Tembo Steels Uganda Limited v Uganda Revenue Authority (TAT 22 OF 2005) [2007] UGTAT 2 (18 May 2007)

Full Case Text

THE REPUBLIC OF UGANDA

# IN THE TAX APPEALS TRIBUNAL AT KAMPALA

# APPLICATION NO: TAT 22 OF 2005.

TEMBO STEELS [U] LTD APPLICANT

## VERSUS

# UGANDA REVENUE AUTHORITY RESPONDENT

### RULING OF THE TRIBUNAL

*I* Coram Mr. B. N. Kamugasha

Chairman

Mr. J. lica Member

Mr. P. A Namugowa Member

# Representation of the parties

| Tembo Steels [U] LTD [Applicant] | Represented Cephas by Mr. Birungyi of Birungyi, Barata Advocates & Co. and Patrick Behangaye of Mr. Capital Law Partners. | |----------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------| | Revenue Authority Uganda | Represented Anne by Mrs. |

[Respondent]

Ms. Bitature. Mr. Oboth Julius and Mr. Innocent Habomugisha.

#### FACTS:

The facts of the Application as stated by the Applicant are as follows:-

- 1. The Applicant is engaged in the production of steel products at two plants one in Lugazi and another at Iganga in Uganda. It has a head office at Pilkington Avenue in Kampala. - 2. The Applicant registered for VAT when it commenced business in 2001 and has been filing VAT returns since. - 3. On 20th May 2003 the Applicant received a letter from the Special Revenue Protection Services (SRPS) introducing officers to conduct an audii and take documents. *[Pg. 136]*

*I.*

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- 4. On 24th July 2003 the Applicant got another letter from URA introducing staff intending to carry out an audit. Exhibit 8 [Pg. 138] - 5. The SRPS audit resulted in a letter dated $2^{n\alpha}$ February 2004 being a recommendation for a refund of Shs $14,465.509=$ (Fourteen Million four hundred sixty five thousand five hundred nine shillings) *IPa*. 1397 - 6. Following the refund claim application Uganda Revenue Authority (URA) introduced another audit team on 13th September 2004 which comprised both URA staff and SRPS. The audit team concluded their report on 13th October 2004 vide report marked Exhibit 18 & 22.[Pq. 158, Pq. 164] - 7. Another audit was communicated to Tembo Steels on 01st November 2004 and in furtherance of this a reconciliation meeting was scheduled for $16^{th}$ December 2004. Exhibit 24 [Pg. 171, Pg. 172]. - 8. Among other questions, the management were asked what power consumption the Applicant's mill required to produce a ton of steel, what the selling price of Steel was, what the proportion of exports to local sales were. [2.21 (a), 2.23, Exhibit 25] - 9. Seven (7) days after the meeting URA came out with a fresh VAT assessment of Shs 681,500,089= Six hundred eighty one million five hundred thousand eighty nine shillings) said to be based on the ratio of power consumption to output of steel expected. [See Exhibit 26]. - 10. The Applicant vehemently protested the assessment on the ground that. errors in computation of Zero Rated sales and assumptions made. I Pa. 191. Exhibit 27]. - 11. Following the objection by the Applicant, the Respondent revised the assessment of the VAT to shs. 494,432,219 (Four hundred ninety four million four hundred thirty two thousand two hundred nineteen shillings) [Pg. 198, Exhibit 33]. - 12. The Applicant objected to the assessment in a letter dated 16th May 2005 and referred to Exhibit 27 stating among others "Your department has failed to work on practical grounds and prefer to work on assumptions and presumptions". [Exhibit 34] - 13. The URA then stated its position for assessing the $Shs$ . 491.742.090= (Four hundred ninety one million seven nundred forty two thousand ninety shillings) being a result of adjusting the zero rated sales for April 2004[Exhibit 35] URA promised to make adjustments if proof of payment of corporation tax paid was made on the Shs. 150,694,451= (One hundred

$\n\overline{7}\n$

fifty million six hundred ninety four thousand four hundred fifty one shillings) that arose in a previous audit. The said sums were well explained by the Applicant by letter of 18th March 2005 [Exhibit 36], the Respondent took no heed. In his testimony, RW1 conceded that no payment was due or. the amount since it had already been added back in the tax computation. [See para. 7 & 8 at page 4 of proceedings of 7th February 2007]. The Respondent was therefore wrong to make this a condition of making adjustments.

- 14. The documents to be used by both parties were recorded and circulated by the tribunal and are part of this record. - 15. The Applicant was required to file the financial statements for the relevant period and they are part o this record.

#### The facts as stated by the respondent are as listed below:-

- 1. The Respondent was advised by the special Revenue Protection Service(SRPS) who, together with staff of the Respondent, carried out an audit exercise of the Applicant, that a refund of 14,465,509/= was found payable to the Applicant and that a reconciliation of the Applicant's accounts and further management its tax matters be done. The Audit reports of the team also indicated that the primary documents had not been availed nor examined. Consequently, a new team comprising of staff from the Respondent's Internal Audit & Tax Investigation and Domestic Taxes Departments was set up to review the case. - 2. The Applicant was informed of the audit exercise to be carried out by the new team using the input/output ratio method and was requested to provide all relevant records for the period March 2001 to September 2004. Further the Applicant was invited for a meeting to discuss its VAT liability and requested again to attend the said meeting with all primary records relevant to the matter. - 3. At the meeting, the Applicant voluntarily disclosed to the Respondent. interalia, the input in terms of power used to produce specific quantity of steel. - 4. Basing on facts stated during the interview and information available a VAT assessments amounting to $681.500.089$ /= was computed and communicated to the Applicant. - 5. The Applicant responded to and commented on the computation which the Respondent revisited and a new tax position of $494,432.219$ was arrived at and accordingly communicated to the Applicant.

$\cdot \rightarrow \cdots \rightarrow \cdots$

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6 The Applicant replied and raised the issues to the effect that there was no correction regarding zero rated sales and requested to have the same considered. The Respondent studied the issues raised and zero rated sales were corrected and thus the VAT liability was reviewed to $491.756.679=$

Resolution of the issues: By the Applicant.

#### Issue No.1

Whether the method used to arrive at taxable at taxable supplies is legally acceptable?

- 1. It is not in dispute that the applicant makes taxable supplies which are chargeable to Value Added Tax (VAT) under S. 4, 10, 18 of the Value Added Tax Act Chapter 349. - 2. The proper procedure for administration of VAT is that a taxable person lodges a return with the URA within 15 days after the end of the month, showing the tax payable for the period, the amount of input tax credit claimed. (Section 31). - 3. Tax payable is calculated by applying the rate of tax to the taxable value of the transaction. A taxable transaction is defined as a taxable supply or an import of goods or services that is subject to tax under this Act and a supply means any arrangement under which the owner of goods parts or will part with good. VAT is a Self Assessment tax. - 4. The exception to the Self Assessment procedure arises where any of the following conditions arise; (Sec. 32) *VAT Act.* - a person fails to lodge a return under Section 31. $(a)$ - The Commissioner General is not satisfied with a return $(b)$ lodged by that person; or - The Commissioner General has reasonable grounds to $(c)$ believe that a person will become liable to pay tax but is unlikely to pay the amount due. - 3. The Commissioner General may, based on the best information available, estimate the tax payable by a person for the purpose of making an assessment under subsection (1). - 5. No evidence has been offered which of the three options in section 32 were used by the Commissioner General in raising fresh:assessment. It is not in dispute that the applicant duly filed returns. It is not on record that the audit is challenged any return for being a miss declaration or otherwise.

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- 6 We submit that the method used by the Respondent to arrive assessments which has been referred to as the input-output method if fundamentally illegal for the following reasons: - $a)$ Firstly, the Applicant herein duly filed returns and made all relevant payments. The evidence of this has been provided to the Tribunal and was admitted by the Respondents at the scheduling; vide the Applicants documents pages 70 to 132. These were never referred to by the Respondent. It was never in fact the Respondents case that they were dissatisfied with the returns and indeed no such communication was ever made to the Applicant. This was confirmed by both RW1 and RW2. To the contrary, RW2 stated "even if we had had the records we would still have used the input/output *ratios*" [page 9 para. 5 line 1 proceedings of 7th February 2007]. RW2 agrees, "There is no policy of formula or practice of how to use input/output ratio."[Page 5 para, 5 line 1, proceedings of 7th February 2007]. - Secondly, whereas the Act provides for assessment of VAT based $b)$ . on sales, the method apparently used by the Respondent purports to base itself on production, and even then on a few oral statements of the Applicants employees who were discussing generalities, yet the Respondent had all necessary information to properly use within the provisions of the Act. RW2 in fact states that the information was satisfactory vide "We never traced any invoice which did not have VAT on them, we did not confirm that there were under declared sales". She adds, "VAT is computed from the product sold, the sales were established from the VAT returns..." [Page 9 para 8 and 10 proceedings of $7^{tn}$ February 2007]. On his part RW1 stated "I did not see any sales made without an invoice. I did not *look at accounts filed by the Applicant with URA*" [page 5 para 3] proceedings of 7th February 2007]. - Thirdly, the method used by the Respondent to assess that $c)$ . Applicant is illegal in as far as it falls far short of the provision of Section 10 (1) of the Act in as far as it does not show that there was an arrangement under which the owner of the goods parted or was to part with the supply of goods including an agreement of sale and purchase. The best the method can estimate (with many adjustments) in any event, is production capacity. This however does not prove supply. - Honorable Chairman and Members, it is the law that tax statutes are to be $\overline{7}$ strictly interpreted. In Bhagwanji & Co. Ltd v. Commissioner for Customs & Excise [1969] EA 184 at 188, Sir Newbold P. held that:

$\dddot{\cdot}$

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**(e)** ...the courts should be slow indeed to accord a governmentofficer any right to interfere with the liberty or property of an individual unless it is manifest that such right is given by Statute or me Common law and even then such interference should only be permitted in accordance with the requirement of the Statute or tne common law conferring such a right."

- 8. The High Court of Uganda has restated this position in Maha Enterprises v. Uganda Revenue Authority HCCA 2 of 2001 where Ogoola J. emphasized Article 152 of the Constitution that *"No tax shall be imposed except under the authority of an Act of Parliament.''* - 9. We submit therefore that since the Parliament specifically provided that assessment would be based on invoices, any deviation to use a method not ■mentioned in the Act was illegal. It is important to note that the input -output method used does not purport to arise under Section 32 (i) (b) because the URA communication nowhere stated that it was dissatisfied with any return lodged. - 10. Even if one was to use estimates, the Commissioner General would only do so based on **best information.** It is very clear the Respondent was relying on word of mouth from an interview and from hearsay as reflected in the questionnaire. All the sources of the Respondent in starting the audit remained at best obscure but manifestly malicious and vindictive. We submit that the **best information** in the circumstances was the records available including the computer records that were offered as well as the previous audit reports. - 11. Value Added Tax is assessed based on records of a taxpayer and the prime records required of a taxpayer are tax invoices. Tax Invoices are provided for extensively in Section 29 of the Act and Sec. 2 of the Fourth Schedule to the Act. - 12. The other records for which it is mandatory to keep are provided for in Section 46 of the VAT Act as being; - (a) Original tax invoices, copy tax invoices, , credit notes and debit notes received by the taxpayer. - **(b)** A copy of all tax invoices, credit notes and debt notes issued by that person. - **(c)** Customs documentation relating to imports and exports by the person and - **(d)** Such other accounts and records as may be prescribed by the Commissioner General.

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- 13. During all the various audits conducted by URA, it is not recorded that any of the records required in Section 46 were not provided. The audit report [annexture No. 24 page 167] lists "Records not examined" as - production and stock records - appointment letters for senior staff - Some records for 2002 were not available. - 14. None of the records in 13 above are mandatory for VAT purposes. It is not even explained why the production and stock records were not examined. Yet the record of stocks at hand is available in the financial returns that were filed with the Domestic Taxes Department of the Respondent [See Applicants] documents pages 70 to 132]. We have already noted that nowhere in the minutes relied upon by the Respondent was it even indicated that the said records were denied. - 15. The letter from the Respondent of 3rd December 2004, [Exhibit 23] and its attachments clearly shows that the workings were based on sales, and that the production approach was attempted. The workings show that the Respondent had data on purchases. Yet the computations were quickly abandoned in favor of the input-output method. - 16. According to the statement of the Commissioner Internal Audit and lax Investigations dated $03rd$ December 2004, - *Page 16*, "We have made deep analysis of your records and oral information". Thus the Respondent got all the records it wanted. Annexture 25. - 17. In the interview held on 16th December 2004, nowhere did URA mention that it had received insufficient records from the Applicant. - 18. As was confirmed by the Respondents witness, RW2 Justine Nkurunziza URA was determined to use the input – output method of assessing tax whether there were records or not [See line 1 para 5 page 9 proceedings of 7th February 2007]. Respondents witness Mr. Moses Kajubi confirmed that there is indeed no policy formula or practice of using input/output methods and that the input out method was first tested on the Applicant in respect of VAT assessment and had never been tried by URA before except in cases of Fixed Duty Draw Back of Mukono Bakery Ltd v. Uganda Revenue Authority TAT No. 23 of 2004. [See line 1 para 5 page 5 proceedings of 7th February $2007$ ]. - 19. In respect of the Fixed Duty Draw Back the procedures for assessment of the duty are clearly provided in Sections 139 EACMA which conforms that for a method of be lawful it has to be clearly stated in the law.

Section 139 (c) EACMA provides that

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"(iii) the Commissioner shall fix or agree to the rate of yield of the operations. **»**

> (iv). upon fixing or agreeing to the rate of yield, the description and quality and quantity of various compensating products shall be specified.

> (v). the Commissioner shall prescribe duty drawback coefficient applicable.

- 20. Therefore the use of the input-output method used in FDD is not evidence that the present case is similar to any other audited in the past. We would like to point out that the case of Mukono Bakery Ltd came to the Tribunal on matters of payment of interest and refund. It had nothing to do with input output method of tax computation. - 21. We submit further, and invite this Honorable Tribunal to take note that had Parliament sought to make the input-output method applicable for VAT purposes, it would have expressly and elaborately provided for the same as it did in the East African Customs Management Act, clearly spelling out rules and parameters for application of the method of assessment. It did not! - 22. Statistically, for any sample to be relied on and accepted different measures of "central tendencies" that is the mean, median, mode and range, must be applied on the sample data and measures of variability/dispersion established and compared or a null hypothesis tested. *[Statistics, A first course John E. Freund & Gary A. Simon (1991), 5th Edition, prentice Hall, Inc USA Pages 352 to 361; introduction to probability & Statistics (1983) Mendenhall 6th Edition Wadsworth Publishing Co. Inc. USA pages 41 tc 51]* This was not done. - 23. The input-output method is not supported by any tested Scientific or accounting standards and the Respondent did not adduce any literature about the assessment of the tax. The Respondents witness Justine Nkurunziza a food scientist could not confirm what academic discipline the method has been approved in but maintained that it is a common technique called "material balance". She however could not and did not explain what "materia! balance" was. - 24. Not surprisingly, assessments using that method started at Shs. 681,500,089= (Six hundred eighty one million five, hundred thousand eight nine shillings) and ended at Shs 491,786,679-"'(rour hundred ninety one million, seven hundred eighty six thousand six hundred seven nine shillings) a 29% difference which was also not derived by any empirical verification.

*)* **1 z>**

# **(k)**

^5. Even if the input - output method of verification were to be recognized (which we do not recognize), ii is expected that it would nor be calculated based or. word of mouth. As Mr. Kajubi admitted, audit cannot rely on oral answers but in this case should have relied on *'invoices supported through a cycle'* RWI also admitted that there is no specific formula/policy on how to use the input/output ratio. It is our contention that method such as this must rely on empirical data rather than hearsay.

**»**

- 26. The rest of the inputs in the equations were by word of mouth delivered by persons (employees of the Applicant) who were not known to be experts in the area they were discussing. Considering that science is termed .to be the best way to measure quantities that undergo chemical or physical changes, a scientific approach should be the best way out to determine the input -output ratios. There fore, the URA having had ample reason to doubt the Kilowatt hours to produce a ton of steel should have used her scientists to go to the factory to measure from the meters of electricity and from the kilns of the furnace how much was produced Instead Justine Nkurunziza during examination confessed that whereas she visited the factory, she could not figure out how to measure the output because she found the meter alreadyrunning and the production process already in place. - 27. The method did not take into account the fact that goods can be produced but not sold. Since VAT is based on goods that are sold and since the respondent did not find any evidence of sales with no Tax charged, the method cannot be used to determine sales. - 28. In the case of RV Commissioner of Income Tax ex parte SDV Transami (K) Ltd 2004 LLR 6000 HCK 2005 IEA Justice Ojwang J. eloquently stated that;

"While the law entrusts tax-collection powers to the Commissioner, and it is indeed in public interest that he should discharge that mandate, he must not apply methods that are random and wanting in regularity, with the result that unequal and oppressive conduct results".

We submit that the Respondents acts are not only illegal but are random, wanting in regularity and are oppressive on the Applicant. On this issue aione the application ought to succeed and we so pray. Issue No. 2

r Whether the Respondent had sufficient grounds to''estimate the sales ot the Applicant.

- 1. The Commissioner General's power to raise assessments are based in Section 32 and in this particular case since the taxpayer was as regular filer of returns, the Commissioner General this would arise under 32 (1) (b) vide

"Where the Commissioner General is not satisfied with a return lodged by a person."

- 2. We submit that the apparent audit carried out by the Respondent was not carried out under the above provisions. There was no particular dissatisfaction with any return made by the Applicant. In fact as stated by both Respondent witnesses, none was looked at during the audit, none at all was an issue. - 3. By its nature and as provided by law [Section 31(2)], a return spells out the amount of tax payable for the period, the amount of input tax credit refund claimed and such other matters as may be prescribed. - 4. Thus for the Commissioner General to exercise his/her powers under the provision, he/she must be dissatisfied with the return i.e. a taxpavers report on purchases and sales. Not production, not a general survey of the industry in which a taxpayer operates and certainly not information derived from the public or from the internet as put by RW1 would suffice to start the audit. The Commissioner must then use the best information available (of sales and purchases) upon which his/her estimates are based. - 5. Both RW1 and RW2 confirmed the availability of sales invoices as well as computer record of sales and purchases. In fact they also confirm being in possession of the Applicants records confiscated earlier. Both have stated. vide "We never traced any invoice which did not have VAT on them, we did not confirm that there were under declared sales". She adds, "VAT is computed from the product sold, the sales were established from the *VAT returns...*" [page 9 para 8 and 10 proceedings of 7th February 2007]. On his part RW1 stated "I did not see any sales made without an invoice. I did not look at accounts filed by the Applicant with URA" [page 5 para 3] proceedings of 7th February 2007]. - 6. We submit that the Commissioner General being dissatisfied with a return is obliged to use the best-information and either confirm her dissatisfaction and thereby estimate tax payable or confirm the return and thereby leave it to stand. Hence the use of the word "may". From the evidence of both Respondent witnesses, any apparent dissatisfaction that could have been. was allayed. $\mathcal{L}^{\text{max}}_{\text{max}}\left(\mathcal{L}^{\text{max}}_{\text{max}}\right)^{-1}$ - 7. RW1 who was a member of the audit team confirms that the issue of lack of records never came up and adds that she was indeed availed printouts of computer records and could have done a computer audit of the sales record.

$116$ [See page 8 paragraph 5 proceedings of 7th February 2007]. The real reason for the audit and assessment and the refusal to use the best information available is not had to find. RW2 states "The letter dated 1/11/04 (exh. 24) we were instructed to use the input/output ratio to establish *VAT payable...*" [See page 6 paragraph 1 proceedings of $7^{th}$ February 2007] She adds, "Even if we had had the records we would still have used input/output ratios."[See page 9 paragraph 5 proceedings of 7th February 2007].

- 8. Evidently, the whole audit process was of a general nature relating to aggregate productions, instigated by rumours. In fact during the conduct of the whole audit the team did not focus on any one return of VAT. It is not anywhere on record that any particular invoice was queried or any input tax was disputed. During the Cross examination of both Respondents witnesses it was said that one of the reasons for the audit was because of information from the public and another said it was arising from a study of the industry and at another time RW2 said it arose from study of the machinery from certain catalogues and from the internet. None of the claims as to the reasons for the audit were verified by the Respondents witnesses nor in fact were they pleaded by the Respondent. - 9. The record in the questionnaire [Exhibit 25] produced for the meeting between the Respondent and the Applicant in **Note 2.26**

"It is alleged that you have been selling some of your products without issuing tax invoices" and in Note 2.30.

"It was found that steel to the tune of 10378 tons was not declared" indicates that the basis of the audit was third party information and NOT dissatisfaction with any particular VAT return or for that matter, not even observations at the factories and that the Respondent had already made its own assumptions about under declarations.

- 10. During the hearing URA confirmed that during the whole audit process and the alleged search of documents from the business community, it had not come up with any invoice that did not charge VAT. RWI said they did not go out to the market to get invoices. - 11. Upon cross examination, both the Respondents witnesses expressed ignorance of how the figure of 10378 tons was arrived at. For the reason that the Respondent did not show that any tax returns had a defect, or that it lacked any record required under Section 46 of the VAT Act or that the Applicant had missed any filing period means that the Commissioner General had no reason to estimate the sales when URA had all the sales records.

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- ^2. Section 4/ (i) (e) of the VAT Act clearly empowers the Commissioner General to obtain any information, record book or computer stored information from any person by way of notice The Commissioner General never exercised these powers to obtain information through a notice from the applicants customers. Clearly there was no reason to exercise the powers and the Respondent should not be heard to say the decision was taken Decause documents were denied. That would indicate that the action was noi taken out of professional discretion but as a result of anger and vindictiveness. Tne normal course available when records are denied by a taxpayer is provided among the offense provisions in Sections. 52,55,56 and 59 of the Act, none of which were exercised from the numerous audits. It seems quite apparent that the Respondent was out to "get" this taxpayer by hook or crook. - 13. Honorable Chairman and Members, we are constrained to comment on the documents that were apparently produced before the Honorable Tribunal on 7th February 2007 by the Respondent. Firstly the documents were never on record in the first place. They were not on the Members respective files no were they with the Applicant. They only appeared as loose papers on the Registrars file. Secondly, the said documents were clearly altered and parts thereof deliberately blotted out. It transpired also that the documents were dated outside the period of the exercise. These documents must be rejected Not only are they altered; they have been sneaked into court in the most questionable circumstances, they confirm the lack of good faith in the acts of the Respondent.

## Issue No. 3

**\$**

Whether the Applicant is liable to pay the VAT of Shs 491,780,679= (Four Hundred ninety one million seven hundred eighty thousand six hundred seventy nine shillings).

- 1. As we have submitted above, the methods employed by the Respondent in arriving at the above assessment are illegal and so is the assessment itself. We submit therefore, that in any event, the Applicant is not liable to pay the said monies. In the alternative however, and without prejudice to the foregoing, we submit as follows: - 2. The Applicant is not liable to pay the VAT of Shs 491,780,679= (Four Hundred ninety one million seven hundred eighty thousand six hunared seventy nine shillings) for the following reasons. - **i.** The Applicant filed tax returns for the period 2. Q. Q-jt~ 2004 and paid tax accordingly. Each of the tax returns fifed was approved by URA. Whereas there were variances between the tax returns and the tax records examined by the audit teams which audited the records, the

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[See page 8 paragraph 5 proceedings of 7th February 200/.' I he reai reason for the audit and assessment and the refusal to use the best information available is not had to find. RVv'2 states *"The letter dated 1/11/04 (exh. 24) we were instructed to use the input/output ratio to establish VAT payable.* [See page 6 paragraph 1 proceedings of 7th February 2007], She adds, *"Even if we had had the records we would still have used input/output ratios.''[See* page 9 paragraph 5 proceedings of 7th February 2007],

*"It is alleged that you have been selling some of your products without issuing tax invoices'* and in Note 2.30.

*"It was found that steel to the tune of 10378 tons was not declared* indicates that the basis of the audit was third party information and NOT dissatisfaction with any particular VAT return or for that matter, not even observations at the factories and.that the Respondent had already made its own assumptions about under declarations.

- 10. During the hearing URA confirmed that during the whole audit process ano the alleged search of documents from the business community, it had not come up with any invoice that did not charge VAT. RWI said they did not go out to the market to get invoices. - 11. Upon cross examination, both the Respondents witnesses expressed ignorance of how the figure of 10378 tons was arrived at. For the reason that the Respondent did not show that any tax returns had a defect, or that it lacked any record required under Section 46 of the VAT Act or that the Applicant had missed any filing period means that the Commissioner General had no reason to estimate the sales when URA had all the sales records.

- 2. Section 4/ (i) (e) of the VAT Act clearly empowers the Commissioner General to obtain any information, record book or computer stored information from any person by way,of notice. The Commissioner General never exercised tnese powers to obtain information through a notice from the applicants customers. Clearly there was no reason to exercise the powers and the Respondent should not be heard to say the decision was taken because documents were denied. That would indicate that the action was noi taken out of professional discretion but as a result of anger and vindictiveness. The normal course available when records are denied by a taxpayer is provided among the offense provisions in Sections. 52,55,56 and 59 of the Act, none of which were exercised from the numerous audits. It seems quite apparent that the Respondent was out to "get" this taxpayer by hook or crook, - 13. Honorable Chairman and Members, we are constrained to comment on the documents that were apparently produced before the Honorable Tribunal on 7th February 2007 by the Respondent. Firstly the documents were never on record in the first place. They were not on the Members respective files no were they with the Applicant. They only appeared as loose papers on the Registrars file. Secondly, the said documents were clearly altered and parts thereof deliberately blotted out. It transpired also that the documents were dated outside the period of the exercise. These documents must be rejected Not only are they altered; they have been sneaked into court in the most questionable circumstances, they confirm the lack of good faith in the acts of the Respondent.

## Issue No. 3

Whether the Applicant is liable to pay the VAT of Shs 491,780,679= (Four Hundred ninety one million seven hundred eighty thousand six hundred seventy nine shillings).

- 1. As we have submitted above, the methods employed by the Respondent in arriving at the above assessment are illegal and so is the assessment itself. We submit therefore, that in any event, the Applicant is not liable to pay the said monies. In the alternative however, and without prejudice to the foregoing, we submit as follows: - 2. The Applicant is not liable to pay the VAT of Shs 491,780,679= (Four Hundred ninety one million seven hundred eighty thousand six hundred seventy nine shillings) for the following reasons. - **i.** The Applicant filed tax returns for the period 2001 - 2004 and paid tax accordingly. Each of the tax returns filed was approved by URA. Whereas there were variances between the tax returns and the tax records examined by the audit teams which audited the records, the

necessary adjustments were made on a case by case basis as allowed by the VAT Act under Section 32

It has been confirmed by both witnesses for the Respondent tha' nothing was found wrong with the returns or tne sales record upon which the returns were based

Having therefore found no error or under declaration, it follows that the figure above are more than mere speculation

- ii. Even ffthe input and output ratio method were by the widest stretch to be accepted, the tax payable would be different because; - Stock at the end of the tax period was not considered. - Work in progress was not considered. - Of Untrained labour force being responsible for varying. - Different steel products fetch different prices and to produce them require different amounts of power. - The nature of the scrap determines how much steel can be produced. - The power consumed during factory set up, building and machine tests were considered. - Sec. 73 of the VAT Act clearly states that where the amount is expressed in other currencies other than the Uganda shillings, the weighted selling rates of the previous month for the currency concerned is to be used. - *.* All these factors in 2 above were raised by the Applicant [See page 145 of Applicants Documents-Exhibit 27] but the Respondent using no data or any other method transparent to the Applicant argued that adjusting the power per ton of steel from 550 kwh to 650 kwh took into account of everything. This kind of generalization makes the audit exercise appear like a race between administrative terrorism and extreme charlatanism. This is confirmed by the number of audits or intended audits carried out on the Applicant in the period vide, - . SRPS Audit 20th May 2003 [page 136] - URA Audit 24th July 2003 [page 138 Exhibit 8] - URA Audit 13th September 2004 [page 158 Exhibit 18] - . URA Audit 13th October 2004[page 163 Exhibit 22] - URA Audit 1S| November 2004 [page 171 Exhibit 24] - URA Audit 11th January 2005 [page 188 Exhibit 28]

Proving the underlying intention to punish the Applicant.

4. Even if the underlying calculations adopted by URA in the final calculation of 14/13/2005 (Page 198) were to be accepted, the selling price for a tori ot

steel used would be unaj meeting" was \$450 per tot workings about the average the weighted average price Respondent neither used ' increased it to \$528 from nc

**. X J**

- **(i)** RWI said there was not arising from the invoices would have Applicant in order to i - **(ii)** RWII purported to sq at \$528 per ton. Not\* in a suspicious man with and also related] rejected the documei

Therefore the \$ 528 tax of Ushs. . 491 seven **hundred e shillings)** is wrong a

**3.** Further, we submit that whi adjustments proposed by fl was without merit. As we he was due on the amount s computation. [See para. 7 2007], This in itself shows tax.

Issue No. 4

Other Remedies:

Prayed that judgment be entei event with interest.

•ed against the Respondent with costs and in any

Resolution of the issues by t he Respondent.

Issue 1

Whether the method used toj

It is the submission of the Resj supplies is legally acceptable f< rceptable. The price as per the "reconciiig'ior. i. The Applicants provided the Respondent with weight of her products in Exhibit 4, which shows ? per ton as USS 452 inclusive of VAT. out the the figures nor disputed them The Respondent ■justifiable reason because:

no market research; therefore the USS 528 was open market. Even if it had been, the particular to be reconciled between the Respondent and the get an explanation.

rbmit very questionable documents used to arrive only did the documents get to one of the TAT files ner, but the invoices had been clearly tampered to a period outside the audit period. The Tribunal its.

is unacceptable and confirms that the purported ,780,679= (Four **Hundred ninety** one million ighty thousand six **hundred** seventy nine nd ought not to be paid by the Applicant.

areas the Respondent had previously rejected the te Applicant as shown in Exhibit 10. the rejection ive shown above, RW1 conceded that no payment ince it had already been added back in the tax & 8 at page 4 of proceedings of 7th February that the Applicant ought not to pay the purported

arrive at taxable **supplies1 rs** legally acceptable

jondent that the method used to arrive at taxable ar the reasons laid out hereunder.

**, ) \ )**

By letters dated 2nd February 2004. the Respondent was advised by tne then Head. Special Revenue Protection Services (SRPS) Brigadier Kale Kayihurs tna1 the SPRS carried out a VAT audit on the Applicant which resulted mtc a claim position of Ushs. 14.465.509/= for the period January 2002 to March 2003. In me letter of 14'1' September 2004. the Head SRPS also advised that "you reconcile the taxpayer's accounts" and that "this case is now forwarded to you for further management". (Copies of the letters of 2/2/04 and 14/9/04 are marked as l.d 9 and 1.d 19 respectively). It is notable that the document marked 1.d 19 in the list of documents is different from that referred to here, and for the avoidance of doubt the letter of 19th September 2004 from the Head SRPS is reproduced hereunder and attached to these submissions.

> *State House P. O.box 25497 Kampala Uganda*

*19'" September 2004*

**>•**

*The Commissioner General Uganda Revenue Authority P. O.box 7279 Kampala.*

## *RE: TAX MATTERS OF M/S TEMBO STEELS (U) LTD FOR THE PERIOD JAN. 2002 TO MAR. 2003.*

*The Special Revenue Protection Service carried out VAT audit on the above mentioned Company.*

*A Joint Audit team comprising of officers from SRPS and Internal Audit & Tax Investigations, Uganda Revenue Authority, was formed to review the initial SRPS findings.*

*Both audit teams findings have resulted into a claim position of Ushs. 14,465,5097- (Shillings fourteen million four hundred sixty five thousand five hundred nine only) for the period under review. Find attached audit report and working schedules.*

*I would advise that you reconcile the tax payer's account.*

*This case is now forwarded to you for further management.*

*Yours faithfully,*

**r**

# *Kaie Kayihura Brig. MA-'H. E/Head SRPS.*

*f*

As-testified by the Respondent's first witness, who is the Commissioner. Interna! Audit & Tax. Investigations, Mr. Moses Kajubi, these two letters were accompanied by Audit reports. The first Audit report indicated that primary records including cash sales, tax invoices and local purchases were used and went ahead to conclude in its findings that "the source of information was unreliable". The Final Audit report dated 13th October 2004 (i.e. document No. 22 attached to Application) on its page 3 indicated that some Records were not examined And among these were production and stock records, Appointment letters for senior staff, and that some records for 2002 were not available. Further on page 4, point (iv) indicated that "Due to absence of some records relating to this year...''. The Applicant did not dispute the fact that these audits took place and recommended as stated. These recommendations meant that information received could not be relied on and that even if any was received it was incomplete and not sufficient to compute the Applicant's tax liability and hence tax refund.

The Respondent's witness explained that a recommendation to refund the Applicant meant refunding Treasury money to persons meant to keep all records for the purpose of obtaining the refund in question and as required by law (Section 76 and 49 VAT Act Cap 349) but which the Applicant in this case failed to do. The words "records not reliable" and "due to absence of-some records relating to sales of 2002" used in the audit reports by the SRPS/ URA teams put substantial disclaimer on the work done, and sufficiently explain why the Head SRPS requested further management of the case.

Consequently, the Respondent decided to review the matters of the Applicant and on 1sl November 2004 (Document No. 24), the Commissioner Internal Audit and Tax Investigations wrote to the Applicant and informed it that a team of Officers would carry out a review of its VAT refund claim fir the period January 2002 to March 2003 using the input- output ratios method. The team was to further examine the Applicant's documents for the March 2001 to June 2004. visit its factory and outlets related to its operations and the Applicant was requested to avail all necessary records to enable the team speed up the review exercise.

The Respondent's witness explained that on the 5th of November 2004. the Respondent wrote to the Applicant requesting for records to be availed to its review team. Among the documents requested were purchase records., list cf products manufactured by the Applicant, detailed process fewchart of steel manufacturing; price lists and lists of all inputs used to manufacture its products. Although the Applicant replied to the communication aforementioned, it failed tcavail the documents requested for; which documents as testified by Mr. Kajubi. are very important in determining the liability of the taxpayer and more so where

: 6

a remind jsjequested for. The Applicant s second witness admitted receiving toe letters of. 1 and 5th November 2004 and replying the same on 10th November 2004 (page / of the draft record of proceedings of 6!h Februarv 2007';

On the 14 1 of December 2004. the Respondent invited the Applicant for a meeting to be held on the 16lil of December to reconcile the audit findings for the period March 2001 to September 2004. The reconciliation as testified by Mr Kajubi, was meant to look at the audit reports that had been produced, trace them back to the control accounts and to the primary records such as cash . books, sales ledgers etc., relate the entries from the primary records to the source documents such as invoices, receipts etc to justify/ explain basis of the outcome. The Respondent submits that even before the meeting of 16th December 2004, the Applicant was requested to attend the same with all relevant records both in soft and hard copy, but still failed to produce the same at the meeting. The allegation that all records were supplied to the Respondent does not hold water,because never at one time was the audit team appointed on 1s: November 2004 availed with any primary documents, and even if these were availed (which they were not) they had already been described as unreliable by the previous audit team and could not, therefore, be relied upon by the new audit team. Even when put to task to identify the unexamined records among the list of documents allegedly taken by earlier teams, the Applicant's officials failed to show which documents comprised the production and stock records or missing sales records for 2002.

It is also pertinent to note that the Applicant never at any one time objected to the use of the-input/ output ratio method to compute taxes payable by it. No evidence of any written objection by the Applicant regarding the said method to the Respondent was availed at the hearing. Instead, both witnesses of the Applicant admitted that they did not object to the use of the input/ output method and their only problem was with the average sales price adopted in the computation of taxes payable (page 5 and 7 of the draft proceedings of 6th February 2007). The Applicant and its officials continued to cooperate and condone the use of the input/ output method during the meeting of 16th December 2004 (Document No. 25) and in the numerous correspondences that was attended by the Applicant s top management staff i.e. its Chairman/ Managing Director, Mr. Shyam Agarwal and Head Finance Mr. Anil Kumar Singh who willingly and in their own words, in a "fantastic" and "conducive environment" volunteered information regarding their business and in particular the steel production process. The Applicant in its letter of 18th March 2005 (Document No. 36) further attached a schedule prepared by one Ali Kumar Singh, Head of Finance & Account, in which he applied the input/ output ratio method based on the actual information given to the Respondent by the Applicant, to compute its tax liability

Section 16(4) of the Tax Appeals Tribunal Act Cap 345 provides that: Where an application for review relates to a taxation decision that is an objection decision.

![](0__page_19_Picture_0.jpeg)

ihc r-.pphcant is. unless the Tribunal orders otherwise, limited to the grounds Stated-in.the taxation objection to which the decision relates"

I h.e Applicant in its objection letter of 16r:' May 2005 which refers tc the Applicants letter of 18J1 March 2005. nowhere dispute the method used to compute taxes payable by it and must therefore limit itself to only the grounds stated in the objection. The Applicant cannot therefore be seen to shift grounds of objection at this point or at the instance of its advisors when it had never mentioned the same as required by law. It is this kind of situation that the case of Matla Coal Ltd. V. CIR (1987 AD) intended to cure when Corbett JA held that it is naturally important that the provisions of S. 83(7)b (as it then was) be adhered to, for otherwise the Commissioner may be prejudiced by an appellant shifting the grounds of his objection to the assessment in issue. ("Notes on South African Income Tax 1994", 13th Edition by Keith Huxham & Philip Haupt).

The cases of Bhagwanji & Co. Ltd v. Commissioner for Customs & Excise and Maha Enterprises v. URA cited by counsel for the Applicant have been quoted out of context in as far as they relate in this matter and which have completely different sets of laws/ rules that regulate the activities therein. In the case before this Tribunal, there was no interference of any nature by the Respondent and the procedures invoked or applied are all provided for under various communications with and responded positively to the Applicant's explanations, hence the various adjustments in taxes to the advantage of the Applicant.

Mr. Moses Kajubi further explained that the input/ output ratio methodology is widely used and accepted in determining revenue assessments and not availed by the taxpayer as was the case in this matter. This method has been applied to compute tax liability of taxpayers such as Nile Breweries Ltd. UBISCO.. Britannia Ltd, and Mukono Bakery Ltd among others; the input/ output ratio method was used to determine VAT liability and in its wisdom, the Honorable Tribunal ordered the Applicant to pay the VAT due including penal tax for non- payment of tax on the due date. The method was therefore not being 'tested'on the Applicant as claimed, but has been widely applied on various taxpayers who have paid taxes found payable.

The Respondent's second witness did not state that there is no formula or practice on how to use input/ output ratios, but further confirmed the generally accepted use of the input/ output ratio method in computing tax liability. The witness stated that the method is based on material balance, which is derived from the Fundamental Law of Conservation of Nature. This law states that "Energy *I* Mass is neither created nor destroyed but only changes from one form to another". (David M. Himmelblau, Basic Principles arret Calculations in Chemical Engineering, 3rd Edition 1996).

**4** The input/ output ratio method based on tne mass balance (also called a mateus' balance).is an accounting for materials entering and leaving a production '. process/ system. Its application is widely used in process Engineering Accounts and Chemical Engineering. In simple terms, the material balance is applied tc account for what happens to each of the materials used in a production process The inputs used are related to the output hence deducing production and thus sales. It should be noted that because the Applicant did not avail the audit team/s (and the Tribunal) evidence of opening and closing stock (stock records.) for the period in issue, it was deemed that all that was produced was sold which the Applicant failed to disprove at any one point. As testified by the Respondent s witness, this method is clearly taught ai the Respondent's Training School where it comprises a whole course module, and is stated in the Respondent's desk instructions and. tax investigations Manual. It is very important to note that in the absence of reliable primary documents as explained earlier, the input/ output ratio method based on the best information avaiiabie (from the Applicant's officials themselves), is a legally accepted/ provided for basis for the Commissioner General to estimate the tax payable by the Applicant.

Thus the VAT Act Cap. 349 in Section 32 provides that:

(1) Where:

**£■**

- (a) A person fails to lodge a return as required in Section 31. - (b) The Commissioner General is not satisfied with a return lodged by a person; or - **■(c)** The Commissioner General has reasonable grounds to believe that a person will become liable to pay tax but is unlikely to pay the amount due.

The Commissioner General may make an assessment of the amount of tax payable by the person.

# Subsection (3) provides:

. "The Commissioner General may, based on the best information avaiiabie estimate the tax payable by a person for the purposes of making an assessment under subsection (10).

In the case of Coy v. Kime (Inspector of Taxes) [1987] STC 114. it was held that:

"The court could set aside the Commissioner's determination only when it was clear that the commissioners did not have before them matter on which tney could properly reach the conclusion contradicted their determination, in the present case, the conclusion arrived at by the commissisfiessrwas one which they could properly reach on the material before them. The appeal would therefore be dismissed".

Similarly, in the case of Farnocchia and another v. Customs and Excise Commissioners [1994] STC 881. which discussed the power of commissioners to.assess amount of value added tax due based on best judgment in default cf ■proper-returns by the taxpayer, it was held tnat

*4*

The commissioners were not obliged io conduct exhaustive inquiries and to investigate every point of detail in order io assess the amount of tax due from a person who was in default. It was open to them to select a shorter period than that which was to be covered by the assessment in order to arrive at an appropriate figure for the food to drink ratio on which that assessment was to be based..."

In light of the above cases, it is the submission of the Respondent that due to the failure/ default of the Applicant to avail relevant and reliable documents such as VAT returns for some months, original sales invoices, purchases, expenses, stock records, etc which it stated were in its possession (computers), to the new audit team; the Respondent had the legal right to use the best information before it to base its VAT assessment, even without conducting exhaustive inquiries. Infact in this case, in order to take care of the taxpayer's concerns, (which it was not obliged to do) the Respondent went an extra mile by constantly inquiring from, communicating and holding meetings with the Applicant about the method and material to be used in order to reach a consensual tax position. The case of R v. Commissioner of income Tax ex parte SDV Transami (K) Ltd cited by counsel for the Applicant, while significant in highlighting the ability of the High Court to deal decisively with technical tax collection -issues, related to the interpretation of agency/ royalty fees for income tax purposes and the facts therein are very different from the present case. Suffice it to note that the actions of the Respondent in this case, as earlier and repeatedly submitted, were in accordance with the law, supported all the way by the Applicant whose only bone of contention was basically the sales value per ton of steel as adopted by the Respondent.

In conclusion therefore, it is the submission of the Respondent that in this matter, the Commissioner General of the Respondent had no alternative but to apply section 32 (a), (b), (c) and 33 of the VAT Act Cap 349 because she was net satisfied with the returns filed by the applicant, since the returns for the months of March 2002, April 2002. May 2002, June 2002 and July 2002 had not been filed by the Applicant (who at the hearing at the Tribunal failed to identify them or even explain their failure to file the same, but included some concocted figures to reflect them in its own computation of 18;h March 2005). Further, the Commissioner General had reasonable grounds to believe that the Applicant was liable to pay tax but was unlikely to pay the amounts due since as earlier said the Applicant had failed to lodge returns from whicWaxesr-accrue if they had been lodged as required by law. It is in circumstances such as the above that VAT self assessment cannot apply because true information is witnheic which would lead to non-payment of due and payable taxes.

This1 option was further embraced by the Respondent after the recommenoa;ic-ns of.the earlier joint audit team i.e. the SRPS and Respondent that the primary records used by it had been found unreliable, and that the Applicant had failed tc provide all relevant documents and information to team. The applicant was aware of its failure to produce all relevant and reliable documents to the new team, did not dispute this fact and hence its agreement and cooperation tc utilize the best available information which comprised power units consumed by the Applicant as per electricity bills (tax invoices) issued by the then Uganda Electricity Distribution Company (UEDCL) and which invoices it uses to claim input tax. The tax invoices from'UEDCL and the explanation of the Applicant itself in its letter of 5th January 2005 (document 13) that it uses 650 units to produce one ton of steel under actual working conditions were reliable and sufficient information for the Respondent to adopt in computing taxes payable, and did not necessitate it to carry out trial runs or tae meter readings as suggested by^ the Applicant. Scrap which is a basic input used in the steel manufacturing process could not be used to determine output by the audit team because all data on its purchase was not available and that which may have been availed was unreliable. It is noteworthy that without satisfactory returns being availed to compute tax payable, tax refundable to a taxpayer cannot be legally and justifiably determined.

It is the submission of the Respondent that the Tribunal finds that the methodology used to compute the Applicant's tax liability is legally acceptable and provided for in section 32 and 33 of the VAT Act Cap 349: and it is its prayer that the law is interpreted in accordance with the intention of the legislature which is to address and rectify situations such as this matter whereby the taxpayer intentionally refuses to avail relevant and reliable documents/information required to compute taxes duly owing and payable by it.

#### ISSUE 2:

# Whether the Respondent had sufficient grounds to estimate the sales of the Applicant?

It is the submission of the Respondent that it had sufficient grounos to estimate the sales of the Applicant based on the average value per ton of steel sold locally for various reasons. As submitted in issue 1, earlier audits had indicated that information used was not reliable and that some records of sales for 2002 had not been availed. Secondly, even when the Respondent requested for records for the period March 2001 - November 2004. i.e purchase records, list of products manufactured, detailed process flow chart of steel manufacturing, price lists for all products in the period, list of all inputs'"manufacture products, the Applicant failed to produce/avail the same and did not deny this fact.

Thirdly, the Applicant was again given opportunity to prodive all relevant primary records both in hard and soft copy when it was invited to attend a meeting on 16'

December, 2004, but the Applicant confidently attended the said meeting without the-required records. In point 1.12 of the minutes of the meeting (document 25;. Applicant admitted keeping al! records as booked in the computer right from the time of inception. These included sales, purchases, expenses, stock recces. But it did not bother to avail these records at any one time to the Respondent to enable it compute its tax liability and hence tax refund, if any Trie statemem alluded to the Respondent's witnesses in paragraph 5 on page 10 is therefore not true and should not be relied upon by the Tribunal.

As testified by the Respondent's second witness, Justine Nkurunziza. even before the meeting of 16m December 2004, the new Audit Team was turned away empty-handed at all the Applicant's locations, and one point stooped from receiving information from the factory at Iganga. The question that arises is what was the Applicant hiding/concealing?

In that same meeting, the Applicant was only too willing to provide other information such as the number of units (kilo watt-hour) used to make one tone of steel from scrap and the average value per ton of steel both at local and export level i.e 550 to 580 units to make a ton of steel and US\$450 per ton sold locally and US\$600 per ton of export. (Points 2.21 (a); 2.23 of minutes of meeting of 16th December 2004).

The respondent proceeded to compute the Applicant's tax liability using the best information available to it by the Applicant itself i.e power consumption and sales value which had been said by the Applicant to be US\$600 for exports which was evident from the entries and not disputed and US\$450 per ton of steel sold locally. Hence, the first computation of Ushs681,500,089/= which the Applicant was requested to respond to within 14 days (letter of 23rd December 2004 - Document 26). The applicant wrote back to the Respondent making a case for the use of 650 units of power per ton based on actual working conditions (letters of 5th January and 2™ February 2005 - Document No. 13 and 32).

This position was accepted by the Respondent in its letter of 14ih March 2005 (document 33); and as testified by the Applicant's witnesses resolved the issue of power consumption used in the production of steel to be used to compute taxes, payable using the input/output ratio method.

The Respondent in its letter of 14th March 2005 also informed the Applicant that the average price per ton of steel sold locally had been derived from tax invoices ' issued by the Applicant to its clients. This value was US\$528 and was derived from tax invoices given to some of the Applicant's customers (see Annexture K;. As testified by the Respondent's witnesses, and. confirmed, by the Applicants witnesses during cross- examination, the Applicant could not explain or proouce evidence to support its claim that the local sales value per ton was US\$450. Tne Applicant failed during, after and even at the trial, to support the figure of USS450 ii had confidently uttered during the meeiing of 15:r' December 2004. ~ne

Respondent, consequently, proceeded to attempt to determine the local saies value pei ton by searching for tax invoices supplied by the applicant, while at the same time being careful not to disclose these sources in order to avoid any bad blood being brewed between parties.

It is the submission of the Respondent that while the use of USS528 as iccai sales value and reflected in Annexture 'K: may have been computed using invoices outside the audit period, this was because as earlier stated the Applicant refused to provide the relevant documents to the new audit team and the Respondent was thus constrained to utilise the invoices it managed to obtain .in order to determine an average sales value. The arrival at the figure USS525 was therefore not out of the blue, but was based on the best information available.

Suffice it to note that the prices on the invoices used by the Respondent indicated lower/ prices per ton, which was to the advantage of the Applicant. Not only was the Respondent denied access to original invoices issued by the Applicant within the audit period, but it was difficult to obtain later invoices from willing customers of the Applicant, hence the disclosure of the same as reflected on the copies of invoices relied on. Further and as earlier stated, previous audit teams who may have studied and relied on the primary documents had found them unreliable and lacking in content, and could not therefore be relied on by the new audit team.

Further, it is not justifiable to use the figure of US\$450 offered/uttered by the Applicant because it failed to produce any record whatsoever in support of ihis value. This was confirmed by the shaky testimony of both witnesses of the Applicant who not only miserably failed to justify the use of USS450 as its saies price, but also admitted being incompetent to testify on the issue. It is the prayer of the Respondent that, given the reasons discussed above, the Honourable Tribunal appreciates the efforts made by the Respondent to determine the average sales price per ton of steel produced using available original invoices issued by the Applicant itself, and that it adopts the average sales value arrived at by the Respondent being based on the best information available to it at the time.

The respondent submits that the rest of the information regarding the Applicant's sales was derived from its VAT returns for the period in issue i.e March 2001 - September 2004 (except returns for the months of March to July 2002 which were never filed with the Respondent). The Respondent submits that even in its own computation using the input/output ratio method, the Applicant continued to reflect wrong or non-existent information which alkccrafomsd. the doubtful and unreliable nature of the Applicant's information in as far as this matter was concerned. Below are the issues that the Applicant failed to provide evidence in proof throughout the period before it resorted to the Tribunal' and even during the hearing at the Tribunal:

- 1. Evidence to support the alleged zero-rated sales amounting Ushs150,694,451/= (This should have comprised tax invoices of the same $\frac{1}{2}$ sales and the corresponding bills of entries supporting the expons: - For the months January and February 2002. August December 2002. $2. \cdot$ January – February 2003; the VAT returns reflected different figures from those listed in the Applicant's table. (Why the upward variance in the figures reflected in the table prepared by the Applicant?) - 3. For the month March – July 2002, the Respondent did not have any VAT returns received into its system; and yet the Applicant listed various figures reflecting local sales. (Where did the Applicant get these figures and where is evidence to the same?). - $4.$ As earlier pointed out, the Applicant adopted a local sale value of US\$450. which it completely failed to prove throughout the Audit commencing $15^{\text{th}}$ November 2004 and also at the hearing of the Tribunai.

These anomalies by the Applicant only serve to confirm the Applicant's attempts to be evasive and dishonest in as far as disclosure of relevant information required to compute its tax liability was concerned. All the information gathered supports a definite accrual of tax liability payable by the Applicant which the Applicant intentionally attempted to evade by failing to provide relevant information/records required to compute the said tax liability.

#### ISSUE 3:

# Whether the Applicant is liable to pay VAT of Ushs491,780,679/ $=$ as assessed by the Respondent?

It is the submission of the Respondent that the Applicant is liable to pay taxes of Uashs491,780,679/= as assessed, before interest and penalty to be computed on that figure.

As pointed out earlier, the method of input/output ratio applied to compute the Applicant's taxes was never at one point legally objected to and is legally provided for under the VAT Act Cap 349.

Secondly, the parties and as confirmed by the Applicant's witnesses agreed on the units of power consumption used to produce a ton of steel, and were not agreed on the sale value per ton which the Applicant insisted was US\$450 but failed to justify from the start to the end The available VAT returns filed by the Applicant were also relied on to compute taxes using the method.

It is the submission of the Respondent, that in the absence of proof of the sale value per ton of US\$450 by the Applicant: the figure of US\$528 as determined by the Respondent is adopted as the best information available to determine the average value per ton to enable the Respondent compute taxes payable by the Applicant. The submission is further reinforced by the fact that all documents

$\mathcal{L}$

that had been submitted to and examined by the earlier audit teams were described as unreliable and some were not available for them to be able io mai-.e conclusive and justifiable findinos

Finally, the Respondent does not deem it proper to close submissions on mis matter without responding to the rather unfair and malicious statements mao- by counsel for the Applicant that 'documents (Annexture !K ) were sneaked mtc court in the most questionable circumstances' and that 'they confirm the lack of good faith in the acts. of the Respondent'. This unfortunate statement is obviously meant to cast doubt on the integrity of not only the Respondent but also the Tribunal, for how else are documents found on the Tribunal's file if the v are not duly received and filed by the Tribunal itself?

It is dishonest of Counsel for the Applicant to, without any iota of evidence, claim that documents were sneaked into court when he was physically present at the scheduling conference held at the Tribunal on 22nd August 2006, at which the documents in issue were agreed upon and filed in the same way that he was allowed to file final returns for the period 2001-2004. The Registrar of the Tribunal was present at the scheduling conference and would have been the best person to explain the presence of these documents on the Tribunal's file, rather than make baseless and harmful allegations meant to divert the Tribunal's attention from the actual issues at hand.

It is notable at this point that other documents e.g ID 19 -and ID 7 do not reflect the actual documents in the list of documents. Id 7 is some kind of list of documents/files while ID 19 is a completely different letter from the one agreedupon i.e. the letter dated 14th September 2004 from Head, SRPS -and reproduced in the Respondent's submissions. These anomalies serve to show that there may have been a problem in compiling the list of documents since these were many, without imputing any ill will on parties involved in compiling the same.

It is the prayer of the Respondent that Counsel for the Applicant is cautioned against making such careless utterances as he did without any proof of the same since they may have far reaching implications. Counsel for the Applicant should understand that it is not professional to apply derogatory tactics meant to derail the courts from the case before it. but instead focus on meaningful arguments that will strengthen his case, it at all.

#### ISSUE 4:

**&**

## Remedies and costs.

It is the payer of the Respondent that the Tribunal finds that:

- **1.** The method used by the Respondent to compute taxes is-legally accepts:?. - **2.** The Respondent had sufficient ground to estimate the sales of the Applicant. - **3** The Applicant is liable to pay VAT in the sum of Ushs 491.780.679/= - **4.** The Applicant be ordered to pay accrued interest and penalty. - **K** The Applicant be dismissed with costs.

**/**

# **I •** APPLICANTS WRITTEN SUBMISSIONS IN REPLY.

.lhe Applicant reiterates its submissions ano replies to the Respondents submissions specifically as below;

## Issue No. 1

**&**

### Whether the method used to arrive at taxable supplies is legally acceptable

- 1. Firstly, we note that the Respondent has not responded or disputed the Applicants submissions in points 1 to 9 of the submissions. - 2. Secondly we note the Respondents apparent reliance on Exhibits ID 9 and ID 19, as well as the audacious attempt to introduce a document clearly noi on record by-way of attempting to substitute it for ID 191! This action raises serious evidential issues as well as issues of contempt of this honorable Tribunal as below; - a) When this matter first came upon for scheduling, counsel for the Applicant sought to tender in several documents originating from the Special Revenue Police Service (SPRS) including documents marked ID 9 and ID 19. The Respondent vehemently objection to the said documents and demanded that the same be identified by witnesses before they can be admitted in evidence. The Respondents argument was that SRPS is independent from URA and therefore SRPS's documents are noi known to URA.

As the record shows, the said documents were never identified and were never tendered in evidence. We therefore submit that the said documents cannot be relied upon by the Respondent or by this honorable Tribunal in this matter.

b) Once again the Respondent has brought into these proceedings a document that was never part of the record, was never supplied to the Applicants, and for which no leave of this tribunal was sought. It is clear from the record that ID 19 was brought to the Tribunal as part of tne Applicants documents. Clearly the Applicant was aware which document it is that was to be relied on. The Respondent cannot therefore make a decision as to which document is the true ID 19.

In any event the document presented to court and marked by the Tribunal as ID 19 is ID 19. and remains so. its relevance or lack thereof nor withstanding.

**/** L

**)**

![](1__page_28_Picture_1.jpeg)

c) Without prejudice to the forgoing, it is clear that the document attaches er, the Responds submissions has been altered as well. A look at me document reveals that the stamp at tne bottom thereof has beer, partialiv . erased together with the date following the comments handwritten st me bottom of the page.

**r•**

We submit that the continued attempt to sneak altered documents imo me court record by the Respondent is reflective of nothing less than contempt of this Honorable Tribunal

- **o.** Without prejudice to the foregoing, and in light of the fact that the Respondent has risen matters on documents ID 9 and ID 19, we submit that if this honorable tribunal is inclined to consider the two documents it notes the following, - a) The letter from SRPS of 2 2nd February 2004 [ID 9] clearly states that the Applicants VAT matters have been finalized and that the Respondent owes a refund of Ushs. 14,465,509 to the Applicant. It then asks the Respondent to review the Applicants "other tax heads". There is no mention of failure to produce documents and no issues whatsoever to suggest the unreliability of information availed for the audit. - b) On 14th September 2004, the head of the Fraud Investigations and Audit of SRPS, writes to the Applicant returning the documents used in the audit and expressing appreciation for the co-operation offered by the Applicant to the officers who conducted the audit.[see ID 18 as per the court record]. - c) Be that as it may, the words in the purported letter i.e. "further management" and "unreliable records" coming after recommendation of a refund, cannot imply that there should be another audit. Had this been the case there would be no recommendation for a refund.

But even if it were to be taken that URA took instructions from SRPS on what and when to audit, then it is immediately clear that whatever the actions of the Respondent, they were never brought under section 32 of the VAT ACT for at that time, the Commissioner General had not considered the Applicants returns and any dissatisfaction would be that of SRPS not the former. In any event, there is no indication that the input-output method used by the Respondent was in further management and following up other tax heads or that any dissatisfaction even on **ttwgasfc'of** SRPS was with regard to returns!

**d)** We emphasize that the documents sought to be relied upon oy me Respondent i.e. ID 9 and ID 19 are inadmissible in evidence as they •.». ere

**/**

e) At page 7 of the Respondents submissions, Counsel alleges from the bar that the Applicant did not avail the Respondents audit team with evidence of opening and closing stock and that therefore the Respondent concluded that all that was produced b the Applicant was sold. With respect this is no more than a falsehood as it contradicts evidence of the Respondent witnesses.

The records of opening and closing stock were and have always been available to the Respondent. These are reflected in the Applicant final yearly returns filed with the Respondent. [Copies were filed on the Tribunal Record on 25th May 2006]. RW1 testified "I did not see any sales made without an invoice. I did no look at accounts filed by the *Applicant with URA*" [para 3 at page 9, draft proceedings 7th February 2007]. RW2 testified as we have quoted above, that all records were on the Applicants computers but were never asked for except for the sales records of which they obtained a printout.

On the issue of assuming that all produced was sold RW2 who was heading the audit team testified, "We never traced any invoice which did not have VAT on them, we did not confirm that there were undeclared sales... VAT is computed from the product sold, the sales used were established from the VAT returns...it is possible to produce and not sell the products."[para 8 & 9 page 9 proceeding $7^{\text{th}}$ ] **February 2007**]. There was therefore no need for assumptions. All records were available and it was found that there were non undeclared sales.

We submit therefore that in any event, the documents referred to in $ID 19$ prove that the Applicant availed all necessary records to aid the audit and that its VAT matter had been substantially dealt with arriving at a position that recommended a refund to the Applicant. This dispels the Respondents argument that documents were either unreliable or were not availed.

4. The Respondent has submitted that the Applicant never at any one time objected to use of the input/output method. Counsel argues that the Applicant cooperated and condoned the use of the method! Three issues arise out of this submission. a) Firstly, we must ask ourselves did the Applicant have a choice or wauthority in relecting the method and thereby rejecting the whole audit carried out by the Respondent otherwise than by application to this Honorable Tribunal? The answer is definitely NO. It is the evidence of DW2 that whether or not there was information or documentation the instructions of the Respondent were to use the input output method and it was always the system they were intent on using. RW2 states "The letter dated 1/11/04 (exh. 24) we were instructed to use the input/output ratio to establish VAT payable..." [See page 6 paragraph 1] proceedings of 7th February 2007]. She adds, "Even if we had had the records we would still have used input/output ratios."[See page 9] paragraph 5 proceedings of 7th February 2007]. The question therefore as to whether the Applicant objected to the method or not does not arise. The law states what methods are to be employed and the law alone is what the Respondents ought to follow and ought to have followed.

b) Secondly, we must also ask ourselves, does cooperation in or condonation of, an illegal method make it legal? Again the answer is NO. The law is that once there is an illegality, it overrides all matters including any admission made by any party to the litigation. This is the position of the law as stated in *Makula International Ltd v. His Eminence Cardinal* **Nsubuga & Anor [1982] HCB** 11 where the Court of Appeal (at the time the Highest Court in Uganda) held that

> "A court of law cannot sanction what is illegal and illegality once brought to the attention of the court, overrides all questions of pleading, including any admissions made thereon." [Copy attached]

It follows therefore that the letter referred to by the Respondent of $16^m$ May 2005 [Exh. 34] and the letter of 18th March 2005 are irrelevant in as far as the method used by the Respondent was illegal. Similarly, section 16(4) of The Tax Appeals Tribunal Act Cap. 345 would apply in a situation where there is no illegality.

The Respondent also cited an unreferenced case as Matla Coal Itd v. CIR (1987 AD) and provisions of a section $83(7)(b)$ . Neither has the case been submitted for the attention of this honorable Tribunal nor for the Applicant. It is gathered from the proceeding sentence that the section of the law cited is South African. We submit that both the case and the section are wholly irrelevant to both this case and to our local legislation.

c) Even then, the Applicant actually protested the method used in various $\frac{1}{2}$ communications as are on record. It is the Respondents evidence that the Applicant did object to the methods used but to no avail. DW2 states " $By$ " letter dated 12th May 2005 and 5th January 2005 the taxpayers did not

*accept our methods, that is why they applied ''* [see draft record *o'* proceedings of 7lh February 2007 page 9 para 9],

**t**

- 5 . We maintain that the method used by the Respondent to arrive a; the assessments which has been referred to as the input-output method is fundamentally illegal We have shown that the proper procedure for administration of VAT is that a taxable person lodges a return with the URA within 15 days after the end of the month, showing the tax payable for the period, the amount of input tax credit claimed. (Section 31). Tax payable is calculated by applying the rate of tax to the taxable value of the transaction. A taxable transaction is defined as a taxable supply or an import of goods or services that is subject to tax under this Act and a supply means any arrangement under which the owner of goods parts or will part with good. VAT is a Self Assessment tax. - *Bugisu Coffee Marketing* a) We, cited and submitted the authorities of Bhagwanji & Co. Ltd v. Commissioner for Customs & Excise [1969] EA 184 at 188 and Maha Enterprises v. Uganda Revenue Authority HCCA 2 of 2001 not for the facts therein, but rather for the general principles of tax lew enumerated therein. In the *Maha Case* James Ogoola J. (as the Hon. The Principle Judge then was) emphasized the nature of treatment of tax legislation. He follows and cites with emphasis the decision of *Slade J.* in *Attorney General v. association Ltd (1963) EA 39* vide;

"in a taxing Act one has to look at what is clearly said. There is no room for any intendment. There is no equity about tax. there is no presumption as to tax. Nothing is to be read in, and nothing is to be implied. One can only look firmly at the language used." '

He goes on to cite an follow the decision in *Kanjee Narajee v. Income tax Commissioner (1964) EA 257 at 258* vide:

"...if the language of a Revenue Act is obscure, the taxpayer is entitled to demand that his liability to a higher charge shouid be made out with reasonable clearness before he is adversely affected."

b) The Respondent has maintained in its submissions that the audit of the Applicant and the use of the input-output method were used in accordance with the Commissioner Generals, powers under Section 32 (1) and (30. We have submitted that the safer section applies whe-e there is dissatisfaction with a taxpayers *returns lodged.*

We have shown that the Applicant diligently filed returns and made all relevant payments. The evidence of this has been provided to the Tribunal and was admitted by the Respondents at the scheduling vice the Applicants documents pages 70 to 132. These were never referred to by the Respondent. It was never in fact the Respondents case that they were dissatisfied with the returns and indeed no such communication was ever made to the Applicant. This was confirmed by both RW1 and RW2. To the contrary, RW2 stated "even if we had" had the records we would still have used the input/output ratios [page 9 para. 5 line 1 proceedings of 7th February 2007]. RVV2 agrees, "There is no policy of formula or practice of how to use input/output ratio." RW2 in fact states that the information was satisfactory vide "We never traced any invoice which did not have VAT on them, we did not confirm that there were under declared sales". She adds, "VAT is computed from the product sold, the sales were established from the VAT returns..." [page 9 para & and 10 proceedings of $7$ th February 2007].

On his part RW1 stated "I did not see any sales made without an invoice. I did not look at accounts filed by the Applicant with URA" [page 5 para 3 proceedings of 7th February 2007] [Page 5 para. 5 line 1, proceedings of $7th$ February 2007].

Only after our submissions has it occurred to counsel for the Respondent that the powers in the above sections are exercisable strictly. Hence the attempt to give evidence from the bar on the Applicants returns for March, April, May, June and July 2002. When the Applicant tendered Exh. 36 detailing the returns filed and payments made there was no challenge from the Respondent. Indeed as shown above, the evidence of the Respondent witnesses shows that this was never an issue.

At the time of writing Exh. 36 the issues were on zero rated sales. The Respondent promised to make adjustments if proof of payment of corporation tax paid was made on the Shs. 150,694,451= (One hundred fifty million six hundred ninety four thousand four hundred fifty one shillings) that arose in a previous audit. The said sums were well explained by the Applicant by letter of 18th March 2005 **[Exhibit 36].** In his testimony, RW1 conceded that no payment was due on the amount since it had already been added back in the tax computation. [See para. 7 & 8 at page 4 of proceedings of $7^{th}$ February 2007]. It is inconceivable then, that Counsel for the Respondent seeks to depart from the evidence of the Respondents witnesses confirming no fault in lodging returns by the Applicant

![](2__page_33_Picture_1.jpeg)

The Respondent has also attempted to justify the method on account that it has been used on several other companies. Firstly, it was tne testimony of RW1 that the method has never been used cn a company of the Applicants standing. Secondly, the case cited bv fee Respondent as examples were never demonstrated tc court. S,imply naming a company is o proof at al! as to what methods c-f ta< collection have been employed on it. We on the other hand have demonstrated that where the law has sanctioned used of the method, clear provision gave been laid out detailing the formulae.

We submit that Respondents actions were illegal. We have aiso cited the case of *Makula International Ltd v. His Eminence Cardinal Nsubuga & Anor [1982] HCB* 11 above to show the effect of an illegality brought to the attention of the court. It is irrelevant therefore that the method has been used on other taxpayers.

**/ \_** Therefore the cases of Coy v. Kime (Inspector of taxes) [1987] STC 114 and Farnocchia & Anor v. Customs & Excise Commissioners [1994] STC 881 are irrelevant. In any case the same have not been presented to this Honorable Tribunal or to the Applicant and there jurisdiction and authenticity cannot be vouched for. For these to have any sort of relevance, there is need to have obtained the detail of the taxing statute and to confirm that it is in *pan materia* with out VAT Act Cap. 349.

d) The Respondent has also, as an afterthought perhaps, sought to rely on Section 32 (1)(c) to justify her actions. This is again contained in statements from the bar by counsel for the Respondent. The section provides as follows;

32. Assessments.

(1) Where-

**. c)**

**I**

**4**

- (d) a person fails to lodge a return under Section 31. - (e) The Commissioner General is not satisfied with a return lodged by that person; or - (f) The Commissioner General has reasonable grounds to believe that a person will become liable to pay tax but is unlikely to pay the amount due. - 4. The Commissioner General may, based on the best information available, estimated:thfe tax payable by a person for the purpose of making an assessment under subsection (1).

For the provision in section 32(1;(c) to be effective there must ce *Reasonable grounds,* that there is *a likely future tax liability that the taxpayer is unlikely to pay when* the liability arises

With respect, even if Counsels statements from the ba; were io be considered, they cannot in the circumstances be relevant io this case Firstly because this case arises from a period of review, i.e. a period in the past whereas the provisions sought to be relied refers to prospective tax liability.

Secondly, that particular provision requires that the Commissioner General have *reasonable grounds* As submitted this has come up as an after thought. It was never canvassed at the hearing and no grounds were ever shown to have been communicated to the Applicant or better still to the Tribunal. Better still, Exh. 10 which is the Commissioner General's letter containing clearly shows that section 32 of the VAT Act was never considered in the slightest. In fact, the reason given in Exh. 28 dated 11th January 2005, was that the Respondent was only interested in "profiling your firm for Corporation Tax, VAT, and PAYE status". It was never to do with returns.

Thirdly, clause (b) and (c) of Section 32 (1) are mutually exclusive. Clause (c) presupposes a situation where there are no returns lodged or likely to be lodged, but there is a likely tax liability. This clause is commonly applicable in instances of one off transaction by non residents for instance visiting musicians etc who are assessed before the event. Counsel's uncertainty as to which clause might have been applicable in the present case is further proof that the actions of the Respondent were never under section 32 of the VAT Act.

6. Counsel for the Respondent also submits that the input-output ratio method is generally accepted and based on a material balance. Counsel adds that the Respondent witness (presumably DW2) testified that the said material balance derives from the Fundamental Law of Conservation. She states that law as "Energy/Mass is neither created nor destroyed but only changes from one **form** to **another"** and purports to quote "David M. Himmeibiau. Basic Principles and Calculations in Chemical Engineering, 3r0 Edition 1996".

We do not dispute the existence of Newton s Third Law of Motion about mass changing to other forms and we are also aware that David M. Himmeibiau is a leading authority in the field of chemical engineering. However we disagree with the Respondents submission for the following reasons;

a) A theory accepted in chemical engineering does not thereby become a generally accepted accounting principle in auditing and accounting sr.c-

![](2__page_35_Picture_1.jpeg)

David M. Himmeiblau would, if he were a witness. tell anybody trie; the theory is not to be used in accounting and taxation. As we have shown in the attachments hereto, the theory is applicable in the area of enemies reactors and hyper physics. This is why RW2 could not explain the theory and how it fed into the methods used. She testified that *"there is no authoritative literature concerning the input/output ratio:'* [para 4 page 9 draft proceedings of 7th February 2007], She adds that it is just a common technique called "material balance". She however could not and did not explain what "material balance" was. RW2 agrees, *"There is no policy of formula or practice of how to use input/output ratio.*''[Page 5 para. 5 line 1, proceedings of 7th February 2007].

**A**

We submit that the generally accepted principles in taxation should be in the law itself and if any supplemental principle were required, it follows the accepted accounting principles.

**b)** The Conservation laws have four principle paradigms i.e. Conservation of Momentum, Conservation of Energy, Conservation of Angular momentum and The isolated System. The third is the central element in the other two [Generic Documents for Building Hyperphysics, Hyperphysics-Mechanics, R. Nave [http://hyperphysics.phy](http://hyperphysics.phy-)<astr.gsu.edu/hbase/conser> copy attached as "B"].

The law of conservation of energy is that "Energy can neither be created nor destroyed i.e. the total energy of an isolated system remains constant." An isolated system implies a collection of matter which does not interact with the rest of the universe at all. The above author states "as far as we know there are really no such systems." So this law cannot have been applied to the Applicants production process let alone to determining its VAT liability for it cannot be an isolated system to which the law would apply.

- **c)** From what has been searched by the Applicants counsel and attached hereto, the literature of materials balance is quite a complex area of physics involving algorithms, equations and experiments in highly controlled laboratories. It is not the kind of stuff where one would visit the premise of a steel mill and without checking stocks.. Raw material, or power supply, come up with a conclusion. RW2 stated *"I did not look at the electricity meters"* [See para 5 page 8 proceedings of 7tr February 2007], The Respondent ought to have proved by formulae before this tribunal how the equation of the material balance came up with the tax assessed. - **d)** Even if one were tc apply Conservation of energy as a fundamental principle (without prejudice to our foregoing submissions) one would ha-.-e to apply one of three primary equations These are tne Bernoulli

**)**

equation for Fluids, the Voltage Law for Electric Circuits: and the First Law of thermodynamics for Heat and Thermodynamics So if the Respondent had indeed applied this law as Counsel submits, then seeing that the Applicants production process involves electric circuits, heat and thermodynamics, the Respondent ought to have employed the last two equations. They did not. The both witnesses of the Respondent could not explain how they arrived at the result they did. First because they never used this method and second because it is not applicable in any event.

$\epsilon$ ) The Respondents authority itself ("David M. Himmelblau, Basic Principles and Calculations in Chemical Engineering) reveals that there is a labyrinth of equations to employ for one to use the concept of "Material/mass Balance". The author lists a host of parameters to employ [See Annexture "C" excerpt of Basic Principles and Calculations in Chemical Engineering: International Edition, 7th Edition also found at www.pearson.ch/HigherEducation/ChemicalEngineering/].

These differentials and formulae are further explained in the Wikipedia Free Encyclopedia [Copy attached as Annexture "D"] found at http://en.wikipedia.org/wiki/Mass\_balance\_\_\_The\_Respondent\_never used any such formula.

- Counsel for the Respondents argued that the input-output ratio is widely $f$ used in the Respondents Training School and that there is a full module on the subject. Whereas this information is a statement from the bar and whereas it is wholly irrelevant to the matter before this tribunal, it is in stack contrast to the sworn testimony of RW1 that "There is no policy or formula or practice of how to use input/output ratio."[Page 5 para. 5] line 1, proceedings of $7^{th}$ February 2007] and that of RW2 that "there is no authoritative literature concerning the input/output ratio." [para 4] page 9 draft proceedings of $7th$ February 2007]. - g) Having attempted to use the authority of David M. Himmelblau, the Respondent ought to have brought a witness conversant with the theory so that this Honorable Tribunal is educated on its relevance to the issue at hand, if any. Least of all the Respond ought to have attached for the record an extract of the cited authority so that its authenticity can be verified. None of this was done.

Therefore the Respondents submission on this point ought to be disregarded.

Issue No. 2

$\mathcal{L}_{\text{max}} \in \mathbb{R}^{n_{\text{max}}}$

Whether the respondent had sufficient ground to estimate sale of the applicant.

Fortunately for the Applicant, the evidence on the record shows rather differently. DW2 testified.

> "During the interview we did not raise the issue of being denied records. I am able to do computer audit. We did not ask to audit on computer. We got a print out of sales...".[See para 5 page 8 proceedings of 7th February 2007].

This was the position. All records were availed for the Respondents taking They did no use them because as earlier submitted and as testified by the Respondents witnesses, whether or not they had the documents and whether or not the Applicant objected they were going to use the method. RW2 states "The letter dated 1/11/04 (exh. 24) we were instructed to use the *input/output ratio to establish VAT payable...*" [See page 6 paragraph 1 proceedings of $7$ th February 2007]. She adds, "Even if we had had the records we would still have used input/output ratios."[See page 9] paragraph 5 proceedings of $7th$ February 2007].

It is unthinkable that counsel for the Respondent would ask this honorable tribunal to turn a blind eye to the sworn testimony of the Respondent witnesses on record and to instead follow statements from the bar! [page 10] Respondents submissions].

2. Counsel for the Respondent has submitted that the Applicant kept all records on computer from the time of inception and that these included sales. purchases, expenses, stock records. This is collaborated by the evidence of DW2 as quoted above.

The Respondent having therefore found that all these records existed and having testified as to having the ability to use the computer on which this information was for audit, we submit that the Respondent cannot in the same breath purport to justify use of the input-output estimation method. Information was available. It was never asked for and it was made clear by DW2 that it was the Respondent intention not to use it.

We have already submitted that the method used was illegal and given our reasons supported by evidence on the record. We do not wish to venture any further into debating the rates and we reiterate our submissions.

C. ODLAIS TOIL

j. I he respondent has listed four points or areas on which it is aiiecec no proxy was offered. All these relate to the zero rated sales and the figure of Shs. 150.694,451= (One hundred fifty million six hundred ninety four thousand four hundred fifty one shillings). Once again the evidence of DW1 shows differently. He states *"The figure of shs 150m/= to do with zero rated sales are the same. Shs. 150m/= was added back. Our review was following up the Vat refund. ...for purpose of corporation tax there would be no recipt for the 150m/= because the tax was nil."* [Page 4 record of proceedings of 7th February 2007], It is clear that no further proof of this matter was required. Actually the condition of proof of payment of 150m/= was irrelevant from the beginning.

## Issue No. 3

Whether the Applicant is liable to pay the VAT of Shs 491.780,679= (Four Hundred ninety one million seven hundred eighty thousand six hundred seventy nine shillings).

- 3. We have submitted that the methods employed by the Respondent in arriving at the above assessment are illegal and so is the assessment itself. We submit therefore, that in any event, the Applicant is not liable to pay the said monies. In the alternative however, and without prejudice to .the foregoing, we submit as follows; - 4. The Applicant is not liable to pay the VAT of Shs 491,780.673= (Four **Hundred ninety** one million seven hundred eighty thousand six hundred **seventy nine shillings)** for the following reasons. - iii. The Applicant filed tax returns for the period 2001 2004 and paid tax accordingly. Each of the tax returns filed was approved by URA Whereas there were variances between the tax returns and the tax records examined by the audit teams which audited the records, the necessary adjustments were made on a case by case basis as allowed by the VAT Act under Section 32.

It has been confirmed by both witnesses for the Respondent that nothing was found wrong with the returns or the sales record upon which the returns were based

Having therefore found no error or under declaration, it follows that the figure above are more than mere speculation.

• Even if the input and output ratio method were by the widest stretu': to be accepted, the tax payable would be different because several

*I*

matters were not considered as listed in point 2 of our main submissions on this issue.

c. The figures used were a generalization The matter that were not considered were brought to the Respondents attention by the Applicant [See page 146 of Applicants Documents-Exhibit 27] but the Respondent using no data cr any other method transparent to the Applicant argued that adjusting the power per ton of steel from 550 kwh to 650 kwh took into account of everything This is confirmed by the seven audits or intended audits carried out on the Applicant in the period.

**£**

4. We have also submitted that even if the underlying calculations adopted by URA in the final calculation of 14/13/2005 (Page 198) were to be accepted the selling price for a ton of steel used would be unacceptable. The price as per the "reconciliation meeting" was S450 per ton. The Applicants provided the Respondent with workings about the average weight of her products in Exhibit 4, which shows the weighted average price per ton as USS 432 inclusive of VAT, but the Respondent neither used the figures nor disputed them. The Respondent increased it to S528 for no justifiable reason

We reiterate our submissions on this issue but wish to comment on the issue of documents referred to as "Annexture K" in light of the. Respondents submissions.

5. In our earlier submissions *we* made comment on the nature of these documents and as to how they arrived before the Honorable Tribunal Counsel for the Respondent has referred to our submission as "unfair and malicious" and as "careless utterances".

We wish to state that we firmly and unreservedly reiterate our submission on the said documents. It is clear from the face of the documents that tne same were blotted, a fact admitted to have been done by the Respondent! With respect, this is never the manner in which evidence is dealt with.

It was also apparent on the afternoon of 7ln February 2007 that none of the members of the Tribunal and neither of the two counsel for the Applicant had these documents on the record. Indeed they were never pan of the record. Al! documents properly on the record *were* labeled numerically and none was labeled alphabetically as indeed is "Annexture K"!

With due respect to Counsel for the Respondent, we note that me practice o;c not stop at the said "Annexture K" but has. beeo-.extende.d. to an overt atiem?' at altering the record of this Honorable Tribunal by introducing a letter cy submissions of the Respondent and attempting to have its substitute? witr 19 which is clearly marked on the Record! Is there any better proof of reoom tampering than that offered by Counsel for the Respondent? We think not *i* **i.** *t* **\**

We as officers of court have a solemn duty to point out flaws of this nature that tantamount to breach of professional integrity and will not balk from making our opinion thereon very clea-

We pray that this honorable I ribunai unreservedly condemns practices seen as these that bring it into contempt.

### Issue No. 4

*&*

Other Remedies:

## 1. Interest and Costs:

We submit that the Plaintiffs' are entitled to costs of this suit in any event with interest as provided for under section 27 of the Civil Procedure Act Cap. 71 and the VAT Act Cap. 349.

### OBSERVATIONS, COMMENTS, FINDINGS, AND RULING OF THE TRIBUNAL

## Majority Ruling

The Tribunal has carefully considered the material facts as presented by each party, evaluated the evidence, and fairly examined the relevant law applicable to this particular Application. The Tribunal has in its own wisdom reproduced verbatim the somewhat extensive written submissions of both Counsel and now proceeds to make its observations, comments, findings and a ruling as follows.

The first observation concerns the facts. The parties generally agree on the facts with the exception of two vital aspects, namely the number of units of power consumed to produce a ton of steel from scrap metal, and the selling price of a ton of steel produced.

The second observation concerns the method used to determine the iax. what otherwise the Respondent refers to as the input/output ratio. The Respondent also wants the Tribunal to believe that the tax was estimated on the basis of 'the best information available" prescribed in Section 32(3) of the VAT Act.

The third observation relates to the tax invoices herein referred to as "Annexture K" which Counsel for the Applicant objected to. These documents were purportedly intended to justify the selling price of a ton of steel at USS52E Trey were blotted to hide their identity and the same were .issued.on 29'n Septemoe'- 2007 long after the dispute had arisen and the Application registered at me Tribunal. Reliance on these documents can lead to a questionable decision. More so the selling price of USD S 528 per ton attributable to a ton.of steel.

IIk fourth obs<'ivatioii is that them were three audits canted cut ! .■ im Respondent at different times with diffr rent results. 'I he. first audit favour, d taxpayer with a refund of Ushs 14 405.509/= which war nwm u. tnr.cn C second audit resulted in VAI arrears of Ushs 4.554 019/= I he tinrc t, i-c yielded a PAYE tax liability of Ushs 35.491,1158/=. As this tax is not in issue disregarded

The audits appear to have yielded no definitive results against winch. any assessment if at all could lean

What followed then was an interview ot a reconciliation meeting arranged by the Respondent at which the Applicant unwittingly disclosed the number of power units consumed to produce a tonne of steel. With this information me Respondent went ahead to make an assessment of Ushs. 681,500.089 claiming that it was based on the input / output ratio method and/or estimated orthe basis ot the best available information rule.

When the assessment was objected to. the Respondent reduced it to Ushs 494. 432,218/=, and finally to Ushs. 491,742.049/=.

No doubt an assessment should never be presumptuous or speculative. An assessment should create a tax liability with reference to the law. Tne Respondent has cited section 32 of the VAT Act as the relevant law to which we shall allude later.

The above observations and comments definitely have impact on the outcome of this Application. What follows is a resolution of the issues by the Tribunal

issue number one is whether the method used to arrive at taxable supplies namely the input/ output ratio method is legally acceptable. Looking st me submissions of the two parties on this issue what comes out dearly ano is in contention is the use of the input / output ratio method and the selling price per ton of US Dollars 528. The Tribunal has already found that this selling price of US Dollars 528 per ton cannot be relied on because documents introducing it are or have been faulted to justify the VAT liability of the taxpayer.

Counsel for the Applicant submits at length that Section 32 of the VAT Act is inapplicable. Counsel for the Respondent equally submits that the input / outpuratio method is to be read in the said section 32 to justify the assessment.

The relevant legal provision governing assessments under sections 32 are subsections (1) and (3) of the VAT Act and are reproduced here under:-

Section 32 (1) Where:-

(a) a person fails to lodge a return under section 3" •

- (b) the Commissioner General is not satisfied with s return lodged by a person: or - (c) the Commissioner General has reasonable grounds to believe that a person will become liable to pay tax but is unlikely to pay the amount due.

the Commissioner General may make an assessment of the amount of tax payable by that person.

(2)

(3) The Commissioner General may, based on the best information available, estimate the tax payable by a person for the purpose of making an assessment under sub- section (1)."

Counsel for the Applicant made submissions and raised points in paragraph 1 io 9, which the Tribunal finds valid. Unfortunately Counsel for the Respondent die not refute these points. As such the Tribunal finds that on the facts and evidence., adduced this assessment is unjustifiable under section 32 (1) and (3) of the VAT Act because the conditions set out therein are not applicable in the instant case.

The assessment is therefore found to be incorr-ect and it should not have been made, and if it was made, it should have been made differently.

Further nowhere in the VAT Act is the input / output ratio prescribed as a method of determining Value Added Tax.

It is noted that input /output ratio which has been called a method by the Respondent is a result of the number of units of electricity consumed to produce a tonne of steel from scrap.

The words "input" and "output" in relation io tax are clearly defined in the VAT Act. It appears there is some element of confusion on how to use and apply these words. Nevertheless in the absence of iegal backing, the use of the two words variously or interchangeably so as io conveniently create tax liability for a citizen is improper.

Before coming to a conclusion reference has to be made to the assertion tha\* the information available was not sufficient. The evidence adduced shows that aH th'p documents required to be kept under the VAT Act were made available The Respondent ought to have used them to the best cf its ability to come cut w: an assessment which is legally acceptable instead the Respondent preferred a short cut the materials input /output ratio 'which has no legal backino. More over if the method is convenient to the Respondent ano is Generally used tr.en it wrongly hence the need to amend the law

*t i*

**(**

In reaching its decision the Tribunal has followed tne authorities cited by Counsel the Applicant of Bhangwani, Eco V Commissioner for Customs and Excise (1969) E. A. 184, Maha Enterprises V Uganda Revenue Authority H. C. C. A 2 of 2001 and RV Commissioner Income Tax exparte SDV Transami (K) Ltd 2004 LLR 6000 HCK 2005

By virtue of these court decisions the finding of the Tribunal is that the input/ output ratio method of materials is non-existent under the VAT Act. and finds me assessment to have no merits.

Issue number two is related to issue number one and is whether the Respondent had sufficient grounds to estimate the sales of the Applicant by using the best information available clause set out in section 32 (3) of the Act. This subsection cannot be applied in isolation or without reference to section 32 (1) of the Act. ir. other words under the circumstances section 32 (3) of the Act cannot be applied independent of section 32 (1) of the same Act. As a result issue number two is sc decided and without going into the nitty gritty of the submissions of both Counsel, on the same issue.

As for issue number three whether the Applicant is liable to pay the tax. Having found in favour of the taxpayer that the assessment was wrong in law the Applicant is not liable to pay the tax of Ushs. 491,742.042/= assessed tax. The Application is allowed the assessment is quashed.

Issue number four is on remedies. These follow the event. The Tribunal orders that the Respondent meets the remedies prayed by the Applicant namely interest, if any, and costs of the Application.

Dated at Kampala this day of May 200/

*i* J.lica

Member

*&*

Certified as correct

- S. Khauk

REGISTRAR

**r** PfATNsaeuguwa— Member

# Minority Ruling

*&*

I his is a minority ruling. Its main variation with the majority ruling is in the orders made.

The facts and circumstances leading to this Application are abundantly presented in the pleadings, the evidence adduced before the Tribunal, and the elaborate written submissions by both parties to the Tribunal which are all on record and need not be repeated in detail here.

The issues in this application mainly revolved around the method used for assessment of tax liability of the Respondent and whether the Applicant is liable to pay tax. There are also other pertinent matters, which arose in the course of the hearing and submissions of both parties relevant to the agreed issues, which have to be taken into account.

From the evidence before the Tribunal it is reasonable to conclude that the Applicant is liable to pay some tax but this has to be properly assessed. The point in contention is not that there is no tax liability at all, but rather that the assessment against which the figure of Ushs491,742,042 was arrived at was erroneous for the reasons given by the Applicant in his submission particularly, the input/output ratio method. While the input/output -ratio -method-can be applied^ in some instances of tax assessments in this particular application it was nob properly applied and an assessment based on it cannot hold as it left a lotto bel desired.

The Respondent argued that the information used in the assessment of tax was unreliable partly because the applicants failed to produce/provide relevant information to the audit team. According to Respondent, Audit reports indicated certain documents were not availed. This is not strictly true. From the evidence; received by the Tribunal documents were dealt with in a superficial manner by| the Respondent even where they were readily available. RW 2 stated that' records were on the Applicants computer but were never asked for except for the sales records which the Respondent obtained in a print out.

Failure to correctly assess tax liability does not by itself absolve a taxpayer from tax obligations especially if proper methods of assessment are applied In this case, the Respondent failed to justify the input output method let alone any otheJ method Ushs491of assessment and this has cast serious doubts on the figure oft , /42.042 claimed as tax liability of the Applicant. 9

I believe that systematic use of information available carr fead to a realistic and accurate assessment of tax liability of the Applicant. The Tribunal can however, not help out the parties in the matter i.e by giving a figure of the tax by reviewing and substituting the decision given that there are some gaps in information which nevertheless the parties can fill between themselves through systematic examination of the records and normal procedures of assessment. i

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In my view if the Respondent had applied the right methods and procedures it would have arrived at a correct assessment of the Applicants tax liability. Some of the indicators/guidelines of what needs to be done to arrive at a correct assessment have been given in the Applicants submission.

It is my belief that this is a case, which calls for a review of assessment.

Failure of the Respondent to properly assess the tax liability of the Applicant has led the Applicant into this litigation for which the respondent should pay costs. It will also not help either party to leave this matter hanging. The Respondent should expeditiously perform its statutory duty of collecting taxes. This should not be in a manner that leaves the Applicant in suspense regarding its correct tax liability hence the need for a time limit. The Respondent should make a fresh and proper assessment within a specified time as indicated in the order below.

For the reasons given above I would order as follows:-

- i) The Assessment of Ushs491,742,042 is set aside and the Commissioner General is to reconsider/review the assessment within 45 days from the date of this ruling. - ii) The Applicant to provide all the information in his possession, which will facilitate the exercise of a review of assessment. - iii) The Respondent to pay the costs of this application.

Dated at Kampala this day of 2007 ..... U

B. N. Kamugash'a CHAIRMAN

Certified as correct

**v A 4 X**

S. Khaukha REGISTRAR

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