‘COMMISSIONER OF DOMESTIC TAXES.. Teer REPUBLIC OF KENYA IN THE TAX APPEAL TRIBUNAL ‘APPEAL seseo/APPELLANT ‘VERSUS JUDGMI INTRODUCTION ‘The Appellant is a limited llability company duly incorporated in Kenya under the provisions of Cap 486 of the Laws of Kenya, ‘The Respondent is a principal officer of Kenya Revenue Authority appointed under Section 3 of the Kenya Revenue Authority Act, Cap 469 of the Laws of Kenya and the Authority's core mandate is to assess collect and account for all revenue in accordance with identified tax laws. BACKGROUND The Respondent received intelligence information from the Investigation and Enforcement Department about traders that were making huge sales bbut declaring very litte or no taxable income. The allegation was that the said persons formed a network in such a way that they would supply almost ‘equal amounts to each other thus bringing the output to zero or end up in «8 credit position, cae mrOn 16% April 2018, the Appellant received a letter from the Respondent demanding for underpaid Value Added Tax (VAT) amount to Kshs. 8,407.735.61. The Respondent claimed that the Appellant used invoices from suppliers listed therein for which no deliveries were nade to account for input VAT for the period from 12" August 2015 to 2% January 2018 ‘The Respondent further claimed that the said invoices were used to account for expenses in the financial statement for the stated period thereby reducing the VAT liability and Income tax liability. The Appellant via a letter dated 22" May 2018 objected to the Respondent's assessment setting out the objection in detail. The Respondent reverted to the Appellant with an objection decision on 29% June 2018 confirming the assessment as issued with principal VAT of Kshs 8,407,736.00 together with the resultant interes. ‘The Appellant found the demand by the Respondent of Kshs. 10,091,157.89 allegedly being underpayment of VAT as misplaced, without any legal basis and accordingly proceeded to the Tribunal by filing a Notice of Appeal ‘APPEAL ‘The Appeal herein is pegged on the following grounds as contained in the Appellant's Memorandum of Appeal: {The assessment of principal value added tax underpayment of Ks. 8,407,736.00 is based on unverified allegations. . The assessment of principal Value Added Tax underpayment of Kshs. 8.407,736.00 is based on unverified presumptions. The Respondent ered in law and in fact and ignored the explanations by the Appellant including an invitation to review their financial records and inventories d. The Respondent erred in law and in fact and ignored documentary evidence supplied by the Appellant to support the assessment. €, The Respondent erred in law and in fact in claiming underpayment of VAT while the Appellant had always filed its returns in good time and was issued with a tax compliance certificate. f. The Respondent erred in law and in fact in claiming that no goods ‘were delivered to the Appellant during the period under review. g. The Respondent erred in law and in fact in claiming that the Appellant used invoices for goods not delivered to diminish tax liability ‘The Appellant found the underpayment of VAT assessment as misplaced, ‘without any legal basis and prayer that the same ought to be disallowed. 10. The Respondent in turn contends as follows: 1a, The Respondent states that the preliminary findings for the period of 12% August 2015 to 24 January 2018 revealed that the Appellant claimed inputs amount to Kshs. 52,548,347.57 from the following suppliers Butys General Supplies, Pericks Investmerts, Surety Global Enterprises, Vijarada Enterprises, Kishna Enterprises, Sorez Enterprises, Swala General Supplies and Shanlester Enterprises. bb. The Respondent computed taxes from the Appellant's invoices and computed VAT of Kshs. 8,407,735.00 and corporation tax of Kshs. 15,764,504,27 as illustrated in the demand letter dated 16% April 2018. Fagen peo avo Tene gener Uni Connon of aes oa«c. The tax demand was asa result of the Appellant claiming input VAT and corporation tax underpaid using involees it obtained from the suppliers as detailed in the demand letters datec 16% April 2018 ‘which suppliers had been profiled by the Respondent as printing and selling electronic tax register (ETR) receipt: without actual supplies 4. The Respondent states the ETRs supplied were illegible such as Invoices for Vijarada Enterprises, Kishna Enterprises, Pericks Investments, Surety Global Enterprises, Sorez Enterprises, and Shanlester Enterprises. fe. The further failed and/or ignored to avail bank statements, sales invoices, job card, stock records and stock movement records to ascertain evidence of goods having been received. f. The Respondent states that some of the suppliers of fictitious invoices had been arraigned in court denied making the supplies of the goods. The VAT assessment were therefore to be raised, input claim denied and the tax due recovered. TI, In light of the above, the Respondent prays that the Appeal be dismissed ‘with costs to the Respondent and the objection decision be confirmed as against the Appellant. D, ISSUES FOR DETERMINATION 12, Inourassessment and from the contesting submis ions by the parties herein, we surmise that only one issue crystalizes for determination by the Honorable Tribunal namel Sr ee 71a. Whether the Respondent erred by disallowing the Appellant's claim for input VAT? ANALYSIS 13, The Appellant herein was assessed for and issued with a tax demand for ‘underpayment of VAT amounting to Kshs. 4.407.735.00. Following the demand the Appellant objected to the assessment and provided the Respondent with the relevant records in support ofits poston that taxable supply was made and consequently the Appellant's entitlement to deduct Input as is legally allowed. 14. The Respondent on the other hand avers that it receved intelligence information from the Investigation and Enforcement Department about traders that were making huge sales but declaring very litle or no taxable income. The Appellant herein was one such beneficiary hence necessitating its assessment, That the Appellant claimed inputs amount to Kshs. 52,548,347.57 and did not provide evidence to support its business ‘transactions fully. Further, the Respondent states that some of the suppliers of fictitious invoices had been arraigned in court and denied making the supplies of the goods. The VAT assessment were therefore to be raised, Input claim denied and the tax due recovered. 15. From the foregoing submissions by the parties herein, we observe that the ‘crux of the Appeal herein is the Appellant's entitlement to input VAT deduction. The Respondent has disallowed the Appellant's claim on the premise that the Appellant did not make taxable supply. Accordingly, before going any further in this analysis, it will be prudent to reproduce the Fine poate anor iie fenoe ge Li Tamminen oboe 76. pertinent provisions of the law on the isue of input VAT deduction. In this regard Section 17 (I) of the VAT Act, 2013 provides thus: “ (1) Subject to the provisions of this section and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or ‘importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only tothe extent thatthe supply or importation was acquired to make taxable supplies. Q.. (3)The documentation forthe purposes of subsection (2) shall be— (a) {an original tax invoice isued for the supply or a certified copy: (2) @ ‘customs entry duly certified by the proper officer and a receipt for the payment of tax; (¢) a customs receipt and a certificete signed by the proper officer stating the amount of tax paid, in the case of goods Purchased from a customs auction; (d) a credit note in the case of input tax deducted under section 16(2); or (e) a debit note in the case of Input tax deducted under section 16(5)". In our view, the above Section of the VAT Act, 2013 allows a registered trader to deduct all input VAT suffered from the output VAT charged in supplies made by the trader. The threshold established there is that the taxpayer must be registered for VAT purposes. The purchase was for the purpose of making taxable supplies. The input tax does not relate to the excluded purchases as set out in Section 17 (4) of the VAT Act, 2013 or ‘exempt supplies. The input is claimed within six (6) months of receiving the supply and the daim for the input tax should be based on the Pe ete 10 oes gcc: Ltn > Gomme Tar medocumentation required under Section 17 (3) of the VAT Act, 2013 and the Regulations thereunder. 17, The record before us by the Appellant is comprised of @ bulk of documentary evidence, supplied to the Respondent in support of the Appellant's contention that the Respondent erred in its asessment, To this ‘extend the Tribunal is satisfied that the Appellant has lived up to it legal ‘obligation to maintain and provide documentary evidence of its business transactions as required by Sections 23 and 43 of the Tax Procedures Act, 2015 and the VAT Act, 2013. We also note that the Appellant has met the threshold under Section 17 of the VAT Act, 2013 in o' input tax deduction. to qualify for 18, That sal the Respondent. With respect, we disfavor the arguments submitted by the |, we must now turn our attention to the arguments tenclered by Respondent on a number of grounds. In the first instance, the Respondent claims that the Appellant herein traded with suppliers that the Kenya Revenue Authority had profiled for being involved in the business of printing and selling ETR receipts. Perhaps the irony of this statement is lost ‘on the Respondent. Considering the vast powers vested in the Kenya Revenue Authority, one would assume that the Authority would not only profile individuals engaged in the illegal printing and selling of ETR receipts but prosecute them and warn the public. Instead, as is evident from this case, the Respondent is going after and injuring the input deduction right accruing to a tax payer who has rightly qualified for deduction in law. 19. We further disfavor the Respondent argument on the premise the Commissioner had entirely failed to demonstrated some nexus and connivance between the Appellant herein and the profiled suppliers, that Fire poate oe rege Tannin obese Tee mTIndeed the Appellant was aware of and fully pattcipated in the missing trader scheme with the intention to reduce its tax liability. The Respondent has i submissions and Statement of Facts alluded to the fact that some of the suppliers of fictitious invoices used by the Appellant had been arraigned in court and denied making the supplies of the goods. However, the Tribunal has not been provided with evidence to this efect. Neither did the Respondent call any of the said suppliers as witness during the hearing of this Appeal 20. The Respondent's case lacks in merit in the eyes of the Tribunal considering that the Respondent claims that its Investigations and Enforcement Department had investigated this traders yet not a shred of ‘evidence demonstrating such investigations has been provided to the ‘Tribunal, This is exacerbated in light of the fact the Respondent has closed its eyes to the bulk evidence produced by the Appellant. issue of miss 21, That said, we note thatthe nature of the accusations by the Respondent are that Appellant participated in fraudulent evasion of tax. The Respondent has contended thatthe suppliers print end sell invoices with ETR receipts to various companies at a commission to reduce their tax liability. The Respondent however, has not shown whether the Appelant has engaged in such an activity so much 50 as to deny the Appellant its input deductions. “There is not a shred of evidence before us to persuade us to entertain the Respondent's allegation. 2. Itis trite law that case of fraud must be specifically pleaded and proved. To simply infer fraud from the facts, we think, not suffice. To this end, we find it appropriate to refer to the elaboration of pleading fraud by Tunoi, Feapnne peo ao Tenia gn Uniad Conmanonr a DomacTe 723. JA. (as he then was) in Vijay Morjaria vs Nansingh Madhusingh Darbar Gamp; Another [2000] eKLR: “It s well established that fraud must be specifically pleaded and that particulars of the fraud alleged must be stated on the face of the pleading. The acts alleged to be fraudulent must, of course, be set out, and then it should be stated that these acts were done fraudulently. It Js also settled law that fraudulent conduct must be distinctly alleged and distinctly proved, and it is not allowable to leave fraud to be ‘inferred from the facts.” [Emphasis added]. Moreover, and perhaps more important, we find that the ourden of proof, which essentially in tax law rests on the taxpayer, shifted to the Respondent at the point issues of VAT fraud were ralsed. In this regard we rely on the Halsbury's Laws of England, 4 Edition, Volume 17, paras 13 and 14, which provides as follows:- (13) The legal burden is the burden of proof which remains constant throughout a tri; it is the burden of establishing the facts and contentions which will support a party's case. If at the conclusion of the trial he has failed to establish these to the appropiate standard, he wil lose. (14) The legal burden of proof normally rests upon the party desiring the court to take action; thus a claimant must satisfy the court or tribunal thatthe conditions which entitle him to an award have been satisfied. In respect of a particular allegation, the burden lies upon the arty for whom substantiation of that particular allegation is an ‘essential of his case. There may therefore be separate burdens ina case of with separate isues”.24, Additionally, Section 107 of the Evidence Act, Cap 80 of the Laws of Kenya provides thus: (1) Whoever desires any court to give judgment as to any legal right or ability dependent on the existence of facts which he asserts must (prove that those facts exist. 25. We find that the decision of the Respondent denying the Appellant the right ‘to deduct input tax i irrational and illegal. The Respondent in arriving at that decision was not guided by the law and took into account irrelevant considerations. In our assessment this case falls squarely on all fours as it leariy failed to consider the evidence produced by the Appellant. In this regard the Tribunal places reliance on the case of Fleur Investments Limited vs Commissioner of Domestic Taxes Samp: Another [2018] eKLR, wherein it was held: “this case falls squarely on all fours with the case of Municipal Council of Mombasa Vs Republic & Umoja Consultants Limited because clearly the Respondent failed to consider the very relevant {facts that their request for an audit meeting had already been met, all documents requested for had been availed and examined, and yet the assessment was premised on the erroneous premise that the appellant had falled to comply with the said requests. The need to take into ‘account relevant considerations and ignore irrelevant facts in the decision making has close nexus with the need to act reasonably”. F. CONCLUSION 26. Our observation in this case remains as our conclusion in Tax Appeal No, 148 of 2018, Computech Limited vs Commissioner of Domestic Taxes. On24, Additionally, Section 107 of the Evidence Act, Cap 80 of the Laws of Kenya provides thus; () Whoever desires any court to give judgment as to any legal right or ability dependent on the existence of facts which he asserts must prove that those facts exist. 25, We find that the decision of the Respondent denying the Appellant the right to deduct input tax is irrational and illegal. The Respondent in arriving at that decision was not guided by the law and took into account irrelevant considerations. In our assessment this case falls squarely on all fours as it clearly failed to consider the evidence produced by the Appellant. In this, regard the Tribunal places reliance on the case of Fleur Investments Limited vs Commissioner of Domestic Taxes Samp; Another [2018] eKLR, wherein It was elds “thls case falls squarely on all fours with the case of Municipal Council of Mombasa Vs Republic & Umoja Consultants Limited because clearly the Respondent failed to consider the very relevant facts that thelr request for an audit meeting had alresdy been met, all locuments requested for had been availed and examined, and yet the assessment was premised on the erroneous premise that the appellant had falled to comply with the said requests. The need to take into account relevant considerations and ignore irrelevant facts in the decision making has close nexus with the need to act reasonably”. F. CONCLUSION 26. Our observation in this case remains as our conclusion ir Tax Appeal No. 148 of 2018, Computech Limited vs Commissioner of Domestic Taxes. On« balance of probabilities. that in respect ofthe period tnder Apes, the ‘Appellant has indeed put forth a slid ease in support ofits entileent to edit refund as dsimed. The Respondents case ls woeful inadequate and -enerally lacking intact given the number of "mising trader” cases currently before this Honorable Tribunal. Accordingly, In light of the totality of evidence on record and the foregoing analy, the Trbunal makes the following Orders: 1, The Appest hersin ir merited. 1. The Respondent's objection dedtion and confrmed assessment ‘therein is hereby set aside, Gach party to bear ts own cots tts 50 ordered. DATED and DELIVERED at NAIROBI this 2" day of August, 2020 ‘CHAIRMAN 2— PATRICIA MAGI MEMBER ‘WAMBLT NAME ‘MEMBER