant from asking for any other documents .
29. On the second issue the respondent submits that it is aware of s. 56(1) of the TPA and s. 30 of the TATA and its obligation on burden of proof. However it is submitted that the appellant accused the respondent of complicity to missing trader fraud and that having done so it was upon the appellant to prove these allegations. That before the TAT the respondent argued its case based on s. 93 of the TPA that where one alleges fraud. That one must prove. The respondent relied on Kinyanjui Kamau vs George Kamau [2015] eKLR and Evans Kidero v Speaker of Nairobi City County Assembly & another [2018] eKLR for the proposition that that he who alleges fraud must prove it
30. It is submitted that s.42 of the VAT act only requires the the supplier to issue a tax invoice to the purchaser which is conclusive evidence of a taxable supply. That the respondent indeed shared this information with the appellant and the onus fell on the appellant to show that the respondent was an accomplice to missing trader scheme. The respondent relies on Part II and III of the evidence Act and s. 107 of the same Act.
31. The respondent further relies on the determination of the TAT at paragraph 64 that:-
“…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.”
32. On whether the respondent had discharged its burden of proof and whether the appellant had an opportunity to scrutinize the documents requested it is submitted that Respondent provided all the documents that were requested and it is for that reason that the Objection was validated and that, in its objection decision, the appellant quotes with specificity, the Invoices provided and the amount of taxes involved.
33. It is further submitted that at Paragraph 62 of its Judgment the TAT summarizes the position of the Parties at the Tribunal by stating that “ 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.” That at paragraph 63 of the Judgment, the TAT states “…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.”
34. It is submitted that therefor if at all there was any claim against the Respondent, which position is contested, then the same would only be in respect of the kshs. 22,710.3 that the Appellant claims was not supported.
35. As to whether the honourable tribunal rightly found that the appellant had erred in disallowing the respondent’s VAT deductions the Respondent relied on s.17 of the VAT act , 2013 and submits that the law does not require the respondent or any taxpayer to verify the authenticity, compliance, propriety or tax registration status of a seller of goods or suppliers of service to benefit from tax deduction as that is the duty of the appellant that the only thing the Respondent is required to do, in its transaction with any supplier is to confirm whether the supplier had a valid PIN and was registered by the Appellant for VAT and had a valid ETR. For this proposition the respondent relies on Shreeji Enterprises (K) Limited vs Commissioner for Domestic taxes TAT no. 58 and 186 of 2019 where the TAT stated;
45. “The Tribunal noted that the Appellant had discharged its duty of paying output VAT and supplying corresponding information to the effect that it had purchased goods from registered persons prior to claiming input tax. The Tribunal was of the view that under the current legislation, the only obligation placed on the Appellant in respect of investigating the status of its counterparty to confirm that it purchased its supplies from a VAT registered trader and that trader had a registered ETR register. The Respondent did not dispute the fact that the traders and registers were registered by it. In short nothing was placed before the Tribunal to prove that the missing traders did not remit their output VAT in respect of the goods supplied to the Appellant. Or put simply knew or should have known that through his purchase he was taking part in transactions connected with the fraudulent evasion of VAT.” 46. “…Despite producing delivery noted, and other documentation, the Respondents concluded that the Appellant received no supplies.”
36. It is submitted that the Appellant should not be allowed to make such allegations of fraud and then demand the accused taxpayer to prove otherwise. That the Appellant should also not be allowed to acknowledge receipt of 17 document, blame them on alleged missing trader scheme, then introduce issues of a ’reasonable man’s test’’. It is submitted
37. .
38. In highlighting the submisions counsel for the appellant submitted tht s. 17 of the VAT Act requires that there must be evidence that supplies were made through the declaration by the suppliers that they actually sold the goods. It is argued that the respondent provided only invoices: That there ought to be evidence of payment through bank statemenst , delivery notes, stock records. It was argued that the TAT made a finding that these documents were presented to the Commissioner but if they were they were not before the TAT. This court was referred to Commissioner of Domestic Taxes vs Structural International (K) limited [2021] eKLR, Commissioner of Domestic Taxes vs Galaxy Tools Limited [2021]eKLR; and Osho Drapers Ltd vs Commissioner of Domestic Taxes [2022]eKLR
39. Reading through these judgments, the golden thread is that the invoices by themselves are insfucient and the respondent ought to have provided further evidence .
40. In the high lights by the respondent’s counsel it was submitted that the appellant had declined the input deductions on the basis that the respondent was party to a fraud called missing trader.
41. The court was urged to find that the objection decision clearly indicated that the respondent had received documents showing purchase of taxable supplies from persons profiled as missing trader fraud. That the objection decision does not just say that the appellant had looked at invoices only, but that that that was not the case that the appellant had looked at other documents as well, and that the only unsupported claim was ksh 22710 meaning that the Ksh 12,789,870 /54 was supported;that the appellant was trying to re-invent the wheel as the issue of insufficiency of evidence was neither here nor there. That it was not upon the respondent to pursue the suppliers for purposes of proving that they had supplied. That that was the duty of the appellant not the respondent. That if the suppliers had not filed their documents it was not the duty of the respondent to pursue them.
42. Regarding the fraud allegations it is submitted that the appellant did not demonstrate the extent of the alleged fraud.
43. In rejoinder counsel for the appellant submitted that the basis of the assessment was not fraud. That if the documents had ben supplied to the Commissioner they would have ben before the TAT.
44. I have carefully considered the grounds of appeal, the submissions and the entire record. The issues that arise are
(1) whether this court has jurisdiction to hear this appeal
(2) whether the objection decision conceded receipt of documentary evidence?
(3) Whether the assessment was based on allegations of fraud
(4) whether the appeal has merit.
45. It is common ground that issues and the entire appeal depend on the interpretation of the objection decision by the appellant dated 10 th November 2021. It will depend on what the objection decision said. This is because the TAT decision is pegged wholly on paragraph 17 of the appellant’s submissions before the TAT.
46. The jurisdiction of this court is on matters of law. This is the position of s. 56 (2) of the TPA that an appeal to the High Court… shall be on a question of law only.
47. At that paragraph 17 of the appellant’s submissions the appellant states: From a review of the documentation (invoices) provided, the Respondent noted that the invoices amounting to Ksh 12, 789,870.54 worth of VAT (99.82% of the assessment) are from particular suppliers as presented in the table below; (the respondent proceeds to list the suppliers, their pin numbers and the VAT claims and draws the conclusion that these are all missing trader claims.
48. The applicable law is section 17 of the VAT Act which provides for Credit for input tax against output tax in the following terms:
(1)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.
(2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1) —
(a) the person does not hold the documentation referred to in subsection (3) , and
(b) the registered supplier has not declared the sales invoice in a return, the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation :
Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.
(3) The documentation for the purposes of subsection (2) shall be—
(a)an original tax invoice issued for the supply or a certified copy;
(b)a customs entry duly certified by the proper officer and a receipt for the payment of tax;
(c)a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction; and
(d)a credit note in the case of input tax deducted under section 16(2) ;
(e)a debit note in the case of input tax deducted under section 16(5) ; or
(f)in the case of a participant in the Open Tender System for the importation of petroleum products that have been cleared through a non-bonded facility, the custom entry showing the name and PIN of the winner of the tender and the name of the other oil marketing company participating in the tender:
Provided that the input tax that may have been incurred by an oil marketing company participating in the Open Tender System before the coming into force of this provision shall be claimed within twelve months after this provision comes into force.
49. To begin with , the facts of this case were settled by the TAT. It found that the respondent had complied with s. 17 (2) and (3) of the VAT Act. That the respondent supplied the invoices which the appellant reviewed. That to that extent the respondent was not required to do anything else as it became the responsibility of the appellant to demonstrate fraud on the part of the respondent.
50. Section 17 (2) of the VAT Act requires that the tax payer to hold the documentation referred to in subsection (3) , and the the registered supplier to declare the sales invoice in a return.
51. It is not the duty of the tax payer to ensure that the supplier has declared the sales invoice. On this I agree with the TAT.
52. What did the objection decision say?
1. That there was no supply of taxable goods from 6 suppliers
2. That the respondent had not responded to request for suppliers confirm that indeed supplies were made
3. That VAT claims totaling to Ksh 12,789.870/54 on supplies were not supported and were due and payable with resultant penalty and interest
4. That purchases with VAT claims of Ksh 22,710.43 were not supported
5. The taxpayer was asked to pay the additional liability.
53. The submissions by the appellant before the TAT concede to receiving the invoices from the respondent however it does not say that the appellant has allowed the deduction.
54. It is clear from that objection decision that the appellant did not state that it was satisfied with the documentation, it clearly indicates that there was something missing.
55. I have carefully reviewed the authorities cited by the respondent i.e., Commissioner of Domestic Taxes vs Structural International (K) limited [2021] eKLR, Commissioner of Domestic Taxes vs Galaxy Tools Limited [2021]eKLR; and Osho Drapers Ltd vs Commissioner of Domestic Taxes [2022]eKLR
[...truncated]
IN THE HIGH COURT OF KENYA AT NAIROBI COMMERCIAL AND TAX DIVISION
INCOME TAX APPEAL NO E057 OF 2024
COMMISIONER OF DOMESTIC TAXES ……………….APPELLANT
VS
UNITRON LIMITED ……………………………………….RESPONDENT
JUDGMENT
(Being an appeal from the judgment of the Tax Appels Tribunal delivered on 26 th January 2024)
1. The appellant is the commissioner of domestic taxes appointed under section 13 of the Kenya Revenue Authority Act 1995. Under section 5(1), the Kenya Revenue Authority is an agency of the government for the collection and receipt of all revenue. Further under section 5(2) 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 and 2 of the first schedule to the Act for the purposes of assessing collecting, and accounting for all revenues in accordance with those laws.
2. The respondent is a limited liability company incorporated in Kenya. The respondents principal activity is sale of motor vehicle parts and accessories. The Respondent was registered for VAT obligation on 21 st July 2009 and has been filing VAT returns on iTAX since August 2014.
3. On 15 th November 2019 the appellant raised additional assessment on VAT of the for respondent for various months from 2015 to 2018 amounting to Kenya shillings 12, 846,789. The respondent objected to the appearance decision through a later dated 18 March 2021 which was validated on 7 th of October 2021. On 10 th of November 2021 The appellant issued an objection decision. That decision the commissioner stated that it had established there was number supply of taxable goods from six of the respondents suppliers with VAT claims totaling to ksh 12,789,870.54. The Commissioner further stated that the taxpayer had not fully supported purchases with VAT claims totaling to ksh 22, 710/43. It also stated that the taxpayer had not responded to their request to help the supplier confirm that indeed the supplies were made a schedule was made up there six suppliers and what was outstanding as A missing trader claims and other unsupported claims the commissioners confirmed the assessments as issued with a total sum coming to 12, 812,580.97 Inclusive of penalty and interest.
4. The tax payer was dissatisfied with the respondents objection decision and filed an appeal at the tribunal dated 30 th September 2022. The grounds for that appeal were contained in the memoranda move appeal dated 30 th September 2022 and filed on 7 th October 2022 On the following grounds.
5. That the appellant did not take into account the credits or advance payments hence the demanded amount was disputed; that the reconciliation was currently being carried out at the station by the accounts manager/debt to come to the actual amount. That urgency notices issued by the commissioner should be withdrawn until the reconciliation is completed; that the tribunal was therefore requested to allow the matter to proceed to ADR.
6. Upon considering the submissions by each party the tribunal was of the view that there was a single issue to be determined which was whether the respondent’s objection decision dated 10 th November 2021 was proper and in conformity with the law.
7. The Tribunal found that the respondent had discharged its burden of proof as required by section 56(1) of the TPA 2015 by providing the necessary records and documentation to support its purchases of 12,789,850.54 VAT refund claim which the respondent confessed in its objection decision that from the respondent’s admission it was apparent that what was in dispute was a tax liability of Ksh 22,710/43 which the respondent did not adduce documentary support. The Tribunal found that the respondent was not justified in disallowing the appellant’s input VAT refund claim and therefore the respondent’s objection decision of 10 th November 2021 was unjustified. The tribunal allowed their appeal and set aside the respondent’s objection decision dated 10 th November 2021.
8. The appellant was aggrieved and filed this appeal on the following grounds’; That the tribunal erred in law and fact by not taking into consideration that in order to claim input VAT there must be a purchase of a taxable supply as it is not enough to have the documentation listed in section 17 of the VAT Act the documentation must be supported by an underlying transaction and the taxpayer must furnish proof that there was actual purchase. Section 17(1) of the VAT Act embodies the well established principle of VAT law that a taxable person who makes transactions in respect of the goods or services acquired by him, provided that such goods or services have a direct and immediate link with the output transaction in respect of which VAT is deductible.
9. That the tribunal erred by not finding that the respondent did not discharge its burden of proof as the appellant did not get an opportunity to scrutinize the documents requested including proof of payment, invoices, stock cards and delivery notes as claimed by the appellant
10. That the tribunal erred in fact by stating that paragraph 17 of the appellant’s submission filed at the Tribunal admitted that the appellant had provided documentation (invoices) yet the paragraph is on reasonable man test.
11. In the circumstances the appellant seeks that the judgment of the Tribunal made on 26 th January 2024 and the consequential orders be set aside, that the review decision dated 10 th November 2021 be upheld that the appeal filed be allowed and the costs of the appeal be awarded to the appellant.
12. Parties filed written submissions.
13. The appeal and framed issues for determination
i. what does the objection decision state?
14. It was submitted that the tribunal made an error by stating that their apparent had confessed in its objection decision that the respondent discharged the burden of proof since it proved the necessary documents to support purchases of Kenya shillings 12789870.54 VAT refund claim. The court was referred to the objection decision in the record of appeal
ii. Whether the respondent discharge its burden of proof
15. It is submitted that the respondent did not adduce any documents to demonstrate that they discharged the burden of proof. That it is not correct that at paragraph 17 of its submissions before the tribunal the appellant admitted to reviewing documents from the respondent or that it allowed the invoices amounting to Ksh 12,789,870/59. That there was no evidence before the tribunal that there were purchases of taxable supplies and the tax payer did not furnish any proof that there was actual purchases. To that end the respondent did not comply with section 56 (1) of the tax procedures act to the effect that it is the burden of the tax payer to prove that a tax decision is incorrect, or section 30 of the tax appeals tribunals act to show that the assessment was excessive or the tax decision should not have been made or should have been made differently. The appellant relied on commissioner of domestic taxes versus Socabelee East Africa limited [2024] KEHC 3319 (KLR) where the high court held that the tribunal found that their appellant ought to have produced more evidence to prove that the trade balance of Kenya shillings 13 136 399 was owed to SA ADURJAU Exploration and the transactional net balance of Kenya shillings 32,163,801 was owed to Kenyan entities and not nonresidents. I am inclined to agree with the appellant that the tribunal erred in this respect. The correct position is that the burden of proving that an assessment is wrong or excessive is upon the taxpayer as set out under section 30 of the tax appeals Tribunal Act and section 56 of the tax procedures act.
16. Relies on section 31 the tax procedures act on the powers of the commissioner to amend an assessment by making alterations or additions from the available information, 59 nine of the same act which empowers their appellant to request the tax payer to produce documents to satisfy the appellant if is of the view that information the taxpayer has given is insufficient.
17. The appellant cited commissioner of domestic taxes versus Trical and hard limited tax appeal E146 of 2020 [2022] KEHC 9927 (KLR). In that matter the court found that the tribunal had erred in its interpretation and application of sections 56 and 59 of the tax procedures act section 17 and 43 of the VAT Act 2013 section 30 of the tax Appeals tribunal act and had arrived at the wrong conclusion in the matter; that they misapprehended the evidence and facts on record and arrived at a decision that was perverse which warrants the intervention of the court.
18. It is submitted that that case is similar to the case at hand as there is an issue of missing trader where the six companies were flagged by their appellant ; That the appellant in its decision stated that there was no supply of taxable goods from the six companies and that it was at that moment the burden of proof upon the respondent came into play to prove the findings by the Commissioner was wrong.
19. The appeal is opposed by the respondent Through their submissions. It is submitted that the appellant claims the respondents input claim of Kenya shillings 12,789 ,870.54 Is none allowable for the reason that the goods were supplied by entities which the appellant claims participated in a missing trader fraud.
20. They responded frames the issues whether the honorable court has jurisdiction to determine matters of facts in this appeal And whether the appellant made out a case of missing trade or fraud against the respondent as alleged under ground one of the memorandum of appeal, And whether they’re honorable tribunal rightly found that the appellant had erred in disallowing the respondents VATdeductions.
21. It is submitted that the respondent provided all the necessary documents required to show that there was a vertical supply made to it It is submitted that this is admitted in the objection decision and the appellant statement of fact and submissions filed at the tribunal.
22. That two and three of the memoranda move appeal as framed invite this quote to dig deep into the evidence and facts to determine whether certain documents were availed or not And whether the respondent made any supplies among others that this is an act of conferring jurisdiction to this court through pleadings it is submitted that this is outside this vulnerable course scope and jurisdiction.
23. The respondent relies on Delmonte Kenya Limited versus county government of Muranga and another [2019] eKLR where the court stated :
68. “By jurisdiction is meant the authority which a Court has to decide matters that are litigated before it or to take cognisance of matters presented in a formal way for its decision. The limits of this authority are imposed by the statute, charter or commission under which the Court is constituted, and may be extended or restricted by like means. If no restriction or limit is imposed, the jurisdiction is said to be unlimited. A limitation may be either as to the kind and nature of the actions and matters of which the particular Court has cognisance or as to the area over which the jurisdiction shall extend, or it may partake both these characteristics…. Where a Court takes upon itself to exercise a jurisdiction which it does not possess, its decision amounts to nothing. Jurisdiction must be acquired before judgment is given”.
69. Black’s Law Dictionary, 9th Edition, defines jurisdiction as the Court’s power to entertain, hear and determine a dispute before it. 70. The significance of jurisdiction cannot be gainsaid. Any court acting without jurisdiction would be employing its energy, time and resources in futility. The issue of jurisdiction is so critical that it can be raised at any stage of the proceedings. In Jamal Salim v Yusuf Abdulahi Abdi & another Civil Appeal No. 103 of 2016 [2018] eKLR the Court of Appeal stated: “Jurisdiction either exists or it does not. Neither can it be acquiesced or granted by consent of the parties. This much was appreciated by this Court in Adero & Another vs. Ulinzi Sacco Society Limited [2002] 1 KLR 577, as follows; “1) …….. 2) The jurisdiction either exists or does not ab initio … 3) Jurisdiction cannot be conferred by the consent of the parties or be assumed on the grounds that parties have acquiesced in actions which presume the existence of such jurisdiction. 4) Jurisdiction is such an important matter that it can be raised at any stage of the proceedings even on appeal.”
24. It is submitted that this coach jurisdiction is limited to matters of law as provided by section 56)2) of the tax procedures act 2015 which says that an appeal to the high court or to the Court of Appeal shall be on a question of law only.
25. It is submitted that the Supreme Court in Gatirau Peter Munya v Dickson Mwenda Kithinji & 3 others [2014] eKLR d id set out what matters of law entail thus;
[75] The Supreme Court of the Philippines has had occasion to distinguish between “a question of fact” and “a question of law” in the case of Republic v. Malabanan, G.R. No. 169067, October 632 SCRA 338, 345. Citing another case, Leoncio v. De Vera, G.R. No. 176842, 546 Filed on: - No Paid- - BY: Mola Kimosop Advocates - Reference: E4GRBZ9Y - KSH. 0.00 SCRA 180, 184 the Court thus remarked: “A question of law arises when there is doubt as to what the law is on a certain state of facts, while there is a question of fact when the doubt arises as to the truth or falsity of the alleged facts . For a question to be one of law, the same must not involve an examination of the probative value of the evidence presented by the litigants or any of them . The resolution of the issue must rest solely on what the law provides on the given set of circumstances. Once it is clear that the issue invites a review of the evidence presented, the question posed is one of fact . Thus, the test of whether a question is one of law or of fact is not the appellation given to such question by the party raising the same; rather, it is whether the appellate court can determine the issue raised without reviewing or evaluating the evidence, in which case, it is a question of law; otherwise, it is a question of fact.”
26. The Court further stated;
“…We reiterate the distinction between a question of law and a question of fact. A question of law exists when the doubt or controversy concerns the correct application of law or jurisprudence to a certain set of facts; or when the issue does not call for an examination of the probative value of the evidence presented, the truth or falsehood of facts being admitted. A question of fact exists when the doubt or difference arises as to the truth or falsehood of facts or when the query invites calibration of the whole evidence considering mainly the credibility of the witness, the existence and relevancy of specific surrounding circumstances, as well as their relation to each other and to the whole, and to the probability of the situation . This Court cannot adjudicate which party told the truth… by reviewing and revising the evidence adduced at the trial court. Neither verbal sophistry, nor artful misinterpretations of supposed facts can compel this Court to re-examine findings of fact which were made by the trial court…. absent any showing that there are significant issues involving questions of law.” [82] Flowing from these guiding principles, it follows that a petition which requires the appellate Court to re-examine the probative value of the evidence tendered at the trial Court, or invites the Court to calibrate any such evidence, especially calling into question the credibility of witnesses, ought not to be admitted. We believe that these principles strike a balance between the need for an appellate Court to proceed from a position of deference to the trial Judge and the trial record, on the one hand, and the trial Judge’s commitment to the highest standards of knowledge, technical competence, and probity in electoral-dispute adjudication, on the other hand.
27. This court is urged to be guided by this authority to decline jurisdiction and to dismiss all the grounds of appeal.
28. That the appellant admitted to having received all the documents , and nothing stopped the appellant from asking for any other documents .
29. On the second issue the respondent submits that it is aware of s. 56(1) of the TPA and s. 30 of the TATA and its obligation on burden of proof. However it is submitted that the appellant accused the respondent of complicity to missing trader fraud and that having done so it was upon the appellant to prove these allegations. That before the TAT the respondent argued its case based on s. 93 of the TPA that where one alleges fraud. That one must prove. The respondent relied on Kinyanjui Kamau vs George Kamau [2015] eKLR and Evans Kidero v Speaker of Nairobi City County Assembly & another [2018] eKLR for the proposition that that he who alleges fraud must prove it
30. It is submitted that s.42 of the VAT act only requires the the supplier to issue a tax invoice to the purchaser which is conclusive evidence of a taxable supply. That the respondent indeed shared this information with the appellant and the onus fell on the appellant to show that the respondent was an accomplice to missing trader scheme. The respondent relies on Part II and III of the evidence Act and s. 107 of the same Act.
31. The respondent further relies on the determination of the TAT at paragraph 64 that:-
“…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.”
32. On whether the respondent had discharged its burden of proof and whether the appellant had an opportunity to scrutinize the documents requested it is submitted that Respondent provided all the documents that were requested and it is for that reason that the Objection was validated and that, in its objection decision, the appellant quotes with specificity, the Invoices provided and the amount of taxes involved.
33. It is further submitted that at Paragraph 62 of its Judgment the TAT summarizes the position of the Parties at the Tribunal by stating that “ 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.” That at paragraph 63 of the Judgment, the TAT states “…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.”
34. It is submitted that therefor if at all there was any claim against the Respondent, which position is contested, then the same would only be in respect of the kshs. 22,710.3 that the Appellant claims was not supported.
35. As to whether the honourable tribunal rightly found that the appellant had erred in disallowing the respondent’s VAT deductions the Respondent relied on s.17 of the VAT act , 2013 and submits that the law does not require the respondent or any taxpayer to verify the authenticity, compliance, propriety or tax registration status of a seller of goods or suppliers of service to benefit from tax deduction as that is the duty of the appellant that the only thing the Respondent is required to do, in its transaction with any supplier is to confirm whether the supplier had a valid PIN and was registered by the Appellant for VAT and had a valid ETR. For this proposition the respondent relies on Shreeji Enterprises (K) Limited vs Commissioner for Domestic taxes TAT no. 58 and 186 of 2019 where the TAT stated;
45. “The Tribunal noted that the Appellant had discharged its duty of paying output VAT and supplying corresponding information to the effect that it had purchased goods from registered persons prior to claiming input tax. The Tribunal was of the view that under the current legislation, the only obligation placed on the Appellant in respect of investigating the status of its counterparty to confirm that it purchased its supplies from a VAT registered trader and that trader had a registered ETR register. The Respondent did not dispute the fact that the traders and registers were registered by it. In short nothing was placed before the Tribunal to prove that the missing traders did not remit their output VAT in respect of the goods supplied to the Appellant. Or put simply knew or should have known that through his purchase he was taking part in transactions connected with the fraudulent evasion of VAT.” 46. “…Despite producing delivery noted, and other documentation, the Respondents concluded that the Appellant received no supplies.”
36. It is submitted that the Appellant should not be allowed to make such allegations of fraud and then demand the accused taxpayer to prove otherwise. That the Appellant should also not be allowed to acknowledge receipt of 17 document, blame them on alleged missing trader scheme, then introduce issues of a ’reasonable man’s test’’. It is submitted
37. .
38. In highlighting the submisions counsel for the appellant submitted tht s. 17 of the VAT Act requires that there must be evidence that supplies were made through the declaration by the suppliers that they actually sold the goods. It is argued that the respondent provided only invoices: That there ought to be evidence of payment through bank statemenst , delivery notes, stock records. It was argued that the TAT made a finding that these documents were presented to the Commissioner but if they were they were not before the TAT. This court was referred to Commissioner of Domestic Taxes vs Structural International (K) limited [2021] eKLR, Commissioner of Domestic Taxes vs Galaxy Tools Limited [2021]eKLR; and Osho Drapers Ltd vs Commissioner of Domestic Taxes [2022]eKLR
39. Reading through these judgments, the golden thread is that the invoices by themselves are insfucient and the respondent ought to have provided further evidence .
40. In the high lights by the respondent’s counsel it was submitted that the appellant had declined the input deductions on the basis that the respondent was party to a fraud called missing trader.
41. The court was urged to find that the objection decision clearly indicated that the respondent had received documents showing purchase of taxable supplies from persons profiled as missing trader fraud. That the objection decision does not just say that the appellant had looked at invoices only, but that that that was not the case that the appellant had looked at other documents as well, and that the only unsupported claim was ksh 22710 meaning that the Ksh 12,789,870 /54 was supported;that the appellant was trying to re-invent the wheel as the issue of insufficiency of evidence was neither here nor there. That it was not upon the respondent to pursue the suppliers for purposes of proving that they had supplied. That that was the duty of the appellant not the respondent. That if the suppliers had not filed their documents it was not the duty of the respondent to pursue them.
42. Regarding the fraud allegations it is submitted that the appellant did not demonstrate the extent of the alleged fraud.
43. In rejoinder counsel for the appellant submitted that the basis of the assessment was not fraud. That if the documents had ben supplied to the Commissioner they would have ben before the TAT.
44. I have carefully considered the grounds of appeal, the submissions and the entire record. The issues that arise are
(1) whether this court has jurisdiction to hear this appeal
(2) whether the objection decision conceded receipt of documentary evidence?
(3) Whether the assessment was based on allegations of fraud
(4) whether the appeal has merit.
45. It is common ground that issues and the entire appeal depend on the interpretation of the objection decision by the appellant dated 10 th November 2021. It will depend on what the objection decision said. This is because the TAT decision is pegged wholly on paragraph 17 of the appellant’s submissions before the TAT.
46. The jurisdiction of this court is on matters of law. This is the position of s. 56 (2) of the TPA that an appeal to the High Court… shall be on a question of law only.
47. At that paragraph 17 of the appellant’s submissions the appellant states: From a review of the documentation (invoices) provided, the Respondent noted that the invoices amounting to Ksh 12, 789,870.54 worth of VAT (99.82% of the assessment) are from particular suppliers as presented in the table below; (the respondent proceeds to list the suppliers, their pin numbers and the VAT claims and draws the conclusion that these are all missing trader claims.
48. The applicable law is section 17 of the VAT Act which provides for Credit for input tax against output tax in the following terms:
(1)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.
(2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1) —
(a) the person does not hold the documentation referred to in subsection (3) , and
(b) the registered supplier has not declared the sales invoice in a return, the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation :
Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.
(3) The documentation for the purposes of subsection (2) shall be—
(a)an original tax invoice issued for the supply or a certified copy;
(b)a customs entry duly certified by the proper officer and a receipt for the payment of tax;
(c)a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction; and
(d)a credit note in the case of input tax deducted under section 16(2) ;
(e)a debit note in the case of input tax deducted under section 16(5) ; or
(f)in the case of a participant in the Open Tender System for the importation of petroleum products that have been cleared through a non-bonded facility, the custom entry showing the name and PIN of the winner of the tender and the name of the other oil marketing company participating in the tender:
Provided that the input tax that may have been incurred by an oil marketing company participating in the Open Tender System before the coming into force of this provision shall be claimed within twelve months after this provision comes into force.
49. To begin with , the facts of this case were settled by the TAT. It found that the respondent had complied with s. 17 (2) and (3) of the VAT Act. That the respondent supplied the invoices which the appellant reviewed. That to that extent the respondent was not required to do anything else as it became the responsibility of the appellant to demonstrate fraud on the part of the respondent.
50. Section 17 (2) of the VAT Act requires that the tax payer to hold the documentation referred to in subsection (3) , and the the registered supplier to declare the sales invoice in a return.
51. It is not the duty of the tax payer to ensure that the supplier has declared the sales invoice. On this I agree with the TAT.
52. What did the objection decision say?
1. That there was no supply of taxable goods from 6 suppliers
2. That the respondent had not responded to request for suppliers confirm that indeed supplies were made
3. That VAT claims totaling to Ksh 12,789.870/54 on supplies were not supported and were due and payable with resultant penalty and interest
4. That purchases with VAT claims of Ksh 22,710.43 were not supported
5. The taxpayer was asked to pay the additional liability.
53. The submissions by the appellant before the TAT concede to receiving the invoices from the respondent however it does not say that the appellant has allowed the deduction.
54. It is clear from that objection decision that the appellant did not state that it was satisfied with the documentation, it clearly indicates that there was something missing.
55. I have carefully reviewed the authorities cited by the respondent i.e., Commissioner of Domestic Taxes vs Structural International (K) limited [2021] eKLR, Commissioner of Domestic Taxes vs Galaxy Tools Limited [2021]eKLR; and Osho Drapers Ltd vs Commissioner of Domestic Taxes [2022]eKLR
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