[2024] KETAT 1347 (KLR)

Alliance One Tobacco Kenya Limited v Commissioner of Legal Services & Board Coordination (Tax Appeal 42 of 2023) [2024] KETAT 1347 (KLR) (20 September 2024) (Judgment)

Neutral citation: [2024] KETAT 1347 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 42 of 2023

RM Mutuma, Chair, M Makau, Jephthah Njagi, T Vikiru & D.K Ngala, Members

September 20, 2024

Between

Alliance One Tobacco Kenya Limited

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company whose principal activity involves the manufacture of tobacco, processing it and exporting the resulting processed tobacco leaf and by-products.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority is charged with the responsibility of among others, assessment, collection, accounting, and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent vide a letter dated 12th September 2022 issued the assessment letter after a review of the tax issues raised by the Appellant. Dissatisfied with the Assessment, the Appellant lodged an Objection on 11th October 2022.

4. Upon review of the Objection, the Respondent fully rejected the Objection through Objection Decision dated 7th December 2022.

5. Aggrieved by the Respondent’s Objection Decision, the Appellant lodged the appeal vide the Notice of Appeal dated 30th December 2022 and filed on 3rd January 2023.

The Appeal 6. The Appellant relied on its a Memorandum of Appeal dated 13th January 2023 and filed on 16th January 2023, which raised the following grounds of appeal, that:a.The Respondent erred by confirming additional tax on variances between sales per Corporate Income Tax (CIT) returns and Value Added Tax (VAT) returns that had been fully supported by the Appellant.b.The Respondent erred by disallowing a provision amount of Kshs. 23,746,793. 00 in the 2019 financial period which had been accorded the correct tax treatment.c.The Respondent erred by confirming additional tax on variances between sales per CIT returns and VAT returns that had been fully supported by the Appellant.d.The Respondent erred in law and fact by arbitrarily classifying the products sold by the Appellant as ‘Other Manufactured Tobacco’ and therefore confirming additional VAT on the erroneously charged Excise Duty.e.The Respondent erred by confirming additional taxes on disbursement costs based on arbitrary calculations not supported by an informed analysis or supporting documentation.f.The Respondent erred in law by applying Withholding Tax (WHT) on disbursements contrary to the provisions of Section 10 as read with Section 35 of the Income Tax Act (Cap. 470, Laws of Kenya) (the ITA).g.The Respondent erred in law and fact by classifying unmanufactured tobacco products sold by the Appellant as ‘Other Manufactured Tobacco’ and therefore subject to Excise Duty at the rates prescribed under the First Schedule to the Excise Duty Act, 2015 (the EDA).h.The Respondent erred in fact and law by failing to consider the international best practices which are judicially noticed in Kenya enunciated in the Appellant’s Notice of Objection regarding the correct classification of the Appellant’s products.i.The Respondent erred in law and fact in issuing an assessment which is partially statutorily time-barred for being beyond the five-year period provided in Section 31 (4) of the Tax Procedures Act, 2015 (the TPA).

The Appellant’s Case 7. The Appellant’s case is premised on its;a.Statement of Facts dated 13th January 2023 and filed on 16th January 2023 together with the documents attached thereto;b.Supplementary Statement of Facts dated 4th April 2024 and filed on 5th April 2024;c.Witness statement of Geoffrey Ndajiwa Banda signed, dated 24th June 2024 and filed on 26th June 2024; and adopted as evidence in chief on 16th July 2024,d.Written submissions dated and filed on 13th August 2024.

8. The Appellant’s case is that its processing activities are conducted at the British American Tobacco (BAT) Green Leaf Threshing Plant (the BAT Plant) in Thika, Kenya. The processing activities of the raw tobacco/green leaf comprises of the following three stages:i.Stage 1 (Stemming) – Under this stage, any undesirable leaf not suitable for processing blend in terms of leaf grade, quality or condition is removed from the production line. The suitable leaf is then processed into dry leaf through ‘loose leaf butting’ in which the ends of the leaf and thick stems are removed from the leaf; ‘threshing’ in which the thick stems are mechanically stripped off the leaf; or ‘hand-stripping’ in which the stems are removed manually from the leaf by hand.ii.Stage 2 (Re-drying) - This process conditions the leaf to a suitable moisture content which will allow it to be packed in cartons and kept in storage ready for shipping after some time without getting mouldy and damaged. Through this stage, the moisture content of the lamina is reduced from around 20% to around 13%, or to moisture levels that will be specified by the customers.iii.Stage 3 (Pressing) - This involves packing the processed re-dried lamina or by-product in specialized cardboard cartons with a product net weight between 180 - 200 kilos based on customer preferences. The cartons are then pressed and closed and tied together with straps.

9. The Appellant stated that on 12th September 2022, the Respondent issued an Additional Assessment for the period January 2016 to March 2021 wherein the Respondent demanded payment of Kshs. 39,804,972,831. 00 inclusive of penalties and interest to which the Appellant objected.

10. The Appellant stated that the Respondent reached out on 1st November 2022 requesting for a meeting to discuss the Notice of Objection. The parties held the meeting on 9th November 2022 at EY’s offices where the Respondent was taken through the Appellant’s business model, as well as the grounds upon which the Notice of Objection was lodged. On 11th November 2022, the Respondent requested for additional documents from the Appellant, which it provided.

11. The Appellant alleged that upon submitting the requested documents, the Respondent neither acknowledged receipt of these documents nor made any additional requests for information or clarifications. The Appellant also alleged that verbal and telephone requests for subsequent meetings to discuss the additional information provided was also not granted. The Respondent then issue its Objection Decision on 7th December 2022 wherein the Respondent demanded for a tax amounting to Kshs. 23,746,847,800. 00.

i. Corporate Income Tax (CIT) Variance between sales as per CIT and VAT Returns 12. On this issue, whereas the Respondent alleged that it was not possible to split sales declared in the 2017 VAT returns; that data for some months was missing; and that the invoices declared in arriving at the sales per the CIT returns and VAT returns ought to have been mapped as part of the Appellant’s reconciliation. As a result, the Respondent confirmed the additional tax demanded of Kshs. 483,860,973. 00 relating to the 2017, 2019 and 2020 financial periods. On this issue, the Appellant averred that in arriving at this additional tax, the Respondent disregarded the reconciliation provided by the Appellant in its Notice of Objection, as well as subsequent explanations and supporting documentation provided following the meeting between the Appellant and the Respondent.

13. The Appellant referred the Tribunal to reconciling items as follows:i.Transfer pricing adjustments — The Full-Cost-Mark-Up (FCMU) adjustment relates to the transfer pricing adjustment by the Appellant for the above years of income in compliance with its transfer pricing policy. These were normally being excluded from the VAT return as the adjustments would happen after the filing of the VAT return and also being related to export sales VAT was zero-rated. The Appellant added that the Appellant provided the invoices and related workings to support these adjustments. The Appellant also alleged that the Respondent accepted that this item was part of the reconciling items and the current variance under dispute does not include this amount.ii.Local sales & other income – the Appellant explained that these related to sundry income from sale of non-tobacco items and interest charges on old receivables. It stated that the respective sales invoices were included in the CIT Return on a different line from turnover in the Corporate Income Tax return as such omitted by the Respondent in their reconciliation. The Appellant alleged that it provided the Respondent with the break downs of the other income disclosed on a separate line in the CIT return and traced these invoices to the listings. The Appellant relied on Appendix 9 being the reconciliation of the other income shown separately in the CIT returns versus what was declared in the VAT returns and the extracts of the CIT returns, which demonstrate that these amounts were declared as other income.iii.Sales declarations due to timing differences (March & April 2016) — The Appellant maintained that export sales made by the Appellant between 17th March 2016 and 31st March 2016 were declared in the April 2016 VAT return which was a new financial year. Consequently, the VAT sales for the FY 2017 (1 April 2016 to 31 March 2017) were overstated. The Appellant alleged that it provided the Respondent with the breakdown of the sales invoice in the VAT return for April 2016 with the dates of the invoice highlighting the invoices dated March 2016 that were making up this difference and also the export entries for the same demonstrating that these were for exports as such no VAT was applicable.iv.Sales declarations due to timing differences (March and April 2017) — the Appellant argued that, due to cut-off requirements associated with the Appellant's internal reporting processes, tobacco sales made to Eastobac Kenya Limited on 31st March 2017 and due for declaration in the March 2017 VAT return were inadvertently declared in the April 2017 VAT return. The Appellant added that the VAT sales for the 2017 period (1st April 2016 to 31st March 2017) were understated and those for April 2017 (which fall in the 2018 financial year) were overstated.v.Credit Note for local sale – the Appellant stated that this issue related to a Credit Note issued to Eastobac Kenya Limited on 31st March 2016 and recorded in the Appellant’s VAT returns for that period. The Appellant noted that the Credit Note was also inadvertently recorded in the VAT return for April 2016.

14. Regarding the contention by the Respondent in its Objection Decision that the Appellant did not map invoices for the sales recorded in the CIT and VAT returns, the Appellant alleged that it provided the explanation on the variances in invoice declarations. The Appellant averred that it provided sufficient information and clarifications to demonstrate that the additional CIT demanded of Kshs. 483,860,973. 00.

Overstated provision in 2019 15. In relation to this issue, the Appellant stated that in reviewing the Appellant’s arguments in the Notice of Objection, the Respondent agreed with the tax treatment adopted but alleged that the Appellant had failed to demonstrate the adjustments passed in the retained earnings extracts provided. The Appellant alleged that whereas the Respondent concurred with the Appellant that the overall entry has no tax impact on the Appellant’s tax liability, the Respondent went ahead to confirm the CIT assessment.

16. The Appellant maintained that the Respondent erred in confirming this additional tax on the basis that the Appellant, during the review stage, submitted the trial balance making up the Loss before tax of Kshs. 78,904,847. 86 for financial year 2019 which clearly shows that only Kshs. 2,631,742. 17 of bad debt out of the total Kshs. 26,378,535. 21 in the closing provision was part of the Kshs. 43,845,208. 00 closing provision went to income statement meaning that Kshs. 23,746,793. 04 went directly to retained earnings. The Appellant averred that this was the reason why the Appellant had to increase the opening provision by this amount so that the net add back would be the difference.

17. The Appellant further stated that it advised the Respondent that the other option was to exclude the Day 1 adjustment from the closing provision and then leave the opening provision as per the financial year 2018 CIT.

18. The Appellant stated that during review stage, the Appellant alleged that it took the Respondent through audited accounts that clearly indicated that the Day 1 provision was re-classed to the retained earnings and did not impact the loss before tax of Kshs. 78,907,000. 00 that was used in the tax computation.

ii. Value Added Tax Variance between Sales as per CIT and VAT Returns 19. The Appellant states that the Respondent vacated the additional VAT demanded of Kshs. 288,229,052. 00 for the period 2016 since it was time barred but the Respondent stated that it was not possible to split some of sales declared in the financial year 2017 VAT returns. Further, the Appellant stated that the Respondent confirmed the 2018 assessments amounting to Kshs. 22,740,247. 00. The Appellant argued that in arriving at this additional tax, the Respondent disregarded the reconciliation provided by the Appellant in its Notice of Objection, as well as subsequent explanations and supporting documentation following the meeting at EY’s offices.

20. Regarding transfer pricing adjustment, the Appellant stated that the FCMU adjustment relates to the transfer pricing adjustment by the Appellant for the year 2018 in compliance with its transfer pricing policy. According to the Appellant, these were normally being excluded from the VAT return as the adjustments would happen after the filing of the VAT return and that being related to export sales VAT was zero-rated. The Appellant alleged that it provided the invoices and related workings to support these adjustments. It also alleged that the Respondent while issuing its Objection Decision noted and accepted that this item was part of the reconciling items and the current variance under dispute does not include the assessed amount for the year 2018.

21. With regard to local sales and other income, the Appellant averred that these related to sundry income from sale of non-tobacco items and interest charges on old receivables. It noted that the respective sales invoices were included in CIT Return on a different line as such was omitted in the corporate Income Tax return by KRA in their reconciliation. The Appellant argued that it provided the Respondent with the breakdowns of the other income disclosed on a separate line in the CIT return and traced these invoices to the listings. The Appellant relied on conciliation of the other income shown separately in the CIT returns versus what was declared in the VAT returns and the extracts to the Financial Statements which according to the Appellant, demonstrate that these amounts were declared as other income.

22. With regards to under-declared export sales in VAT return, the Appellant’s case is that the amount of Kshs. 156,319,626. 00 relates to tobacco export sales for the month October 2017 which was inadvertently excluded from the VAT returns for the month. The Appellant added that the export sales were zero-rated for VAT purposes.

iii. Withholding Tax (WHT) 23. The Appellant averred that the analysis referenced to by the Respondent in confirming the additional WHT assessment was never availed to the Appellant. The Appellant stated that the Respondent’s Audit Team erroneously concluded that the invoices paid by the Appellant on professional and management services comprised an element of disbursements such as air tickets, accommodation, taxi costs, and meals. The Appellant accused the Respondent of disregarding the analysis provided by the Appellant on the quantum of professional services procured during the review period which were based on figures from the financial statements.

24. The Appellant also alleged that the Respondent did not provide the Appellant with any valid justification or source for the following;a.The adopted tax bases from which the alleged WHT had been confirmed despite requests for the same even though the Appellant requested for the same; and,b.The use of the disbursements rate of 7. 5% on all professional fees incurred by the Appellant and reported as “Management Fees” in the Appellant’s financial statements.

25. The Appellant asserted that the Respondent is required to support assessments issued to taxpayers as taxes are burdensome and must therefore be accurate and verifiable. The Appellant also averred that it cannot verify the accuracy of the figures used in the workings and that the Respondent’s assessment in this regard is therefore unsupported, arbitrary and unreasonable and the Honourable Tribunal should vacate this assessment in its entirety.

26. Apart from the above, the Appellant alleged that the Respondent has erroneously charged WHT on disbursements. It argued that the disbursements incurred while offering professional services (where such disbursements can be supported by receipts of expenses incurred on behalf of a taxpayer) do not attract WHT as these are mere reimbursements.

27. The Appellant cited provisions of Sections 10 and 35 of the Income Tax Act which impose WHT on “management or professional fee” which is defined in Section 2 of the Act as, “a payment made to a person, other than a payment made to an employee by his employer as consideration for managerial, technical, agency, contractual, professional or consultancy services however calculated.” The Appellant stated that these provisions mean that only the portion of the invoice that is constituted of the management or professional fee as a consideration for management or professional services should be subjected to WHT. However, the Respondent sought to erroneously charge WHT on not only the “Management Fees” but on also disbursements incurred instead of limiting the same to the actual management or professional fees which are the elements of an invoice that are subjected to WHT under the ITA.

28. Based on the foregoing, the Appellant maintained that the Respondent contravened the general principles of taxation that require tax payments to be clear, concise, transparent and equitable. Therefore, it stated that it would be injurious for the Appellant to suffer WHT based on estimates or non-existent payments, which cannot be supported. The Appellant therefore, submitted that the additional WHT demanded of Kshs. 1,696,269. 00 was therefore erroneous and should be vacated in its entirely.

iv. Domestic Excise Tax (‘Excise Duty’) 29. The Appellant stated that the Respondent erroneously confirmed principal Excise Duty and VAT payable on local sales of the Appellant's products amounting to Kshs. 12,593,678,313. 00 and Kshs. 2,016,896,766. 00 respectively for the 2017 to 2021 periods.

30. In support of its case, the Appellant relied on Section 2 of the Excise Duty Act which defines the term “manufacture” to mean;“(a)The production of excisable goods;(b)Any intermediate or uncompleted process in the production of excisable goods; or(c)The distilling, rectifying, compounding, or denaturing of spirits.”

31. The Appellant relied on Part 1 of the First Schedule to the Excise Duty Act, which lists specific goods and services that are subject to Excise Duty. It stated that for the goods to be subject to Excise Duty they must be “manufactured” and specifically listed in the First Schedule. According to the Appellant, this means that even where a category of goods qualifies as manufactured but is not listed in the First Schedule to the Excise Duty Act, excise duty is not applicable.

32. It noted that excisable goods can either be locally produced or imported, can then either be sold locally or exported out of Kenya. The Appellant stated that in the case of importation/exportation, these goods must be accorded an appropriate customs tariff classification-code based on the World Customs Organization (WCO) harmonized system of tariff nomenclature (HS Code) for classifying goods.

33. The Appellant stated that excisable goods included in the First Schedule to the Excise Duty Act derive their tariff classification from the customs legislation. Whereas the specific product category referenced to by the Respondent does not contain a specific HC Code in the Excise Duty Act, the headings used mirror the nomenclature contained in the CET and the excisable goods are both for local and foreign consumption i.e., importation/exportation. It is therefore a fact that there is a clear linkage between the Excise Duty Act and the customs legislation especially with regards to tariff classification of goods.

34. It is the Appellant’s case that all products whether or not listed under the First Schedule of the Excise Duty Act, must be correctly classified in the CET. The Appellant averred that not all tobacco products are excisable under the Excise Duty Act. It cited an example of raw/unmanufactured tobacco and products containing nicotine or nicotine substitutes (which only became excisable in 2021 through a deliberate amendment to the excise legislation). The Appellant averred that the action by the Respondent reclassifying Appellant’s products from HS Code 2401 to 2403 and therefore subjecting the Appellant’s products to Excise Duty is erroneous and contrary to the provisions of the tax legislation.

35. The Appellant asserted that if the Legislators’ intention was to have the Appellant’s product subjected to Excise Duty, then they should have included the specific description of the goods (stemmed/threshed leaf) under the First Schedule of the Excise Duty Act, which provides for excisable goods. It added that the fact that the Respondent has erred in law is buttressed by the fact that using the Respondent’s current approach, it follows that there will be one product falling under two different HS codes for customs purposes considering that the “Other manufactured tobacco products and manufactured tobacco substitutes; ‘homogenous’ and ‘reconstituted tobacco’; tobacco extracts and essences” where the Respondent has alleged this product to fall does not cover the Appellant’s products.

36. According to the Appellant, in the tobacco supply chain, it is a supplier of raw materials used to manufacture tobacco. The principal activity of the Appellant is stemming and re-drying and its products are globally considered as unmanufactured tobacco.

37. The Appellant referred to Chapter 3 of the Final Engineering Report: Tobacco Products Processing Detailed Study prepared by the U.S. Environmental Protection Agency, which provides that the tobacco products industry comprises facilities that manufacture cigarettes, cigars, smokeless tobacco (i.e., chewing, plug/twist, and snuff tobacco), Ioose smoking tobacco (i.e., pipe and roll-your-own cigarette tobacco), and reconstituted (sheet) tobacco, as well as facilities engaged in stemming and redrying tobacco. It cited section 3. 2.4 of the study which provides an overview of the stemming and redrying activities, with the Appellant being identified as a major player in this process.

38. According to the Appellant, the Respondent advertently misclassified the role played by the Appellant in the tobacco supply chain. Instead, the Respondent elevated the Appellant as a manufacturer of tobacco claiming that the Appellant performs primary processing activities. The Appellant noted that primary processing describes the first stages of tobacco processing in the cigarette manufacturing process and is exclusively done by cigarette manufacturing companies, using tipped and threshed tobacco, which the Appellant predominantly sells. The Appellant cited Chapter 4. 1 of the Final Engineering Report: Tobacco Products Processing Detailed Study to state that tipped and threshed tobacco forms the primary raw material for these cigarette manufacturers.

39. The Appellant contended that it does not manufacture tobacco as envisaged under the Excise Duty Act and that the said Act envisages a process performed by a manufacturer in the production of excisable goods, in this case, cigarettes. The Appellant averred that the Respondent's assertions contradict international and regional best practices e.g., in the United Kingdom (UK), the term “un-manufactured” tobacco includes many forms such as stemmed/stripped tobacco, trimmed or untrimmed tobacco, broken or cut (including pieces cut to shape) and tobacco supplied as whole plants or leaves in the natural state, or as cured or fermented leaves. Under UK legislation therefore, any tobacco that is not ready for smoking is classified as “unmanufactured tobacco.”

40. The Appellant cited an example of the United States of America, where this tobacco is not ready for smoking because it must be further processed e.g., blended with other ingredients to form cigarettes is classified under HS Code 2401 as “Unmanufactured tobacco; tobacco refuse.”

41. The Appellant also cited an example of Uganda, where tobacco not ready for smoking is classified under HS Code 2401. The Appellant cited a ruling by the Uganda Revenue Authority to the Appellant’s sister company, Alliance One Tobacco Uganda Limited, which ruling confirmed that stemmed leaf should be classified under HS Code 2401. According to the Appellant, Alliance One Tobacco Uganda Limited exported the stemmed leaf to BAT Kenya Limited and the Respondent cleared the goods under HS Code 2401 in Kenya without the Respondent levying Excise Duty.

42. The Appellant also cited an example of Tanzania, where stemmed and redried leaf tobacco (not ready for smoking) is classified under HS Code 2401.

43. The Appellant stated that Uganda and Tanzania rely on the same Customs Legislation, the EACCMA and CET, as Kenya. Therefore, it is erroneous for the Respondent to deviate from regional practice and reclassify the stemmed and dried leaf under HS Code 2403 whilst the same products are classified under HS Code 2401.

44. The Appellant reiterated that it supplies a raw material (i.e., unmanufactured tobacco) to cigarette manufacturers such as BAT who further process it to produce cigarettes and/or other related products and that the Excise Duty Act does not specifically list any of the above products under the First Schedule and therefore the Appellant’s products should not be subjected to Excise Duty.

45. It is the Appellant’s case that the Respondent has not disputed the correct classification of the imported raw green leaf tobacco, nor the tobacco refuse therefore, they cannot be considered as excisable products. It noted that the Respondent instead reclassified the products sold by the Appellant as Other manufactured tobacco products and manufactured tobacco substitutes, “homogenous” and “reconstituted tobacco”; tobacco extracts and essences' as described in Part 1 of that Schedule yet this classification relates to HS Code 2403.

46. The Appellant relied on the Explanatory Notes which provides:“(a). On Heading 24. 01 cover:i.2401. 10 (Tobacco, not stemmed/stripped);ii.2401. 20 (Tobacco, partly or wholly stemmed/stripped); and,iii.2401. 30 (Tobacco refuse).”

47. The Appellant argued that its products sold to BAT, Mastermind Tobacco Kenya and Eastobac Kenya Limited fall under the HS Code 2401. 20 (tobacco, partly or wholly stemmed/stripped) which provides for “unmanufactured tobacco”, see an extract of the Explanatory Notes. Part 1 of the First Schedule to the Excise Duty Act does not provide for a specific description/listing or excise duty rate on unmanufactured tobacco sold by the Appellant and as such, these products are not excisable.

48. According to the Appellant, the products included under HS Code 2403 include smoking tobacco (whether or not containing tobacco substitutes in any proportion, for use in pipes or for making cigarettes), chewing tobacco, snuff, tobacco compressed or liquored for making snuff, manufactured tobacco substitutes (e.g., smoking mixtures not containing tobacco), “homogenized” or “reconstituted” tobacco and tobacco extracts and essences.

49. The Appellant averred from the Explanatory Notes that HS Code 2401 relates to unmanufactured tobacco, which is not ready for smoking (such as the Appellant's products) while HS Code 2403 relates to finished products (beyond the primary manufacturing stage), ready for smoking. The Respondent has therefore erred in its classification of the Appellant’s unmanufactured products under HS Code 2403 (manufactured tobacco) which is clearly inconsistent with the regional as well as global practice.

50. Apart from that, the Appellant argued that the analogy under the Excise Duty rates as captured in the First Schedule of the Excise Duty Act is similar to the nomenclature of the CET which runs in a sequential order of goods in the value chain based on the rawness and value addition to the products until a final product is produced. The Appellant cited Chapter 24 of the CET on tobacco products which provides thus;“(a)Unmanufactured or raw/green tobacco falls under Heading 2401;(b)As value is added to the green leaf, the heading is elevated to 2402; and(c)When actual value is added to more sophisticated products like filtered cigarettes, electronic cigarettes and nicotine products, headings 2403 and 2404 then are applied.”

51. The Appellant stated that a review of the Excise Duty rates on tobacco products contained in Part 1 of the First Schedule to the Excise Duty Act demonstrates the absurdity of the assessment issued on the Appellant. The Appellant argued that the following products have undergone substantial value addition and are finished and ready for smoking which explains the high rates of Excise Duty applicable.a.Cigars, cheroots, cigarillos, containing tobacco or tobacco substitutes – Kshs. 12,624. 00 per kg;b.Electronic cigarettes – Kshs. 3,787. 00 per unit;c.Cigarette with filters (Hinge lid and soft cap) – Kshs. 3,157. 00 per mille;d.Cigarette without filters (plain cigarettes) –Kshs. 2,272. 00 per mille; and,e.Other manufactured tobacco e.g., smoking tobacco, homogenized or reconstituted tobacco – Kshs. 8,837. 00 per kg.

52. According to the Appellant, the Excise Duty rate applied by the Respondent on the Appellant’s products is reserved for premium tobacco products such as homogenized or reconstituted tobacco or indeed the products that fall under the HS 2403. The Appellant stated that the most expensive grade of stemmed/blended tobacco sold by the Appellant is approximately Kshs. 600 per kg. The Appellant maintained that any attempt to levy Excise Duty of Kshs. 7,000. 00 or Kshs. 8,837. 00 per kg would not only make no economic sense but would also render the Appellant’s products too expensive for any cigarette manufacturer and an unsustainable business model. It also asserted that any attempt to declare the products sold by the Appellant in the Respondent's Integrated Customs Management System (ICMS) under HS 2403 would not be possible as this would require additional details specific to cigarette manufacturers.

53. The Appellant noted that the Respondent in issuing its Objection Decision, referred to a private ruling issued to the Appellant on 28th August 2020. The Appellant clarified that the application for a Private Ruling by the Appellant was in response to the Regulations which had been issued for public participation/commentary. It added that the Regulations required that importers of raw or unprocessed tobacco and of cigarette paper or cigarette packaging materials be registered by the Commissioner. As an importer of raw or unprocessed tobacco, the Appellant averred that it was required to register for Excise Duty. However, the Regulations also restricted the importation of raw unprocessed tobacco to licensed manufacturers of tobacco products which the Appellant was not.

54. The Appellant maintained that it was seeking for clarity on whether or not registration for Excise Duty was necessary since it was not a licensed manufacturer of tobacco products. In the response, the Commissioner erroneously observed that the Appellant made excisable goods. Further, the Appellant stated that it responded to this ruling on 22th December 2020 clarifying that the products sold were not excisable as envisaged under the Excise Duty Act. The also averred that it is not bound by the private ruling issued by the Respondent as provided under Section 65 (5) of the Tax Procedures Act.

55. In view of the foregoing, the Appellant averred that the Respondent grossly misunderstood the nature of the Appellant’s business and as a result, erroneously classified the nature of these products for Excise Duty purposes therefore wrongfully raising an additional assessment. Therefore, the Appellant prayed that the excise duty assessment should be wholly vacated.

v. Time barred assessment 56. Apart from the above, the Appellant stated that the Objection Decision demanded payment of additional taxes from the Appellant for the period April 2016 to March 2021. The Appellant averred that as at the date of the Objection Decision on 7th December 2022, the assessment between April 2016 and December 2017 is statutorily time-barred. The Appellant argued that the assessments are by Section 31 of the Tax Procedures Act, which provides for five-year period within which the Respondent may issue an amended assessment.

57. The Appellant noted that Section 31 (4) (a) of the Tax Procedures Act provides for an exception as to when the Respondent is permitted to amend an assessment beyond five (5) years. It argued that such an exception would be applicable in the case of gross or wilful neglect, evasion or fraud by or on behalf of the taxpayer. The Appellant averred that the Respondent has not demonstrated any gross or wilful neglect, evasion or fraud on its part, to justify the issuance of an amended assessment beyond the stipulated period of five (5) years.

58. The Appellant’s case is that the Respondent failed in its duty to consider relevant information relating to the Appellant’s tax liability and as a result, erroneously imposed an additional tax burden on the Appellant which is arbitrary, unreasonable and without proper justifiable basis.

59. The Appellant submitted that the Respondent is under obligation to issue assessments within statutory five years. To support this position, the Appellant relied on cases of Commissioner of Domestic Taxes vs. Nielsen (Income Tax Appeal EO02 of 2021) [2024] KEHC 916 (KLR); Commissioner of Domestic Taxes vs. Airtel Network Kenya Limited (Income Tax Appeal E062 of 2022) [2023] KEHC 25059 (KLR); TATA Chemicals Magadi Limited vs. Commissioner of Investigations & Enforcement, (Tax Appeal No. 19 of 2021).

60. The Appellant also cited the case of Kenya Revenue Authority vs. Man Diesel & Turbo Se Kenya [2021] eKLR to support that the Respondent has a duty to examine all documents that a taxpayer provides.

61. It submitted that the Respondent was supposed to give a justified decision and not to pluck figure from nowhere otherwise the decision would be rendered administratively unfair. To support this position, the Appellant relied on a number of case laws including, Republic vs. Kenya Revenue Authority Ex-parte Jaffer Mujitab Mohamed [2015] eKLR; Ndirangu Hardware vs. Commissioner of Domestic Taxes (Tax Appeal E070 of 2021) [2023] KEHC 19357; PZ Cussons East Africa Limited vs. Kenya Revenue Authority MLHCC & HR No 309 of 2012 [2013] eKLR; St. Theresa Industries Limited vs. Commissioner of Domestic Taxes, JAT No, E246 of 2023 [2024] KETAT838 (KLR) among other case laws.

62. In support of the preposition that WHT is only applicable to payments and not expenses, the Appellant relied on the cases of LG Electronics Africa Logistics FZE Kenya Branch vs. Commissioner of Domestic Taxes (Tax Appeal E064 & EO62 of 2020 (Consolidated)) [2023] KEHC 22606 (KLR) and Two Lakes Packing vs. Commissioner of Domestic Taxes, (Tax Appeal No. 420 of 2021).

63. With regard to classification, the Appellant relied on a multiple case laws including Commissioner Customs & Border Control vs. Jayraj Impex Limited Income Tax Appeal No. E173 of 2021; Commissioner of Customs and Border Control vs. Adula (Tax Appeal E003 of 2021) [2022] KEHC 248 (KLR; Judicial Service Commission vs. Mbalu Mutava & another [2015] eKLR and Local Productions Kenya Limited vs. Commissioner of Domestic Taxes (Tax Appeal No. 50 of 2017).

Appellant’s Prayers 64. The Appellant prayed for that the Tax Appeals Tribunal:a.Upholds the Objection dated 11th October 2022 filed by the Appellant in its entirety;b.Annuls and sets aside the Objection Decision dated 7th December 2022 in its entirety;c.Finds that the Respondent erred by confirming additional tax on variances between sales per CIT returns and VAT returns that had been fully supported by the Appellant;d.Finds that the Respondent erred by disallowing a provision amount of Kshs. 23,746,793. 00 in the 2019 financial period which had been accorded the correct tax treatment;e.Finds that the Respondent erred in law and fact by classifying unmanufactured tobacco products sold by the Appellant as ‘Other Manufactured Tobacco’ and therefore subject to Excise Duty;f.Finds that the Respondent erred in law and fact by arbitrarily classifying the products sold by the Appellant as ‘Other Manufactured Tobacco’ and therefore confirming additional VAT on the erroneously charged Excise Duty;g.Finds that the Respondent erred in fact and law by failing to consider the international best practices which are judicially noticed in Kenya enunciated in the Appellant’s Notice of Objection regarding the correct tariff classification of the Appellant's products;h.Finds that the Respondent erred by confirming additional taxes on disbursement costs based on arbitrary calculations not supported by an informed analysis or supporting documentation;i.Finds that in any event, the Respondent erred in law by applying WHT on disbursements contrary to the provisions of Section 10 as read with Section 35 of the Income Tax Act;j.Finds that the Respondent erred in law and fact in issuing an assessment which is partially statutorily time-barred for being beyond the five-year period provided in Section 31 (4) of the Tax Procedures Act, 2015;k.Finds that the Respondent failed to consider the additional information and documents provided by the Appellant;l.Award costs of this Appeal to the Appellant; and,m.Any other remedies that the Honourable Tribunal deems just and reasonable.

The Respondent’s Case 65. The Respondent’s case is premised on its;a.Statement of Facts dated 17th January 2023 and filed on 17th February 2023 together with the documents attached thereto; and,b.Written submissions dated and filed on 15th August 2024.

66. The Respondent case is that a tax verification exercise was undertaken revealing variances between sales per Corporate Income Tax returns and Value Added Tax returns declared in the accounting period January 2016 to December 2021. Vide a letter dated 9th June 2022 the Respondent informed the Appellant of the pre-assessment tax audit findings for Corporate Income Tax, Withholding Tax, Pay As You Earn (PAYE) and Value Added Tax. Consequently, the Respondent issued its the assessment to which the Appellant lodged its Notice of Objection. The Respondent fully rejected the objection for vide its Objection Decision.

67. The Respondent relied on the provisions of Section 3 (1) of the Income Tax Act and Section 5 (1) of the Value Added Tax Act to argued that the assessments are well anchored in law.

68. According to the Respondent, the Appellant failed to provide the documents that the Respondent required to reconcile the variances in both Income Tax and Value Added Tax.

69. In response to ground 1, the Respondent averred that the Additional Assessment was confirmed as the explanation and documents provided were not adequate to explain why there was a variance between the two tax regime turnovers. It stated that the appellant failed to provide a satisfactory reconciliation for the variances and that this finding was communicated to the Appellant as per the Objection Decision.

70. The Respondent stated that without the one to one mapping it was difficult for the Respondent to adopt the Appellant’s reconciliation as respondent could not fully ascertain the following issues:i.Identifying the particular invoices that had been declared late and reason thereof due to timing difference;ii.The effect of transfer pricing adjustment to the two turnovers involving debit & credit note Adjustments;iii.The adjustment of local sales declared as other incomes in the Income tax reconciliationiv.The credit notes adjustmentsv.Over declared sales in VAT returns

71. The Respondent averred that the Appellant provided numerous documents however failed to provide bank statements and sales ledgers and only provided the trial balances thus making it impossible for the Respondent to collaborate the variances. Due to the lack of documents the Respondent maintained that it could only use the other information available as provided for under Section 24 (2) of the Tax Procedure Act.

72. In response to ground 2, Respondent averred that an analysis of the records showed that the Appellant made provisions every year and expensed their movements in the Profit and Loss Account Tax computation. According to the Respondent, the computations were traced during the audit and a discrepancy was noted in the year 2019 where the year opened with Kshs. 49,532,220. 00 while the closing provisions at the end of 2018 was Kshs. 25,785,427. 00 giving a variance of Kshs. 23,746,793. 00 which was allowed for tax purposes. The Respondent asserted that the profit before tax was reduced by this amount.

73. The Respondent stated that the Appellant contravened Section 15 of the Income Tax Act which states that only expenses incurred in the production of income are allowed for tax purposes. It also averred that the Appellant must prove the same to the satisfaction of the Respondent.

74. Further, the Respondent averred that a day one adjustment is permitted under IFRS 9 and where the same is passed through the retained earnings it will not have an effect on the taxable income of a particular year. In order to determine if the journal entry was passed through retained earnings, the Respondent alleged that it requested for the provisions and retained ledger extracts together with accompanying documentations to support the adjustment. The Respondent added that the Appellant provided the bad debt provision ledger account without the accompanying retained earnings ledgers. From the bad debt provision ledger account, the Respondent alleged that it was not able to trace the adjustment of Kshs. 23,746,793. 00 in the provided ledger for the month of April as stated in the Notice of Objection.

75. In the absence of provision of the adequate documentation the Respondent averred that the additional assessment was confirmed.

76. In response to ground 3, the Respondent asserted that the VAT assessment was issued in accordance with the law when the Appellant failed to provide a satisfactory reconciliation that could be adopted by the Respondent.

77. It is the Respondent’s case that it discovered that the breakdown of sales was incomplete for instance, the year 2017 had sales up to July 2017 therefore & months were missing. The Respondent noted that this was the scenario in other years as well.

78. The Respondent alleged that the invoices as declared in Income Tax returns were not mapped one to one to the VAT declarations to demonstrate that every invoice had been declared and to substantiate when each was declared under both tax heads. It averred that without a proper one to one mapping of invoices in the two tax regimes it was not possible to determine which particular invoice had not been declared and there after look at the reasons for non-declaration and if the same had any tax implication. Therefore, the VAT assessment for the period were confirmed as issued.

79. In response to ground 4 and 7 of the Memorandum of Appeal, the Respondent averred there was no misclassification of the Appellant’s products. Instead, the Respondent stated that the Appellant erred in law by trying to use East Africa Customs Management Act to try and determine if Domestic Excise is payable or not. The Respondent stated that the correct law to apply is the Excise Duty Act No. 23 of 2015.

80. The Respondent averred that examination of Appellant’s records showed that the Appellant process green leaf tobacco at the British America Tobacco Green Leaf Threshing Plant and sold some of the processed tobacco to local customers. The Respondent stated that local sales were mainly to British American Tobacco (BAT) and Mastermind Tobacco Kenya. The Respondent maintained that the processed tobacco as outlined is Manufactured as defined in the Excise Duty Act 2015.

81. The Respondent relied on the provisions of Section 2 of the Excise Duty Act which defines manufacture to include: -“(a)the production of excisable goods.(b)Any intermediate or uncompleted process in the production of excisable goods; or(c)The distilling, rectifying compounding or denaturing of spirits.”

82. Pursuant to the above provisions of Section 2 of the Excise Duty Act, and looking at what the Appellant had done to the green leaf from the time it imports the same from Uganda to the time it sells to its customers, the Respondent established that the Appellant processes tobacco. It noted that the processing of the tobacco through the leased machinery at BAT fits within the definition of the word manufacture as per part (b) of this definition. According to the Respondent, the next issue was to determine if the product produced after processing was liable to excise tax and relying on the provisions of Section 5 of Excise Duty Act, the Respondent noted that Appellant was liable to remit Excise Duty.

83. According to the Respondent, the Excise duty under Part 1 of the 1st Schedule of the Excise Duty Act does not list Tobacco or cigarettes using their HS codes and therefore the classification being advanced by the appellant has no legal locus on chargeability of excise duty. The Respondent argued that to determine whether excise tax is chargeable, there is no reliance on the Common External Tariff but on the Excise Duty Act. The Respondent asserted that EACCMA should not be used for interpretation.

84. It was the Respondent’s case that the Appellant had sought a Private Ruling on 6th August 2020 as to find out whether the process it undertakes amounts to manufacturing and the Commissioner was categorical in the letter dated 28th August 2020 that the Appellant is involved in manufacture of tobacco therefore, the Appellant was required to register for Excise Duty in its capacity as a manufacturer of excisable goods.

85. In response to ground 5, the Respondent averred that the assessment was not speculative. The Respondent alleged that it relied on the Appellant’s self - assessments and not incomplete nor erroneous records in assessing the Appellant therefore, the Appellant’s grounds are unfounded.

86. In response to ground 6, the Respondent averred that the Appellant failed in its duty to provide irrefutable proof that the service providers including tax agents, clearing and forwarders, lawyers et al had paid specific costs on its behalf and it was just reimbursing the service providers.

87. The Respondent argued that the documents the Respondent would have required were invoices in the name of the Appellant showing a cost incurred on its behalf which were separate from the particular invoice provided by the service provide for services rendered. The Respondent noted that the Appellant provided invoices from providers which had been split into professional fees and other payments including air tickets, accommodation, taxi and meals catered for these service providers. The Respondent also noted that the invoice was not accompanied by a specific invoice to show a particular payment done on behalf of the Appellant.

88. The Respondent alleged that it established that Withholding tax was only operated on what was classified as ‘professional fees’ and the other payments were left out contrary to the provisions of Section 35 (3) of the Income Tax Act. The Respondent therefore, charged the full payment to WHT without breaking the same to the different components as majority of the “disbursement” were captured as a percentage of the invoice value and not a specific payment.

89. The Respondent averred that in the absence of proper documents to support the disbursements amounts, the Respondent utilized the available information and used the percentage as seen in the sampled invoices to charge withholding tax. The Respondent argued that this was in accordance with Section 31 (1) of the Tax Procedures Act which allows the Respondent to use information available at his disposal to raise an additional assessment.

90. The Respondent averred that there is a hierarchy of laws in which relevant laws are applied. Therefore, there was no error in law and fact since Excise duty is a local tax falling with the Excise Duty Act of 2015 and this law was used to determine if the Appellant was bound to have accounted for Excise Duty Tax.

91. The Respondent also stated that all assessments that were beyond 5 years had been dropped at objection stage and the Appellant notified of the same. It added that the original assessment was for Kshs. 25,802,928,393. 00 while the Objection Decision was for Kshs. 15,125,380,763. 00. The Respondent asserted that it reserved its right to open the matter in future if the appellant is found to have committed an offence as per Section 97 of Tax Procedures Act.

92. The Respondent’s theory was that Section 97 as read with Section 96 of the TPA can be pursued by the Commissioner at any time if new information becomes available that would point to a tax offence. However, the Respondent noted that the assessments that were beyond 5 years were not confirmed as alleged by the Appellant.

93. The Respondent stated that it is empowered under Section 59 of the Tax Procedures Act and to require the production of documents and information to enable the Respondent ascertain tax liability of a person. It therefore submitted that it used the documents presented in order to ascertain the tax liability of the Appellant. It maintained that it cannot be faulted since the Appellant failed to produce all the requested documents thus the assessments were confirmed.

94. Further, the Respondent averred that the Respondent’s determinations of tax deficiencies are presumptively correct and the presumption remains so until the Appellant produces competent and relevant evidence to support its position. The Respondent therefore, argued that the Appellant failed to meet the burden of proof contrary to Section 56 (1) of the Tax Procedures Act.

95. Based on the foregoing, the Respondent’s case is that the allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts are unfounded in law and not supported by evidence.

96. The Respondent cited the case of Anne Wanjiku Kahwai vs. Kenya Revenue Authority & another [2019] eKLR to submit that it has duty to conduct audit process and tax investigations.

97. The Respondent submitted that in determining whether the production process carried out by the Appellant amount to Manufacture, the Tribunal is to be guided by the decisions of the Court in Cape Brandy Syndicate vs. I.R. Commissioners [1921] 1KB and Mount Kenya Bottlers Ltd & 3 others vs. Attorney General & 3 others [2019] eKLR where the court held that Tax Statutes, one has to look at what has clearly been said and not intended or presumed.

98. The Respondent further relied on the case of Mjengo Limited vs. Commissioner of Domestic Taxes CA No. 85 of 2014 wherein the High Court was called upon to determine a similar case to one before this Tribunal, referred to the case of Commissioner of Income Taxes vs. Kenya Seed Company Limited where the court stated that:“from the above definition, I find that the process through which the seed goes, a process involves selection, drying the seed at the controlled temperature, shelling, grading the seed, sizing the same and chemically treating it are processes which change the state of the raw or ordinary seed to a marketable seed for planting and this in my considered opinion falls within the definition of manufacture.”

99. The Respondent also cited the case of Commissioner of Domestic Taxes vs. Metoxide Ltd [2021] eKLR and Kenya Revenue Authority vs. Maluki Kitili Mwendwa [2021] eKLR, Mbuthia Macharia vs. Annah Mutua Ndwiga & Another [2017] eKLR, and Primarosa Flowers ltd vs. Commissioner of Domestic Taxes [2019] eKLR where the court held that the burden of proof falls upon the taxpayer.

100. To fortify its position in relation to its right to request for documents to assist in determining the applicable taxes, the Respondent cited the case of Osho Drapers Limited vs. Commissioner of Domestic Taxes [2022] eKLR.

Respondents Prayers 101. Based on the above grounds, the Respondent prayed that the Tribunal;a.Upholds the Respondent’s assessment and Objection Decision issued on 7th December 2022; and,b.Dismisses the Appeal with costs to the Respondent.

Issues for Determination 102. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts, witness statement, and submissions, the Tribunal is of the view that the main issues for determination are:i.Whether the Respondent erred in its assessment of Corporation Tax;ii.Whether the Respondent erred in its assessment of VAT;iii.Whether the Respondent erred in its assessment of Withholding Tax;iv.Whether the assessment for the year of income 2016 was proper in law; and,v.Whether the Appellant manufactured goods, if so, whether the goods are taxable under Excise Duty Act.

Analysis and Findings 103. The Tribunal wishes to analyse the issues as hereunder.

i. Whether the Respondent erred in its assessment of Corporation Tax; 104. The Respondent in its Objection Decision made a demand to the Appellant to pay a total of Kshs. 770,846,466. 00 as Corporation Tax. The Appellant disputed this finding on basis that the Respondent disregarded the reconciliation explanations and supporting documentation provided. According to the Appellant, some of the reconciling items that the Respondent ignored was Transfer pricing adjustments.

105. It was the Appellant’s position that the Full-Cost-Mark-Up (FCMU) adjustment related to transfer pricing adjustment for the period under review in compliance with its transfer pricing policy. The Tribunal noted that Rule 10 of the Income Tax (Transfer Pricing) Rules provides that;“where a person avers the application of arm's length pricing, such person shall-(a)Develop an appropriate transfer pricing policy;(b)Determine the arm's length price as prescribed under the guidelines provided under these Rules; and(c)Avail documentation to evidence their analysis upon request by the Commissioner.’’

106. The Appellant did not adduce the said transfer pricing policy together with the supporting documents. Therefore, the Tribunal did not have opportunity to examine the policy and the supporting documents therefore, the Tribunal was unable to concur with the Appellant in relation this issue of transfer pricing.

107. In further opposition to the Corporate Income Tax Assessment, the Appellant submitted that it provided the Respondent with the breakdowns of the other income disclosed on a separate line in the Corporate Income Tax return and traced these invoices to the listings. In this regard, the Appellant relied on evidence in Appendix 9, which the Appellant stated was the reconciliation of the said other income. The Tribunal examined the Appendix 9 and noted that the Appendix is a one-pager document and relates to transactions that took place in 2016. The Tribunal having found that the 2016 assessments are statute time barred, the evidence under Appendix 9 does not affect the Appeal. The same point is applicable to Appendix 11 which is dated 31st March 2016. The letter is in the category of statute time barred assessments of 2016.

108. Further, the Appellant’s letter dated 31st March 2016 does not support its Appeal because the alleged sales that the said letter seeks to support were made to Eastobac Kenya Limited on 31st March 2017. A credit memo dated 31st March 2016 cannot be relied upon in support of sales made in 31st March 2017.

109. The Appellant further relied on Appendix 12, which allegedly show a ‘breakdown of lumped sales 2016’ Appendix 12 has no probative value to this Appeal because it relates to 2016 assessments, which the Tribunal has already found to be beyond the five years.

110. The Appellant also filed an elaborate trial balance to assist in explaining the variances. However, a trial balance is a secondary document that is generated from primary or source documents. The Appellant did not file the primary/source documents therefore, the trial balance on its own is not sufficient. Consequently, there is no reason to fault the Respondent in the manner it dealt with this issue.

111. In an attempt to explain the variances between the opening balances in 2019 and the closing balances in 2018, the Appellant relied on Appendix 14, which contains alleged audited accounts that were filed with the Corporation Income Tax return. The Tribunal carefully examined the said Appendix and noted that the same do not aid the Appellant’s Appeal because the documents thereunder relates to the year 2016 and 2017 but seeks to address a problem that occurred in 2018 and 2019. This means that the Appellant did not file documentary evidence to support its allegations.

112. Section 56 (1) of the Tax Procedures Act places the burden of proof upon the taxpayer to prove that the Respondent’s decision is incorrect. Further, Section 30 of the Tax Procedures Act requires the taxpayer to prove that the Respondent’s decision is incorrect or that that the decision should have been made differently. Courts of law and this Tribunal have affirmed this position in multiple case laws, including the case of Leah Njeri Niru vs. Commissioner of Investigations and Enforcement Kenya Revenue Authority & Another [2021] eKLR. The Appellant failed to discharge this burden.

113. Consequently, the Tribunal finds that the Appellant did not adduced grounds to justify interfering with the Respondent’s decision in relation to Corporate Income Tax.

ii. Whether the Respondent erred in its assessment of VAT; 114. The Respondent in its Objection Decision made a demand that the Appellant do pay a total of Kshs. 3,202,230,112 as VAT for the period under review. The Appellant relied on its transfer pricing policy, and Appendix 9 and 12 to support its case against the VAT assessments.

115. The Tribunal established herein above that the Appellant’s failed to file its transfer pricing policy with the Tribunal, and made a finding as to the fate of Appendix 9 and 12. Consequently, the Tribunal finds that the Appellant cannot not rely on those documents for the reasons stated above under the analysis of Corporation Income Tax.

116. The Appellant maintained that under-declared export sales in VAT return amounting of Kshs. 156,319,626. 00 related to tobacco export sales for the month October 2017 which was inadvertently excluded from the VAT returns for the month. The Appellant argued that this did not affect anything since the export sales are zero-rated for VAT purposes. The Tribunal takes a divergent view from the Appellant’s assertion that export sales are zero-rated for VAT purposes on grounds that the assessments were about goods manufactured in Kenya therefore, the issue of export or import cannot arise.

117. Further, the Appellant alleged that the under-declared export sales in VAT return -the amount of Kshs. 156,319,626. 00 related tobacco export sales for the month October 2017. To support this allegation, the Appellant sought to rely on Appendix 15, which contains email correspondence between the Appellant and the Respondent. What the Appellant and the Respondent were conversing about in those emails is not relevant to this appeal since the Appellant did not file annexures or attachments exchanged between the parties in relation to those in the emails. The relevant evidence would have been documentary evidence indicating exported goods and consideration thereon, the date exported, the exporter, the importer and so on and so forth. In short, the Appellant cannot prove under-declared export sales in VAT return amounting Kshs. 156,319,626. 00 through email correspondence between itself and the Respondent. Appendix 15 is irrelevant to this Appeal to the extent that it does not provide documentary evidence in support of allegations of export sales for the month October 2017.

118. Consequently, the Tribunal finds no justification to fault the Respondent’s assessment on VAT.

iii. Whether the Respondent erred in its assessment of Withholding tax; 119. The Appellant alleged that the Respondent erroneously assessed withholding tax on disbursements charged on management or professional fees. In response to this issue, the Respondent submitted that the Appellant failed in its duty to provide irrefutable proof that the service providers including tax agents, clearing and forwarders, lawyers among others had paid specific costs on their behalf and they were just reimbursing the service provides.

120. The Tribunal observed four points regarding this issue, namely;a.Firstly, the Appellant did not refute the Respondent assertions that the Appellant had service providers including tax agents, clearing and forwarders, lawyers among others. The Appellant ought to have given its version of facts on this issue but it failed;b.Secondly, the Appellant having failed to give its version facts concerning the alleged service providers it means that the Respondent’s allegation is not only unchallenged, but it also means that the Appellant is withholding material facts from the Tribunal which would facilitate making an informed decision;c.Thirdly, the Appellant having failed to give its own version of facts concerning the alleged service providers, it means that the Appellant could not adduce documentary evidence. Indeed, the Appellant did not adduce documentary evidence to support this aspect of the Appeal;d.Fourth, the Appellant appeared to forget that it has duty in law under Section 56 (1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act to prove that the Respondent’s decision is incorrect. Instead, the Appellant appeared to shift the burden of proof to the Respondent by requiring the Respondent to provide evidence in support of the assessments.

121. It rests within the Tribunal knowledge that the Respondent is not permitted to pluck figures and impose them upon a taxpayer, however, for the Tribunal to find that the Respondent conducted itself in such a manner, the taxpayer ought to give material facts in the first place. It is only then that the Respondent’s figures can be scrutinized. We say so, because Section 50 of the Tax Procedures Act creates a presumption that the Respondent’s decision is conclusive and correct.

122. Section 50 (1) of the Tax Procedures Act provides as follows:“(1)Except in proceedings under this Part—(a)The production of a notice of an assessment or a document under the hand of the Commissioner shall be conclusive evidence of the making of the assessment and that the amount and particulars of the assessment are correct.’’

123. In the case of Commissioner of Domestic Taxes vs. Metoxide Africa Ltd HCITA No. 121 of 2021 the Court held that;‘‘the Commissioner is entitled to ask such questions and call for such documents that would enable it correctly assess the liability of a taxpayer. From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner. I have emphasized and underlined 'competence/and relevance' because it is only evidence that meets these two tests that demolish the presumption of correctness and swing the burden to the Commissioner (see Kenya Revenue Authority v Man Diesel and TurboSe, Kenya COMM TA NO. EI25 of 2020 [2021] eKLR). This means that even if one avails evidence but then it is found that the same is incompetent or irrelevant, then the burden continues to remain with the taxpayer. In his case, it was upon the Respondent to prove that the invoices were not bogus and that indeed deliveries were made and the vehicles that made the deliveries were of the requisite weight.’’

124. The Appellant failed to discharge the burden of proof in light of this issue. Consequently, the Tribunal finds that the Respondent did not err in its assessment of assessment of Withholding tax.

iv. Whether the assessment for the year of income 2016 was proper in law; 125. The Appellant alleged that the Objection Decision demanded payment of additional taxes from for the period April 2016 to March 2021 yet the Objection Decision was issued on 7th December 2022. The Appellant therefore, argued that the assessment between the period April 2016 and December 2017 was improper as the same was statute time-barred.

126. On the other hand, the Respondent asserted that all assessments that were beyond 5 years had been dropped at objection stage and that the Appellant was notified of the same. The Respondent also alleged that it has right to open the matter in future if the Appellant was found to have committed an offence as per Section 97 as read together with Section 96 of the of Tax Procedures Act.

127. The tax process which includes, the assessment of Tax, objection(s) to the assessment(s) and issuance of the Objection Decision(s) are controlled activities that must be done within the stipulated timelines as provided for under the law.

128. Section 23 of the Tax Procedures Act provides for the timelines for keeping records. In particular Section 23 (1) (c) requires documents to be kept for five years or lesser period. The said section provides as follows:(1)A person shall—

129. Aside from that, the law requires the Respondent to issue default tax assessment within five years, in line with Section 29 (5) of the Tax Procedures, which provides that;‘‘Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.’’

130. In relation to amendment of assessment, Section 31 (4) (b) of the Tax Procedures Act contains provisions on timeframe. It provides that as follows:‘‘The Commissioner may amend an assessment——(b)In any other case, within five years of—(i)For a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or(ii)For any other assessment, the date the Commissioner notified the taxpayer of the assessment.’’

131. Besides the timeframe under Section 27 of the Income Tax Act, time starts running in relation to Income Tax from 1st July of the year upon submitting a return on or before 30th day of June of the year.

132. Further, Section 52 B of the Income Tax Act deals with time frames and final return with self-assessment, which provides as follows:‘‘52B. Final return with self-assessment(1)Notwithstanding any other provision of this Act—(a)every individual chargeable to tax under this Act shall for any year of income commencing with the year of income 1992, furnish to the Commissioner a return of income, including a self-assessment of his tax from all sources of income, not later than the last day of the sixth month following the end of his year of income.’’

133. Pursuant to the foregoing, the Tribunal affirms that the Respondent has to issue an assessment(s) within five years of self-assessment but Respondent can only issue assessments beyond five years upon the elements under Section 29 (6) or Section 31 (4) (a) of the Tax Procedures Act being pleaded and proven. The said elements are gross or willful neglect, evasion, or fraud by, or on behalf of, the taxpayer.

134. In the case of Commissioner of Domestic Taxes vs. Airtel Networks Kenya Limited (Income Tax Appeal E062 of 2022) [2023] KEHC 25059 (KLR) the High Court stated as follows regarding the issue on timeframe:‘‘In this regard, under section 31 (4) of the Tax Procedures Act, an amendment outside the 5-year period can only be permitted if there is evidence of wilful neglect, evasion, or fraud by or on behalf of the tax payer…The legal position is that, all assessments ought to be made within 5 years except when there is evidence of gross or wilful neglect, evasion or fraud on the part of the taxpayer. This also goes hand in hand with the provisions of section 23 of the Tax Procedures Act, which requires a taxpayer to retain documents for the same period. The implication is that, after 5 years, since no assessment can be made, the taxpayer is absolved of his burden of maintaining such records.’’

135. In the case of Gitere Kahura Investments Ltd vs. The Commissioner of Investigations and Enforcement Tax Appeal No. 16 of 2019 this Tribunal observed as follows:‘‘The Respondent has the burden of proof pursuant to sections 107 and 108 of the Evidence Act to prove that the Appellant breached section 29(6) of the Act.The assessed tax is for the period 2013-2016 being demanded in year 2018. The Tribunal has perused respondent’s pleadings and did not find evidence from the Respondent accusing the Appellant for gross or wilful neglect, evasion or fraudulent activities concerning taxes as provided for under section 29(6) of the Act. In this regard, the Tribunal find that tax assessment for the year 2012 and 2013 are time barred by virtue of section 29(5) of TPA.’’

136. The Tribunal examined the assessment dated 12th September 2022 and noted that the Respondent included the 2016 assessments. The Objection Decision indicates that while determining VAT on variance between sales as per IT2C and VAT VAT3, the Respondent made reference to 2016 returns. However, since final tax demand in the Objection Decision does not refer to taxes for specific years, it is not clear whether the final tax demanded includes the 2016 assessments even though the Respondent submitted that the original assessment was for Kshs. 25,802,928,393 while the amount demand was slashed in the Objection Decision to a principal sum of Kshs. 15,125,380,763. It maintained that the assessments do not include the taxes concerning the year 2016.

137. The Respondent failed to demonstrate any cause that would have necessitated it to have the assessment made beyond the five years as provided for in law, thus the Tribunal shall deem the assessments beyond five years as improper and ought not to be levied.

138. For the purposes of clarity, the Tribunal finds that all assessments in relation to Corporate Income Tax made prior to June 2016 and in relation to VAT made prior to September 2017 are null and void.

v. Whether the Appellant manufactured goods, if so, whether the goods are taxable under Excise Duty Act; 139. Whereas the Respondent maintained that the Appellant processed green tobacco leaves and sold some of the processed tobacco to local customers and that the processing activity falls under the definition of “manufacture” pursuant to Section 2 of the Excise Duty Act, 2015 therefore, the products sold by the Appellant locally were subject to Excise Duty in accordance with Section 5 (1) of the Act, the Appellant contended that it does not manufacture tobacco as envisaged under the Excise Duty Act. The Appellant contented that the said Act envisages a process performed by a manufacturer in the production of excisable goods, in this case, cigarettes.

140. Section 5 of the Excise Duty Act imposes Excise Duty on manufactured goods and services. In particular, 5 (1) (2) of the said Act provides as follows;(1)Subject to this Act, a tax, to be known as excise duty, shall be charged in accordance with the provisions of this Act on—(a)Excisable goods manufactured in Kenya by a licensed manufacturer;(b)Excisable services supplied in Kenya by a licensed person; or(c)Excisable goods imported into Kenya.(2)Excise duty shall be charged at the rate specified in the First Schedule for the excisable goods or services in force at the time the liability arises for excise duty as determined under section 6. ’’

141. Section 2 (1) of the Excise Duty Act defines “manufacture” to include—“(a)The production of excisable goods;(b)Any intermediate or uncompleted process in the production of excisable goods;(c)The distilling, rectifying, compounding, or denaturing of spirits.”

142. It is not in dispute that the Appellant deals in tobacco products. In particular, the Appellant stated that it deals in raw tobacco/green leaf comprising stemming, re-drying and pressing. From the Appellant’s own description of what it does, to the Tribunal’s mind it is rather obvious that the Appellant adds value to raw tobacco/green leaf for sale. In other words, the Appellant deals with intermediate goods.

143. Consequently, the Appellant’s process falls within the definition of manufacturing within the meaning of Section 2 (1) (b) of the Excise Duty Act.

144. In relation to definition of manufacturing, the Court in Commissioner of Income Tax vs. Kenya Seed Company Limited Income Tax Appeal No. 284 of 1986 (unreported), the court considered the issue of what amounts to “manufacture” in the preparation of farm produce into seeds for planting. The court held;“From the above evidence, I find that the process through which the seed goes, a process which involves selection, drying the seed at a controlled temperature, shelling, grading the seed, sizing the same and chemically treating it are processes which change the state of the raw or ordinary seed to a marketable seed for planting, and this, in my considered opinion, fall within the definition of the manufacturing process.”

145. Apart from the provisions under the Excise Duty Act and the jurisprudence in Commissioner of Income Tax vs. Kenya Seed Company Limited Income (supra), it is necessary to take cognizance of the fact that tobacco and tobacco related products are controlled products. In particular, Tobacco Control Act Chapter 245A has specific provisions regarding the production, manufacture, sale, labelling, advertising, promotion, sponsorship, regulation of smoking of tobacco products and related matters.

146. To buttress the above position, that the activities done by the Appellant amounts to manufacturing, Section 2 of the Tobacco Control Act defines “manufacture” as;‘‘the processing of a tobacco product and includes the packaging, labelling, distribution or importation of a tobacco product for sale in Kenya.’’

147. Further Section 2 of the Tobacco Control Act defines “manufacturer” in respect of tobacco products, as;“any entity that is involved in the manufacture, including an entity that controls or is controlled by the manufacturer, or that is controlled by the same entity that controls the manufacturer.’’

148. In the instant Appeal, the Appellant carries out stemming, which involves removing of undesirable leaf not suitable for processing blend in terms of leaf grade, drying leaf through loose leaf butting and threshing; re-drying, which conditions the leaf to a suitable moisture content to allow it to be packed in cartons and kept in storage ready for shipping after some time without getting mouldy and damaged and to reduce the moisture from 20% to 13%; and pressing which involves packing the processed re-dried lamina or by-product in specialized cardboard cartons with a product net weight between 180 - 200 kilos. These activities fall within the definition of manufacture under the Tobacco Control Act.

149. If the Appellant’s activities fit the definition of a manufacturing under Tobacco Control Act, the Appellant must be a manufacturer under the Excise Duty Act as well. Therefore, the Tribunal finds that the Appellant’s activities amounts to manufacturing under the Excise Duty Act and the Tobacco Control Act.

150. The Tribunal having established that the Appellant’s activities amounted to manufacturing goods, it was necessary to find out whether the Respondent was justified in subjecting the goods to Excise Duty under Excise Duty Act.

151. Section 5 of the Excise Duty Act imposes excise duty on certain products manufactured in Kenya or imported into Kenya. In this regard, Section 5 (1) and (2) of the Excise Duty Act provides as follows:(1)Subject to this Act, a tax, to be known as excise duty, shall be charged in accordance with the provisions of this Act on—(a)Excisable goods manufactured in Kenya by a licensed manufacturer;(b)Excisable services supplied in Kenya by a licensed person; or(c)Excisable goods imported into Kenya.(2)Excise duty shall be charged at the rate specified in the First Schedule for the excisable goods or services in force at the time the liability arises for excise duty as determined under section 6. ’’

152. Excisable goods are specified under Part I of the First Schedule to the Act.

153. The Appellant asserted that for the goods to be subject to Excise Duty they must be “manufactured” and specifically listed in the First Schedule and that even where a category of goods qualifies as manufactured but is not listed in the First Schedule to the Excise Duty Act, Excise Duty is not applicable. Consequently, it was vital for the Tribunal to determine whether the goods in issue are listed under Part I of the First Schedule to the Act.

154. Pursuant to the Objection Decision, the Respondent appears to have classified the goods under ‘‘other manufactured tobacco and manufactured tobacco substitutes; "homogenous" and "reconstituted tobacco"; tobacco extracts and essences’’ as provided for under Part I of the First Schedule to the Act. From the Appellant’s arguments at paragraph 47 and 50 of its statement of facts, it appears that the Appellant equated this classification to the classification under of HS code 2403 which provides for, ‘other manufactured tobacco and manufactured tobacco substitutes; “homogenised” or “reconstituted” tobacco; tobacco extracts and essences”. We say so because the Respondent distanced itself from applying the provisions of Common External Tariff. In fact, the Respondent was categorical that EAC CET was not applicable to the instant case.

155. The Appellant maintained that its products are classifiable under HS Code 2401 because its goods are unmanufactured tobacco. HS Code 2401 provides for ‘‘unmanufactured tobacco; tobacco refuse.’’ Based its theory that its goods are unmanufactured tobacco, the Appellant also argued not all tobacco products are excisable under the Excise Duty Act and gave an example of raw/unmanufactured tobacco and products containing nicotine or nicotine substitutes, which only became excisable in 2021 through a deliberate amendment to the excise legislation.

156. The main issue that ought to be determined in this push and pull is whether the Respondent was justified in classifying the Appellant’s products under, ‘‘other manufactured tobacco and manufactured tobacco substitutes; “homogenous” and “reconstituted tobacco”; “tobacco extracts and essences.”

157. The Appellant at paragraph 3 of its statement of facts admitted that it deals with the processing activities of the raw tobacco/green leaf and stated what it does to the raw material. Section 2 of the Tobacco Control Act defines “tobacco” as;‘‘the tobacco plant, including its seeds and leaves.’’ It also defines "tobacco product" as ‘‘a product composed, in whole or in part, of tobacco, including tobacco leaves and any extract of tobacco leaves intended for use by smoking, inhalation, chewing, sniffing or sucking and includes cigarette papers, tubes and filters.’’

158. The object and purpose of the Tobacco Control Act under Section 3 is to provide a legal framework for the control of the production, manufacture, sale, labelling, advertising, promotion, sponsorship and use of tobacco products, including exposure to tobacco smoke to protect the health of the users and those who do not use it.

159. Suffice to complement that the provisions of the Tobacco Control Act are superior to the provisions of any other statutes that deal with tobacco. This is so pursuant to the provisions of Section 4 of the said Act.

160. Further Section 12 of the said Act empowers the Cabinet Secretary to make Tax and price policies concerning tobacco. Excise Duty Act contains some of those policies that are meant to enforce the provisions of the Tobacco Control Act. To add on that, Section 14 (1) of the Tobacco Act expressly provides that;“No person shall manufacture, import or distribute a tobacco product that does not conform to the requirements of this Act or any regulations made thereunder.”Therefore, before relying on any other written law on issues and aspects concerning tobacco, the taxpayer must prior be in compliance with the provisions of the Tobacco Control Act.

161. Based on the foregoing, the Tribunal established that the Appellant’s activities amounted to manufacturing both under the the Tobacco Control Act and Excise Duty Act. Further, the Tribunal established that the Appellant deals in tobacco and to be precise, processing tobacco leaves.

162. There is no doubt that the Appellant does not manufacture Cigars, cheroots, cigarillos, cigarettes, or electronic cigarettes that are expressly provided for under the Excise Duty Act. However, the Appellant itself admitted to processes tobacco leaves for sales to other manufacturers who manufacture the final product.

163. The Tribunals deems what the Appellant does as value addition to intermediates. Consequently, the Tribunal is in agreement with the Respondent’s categorization of the Appellant’s products under ‘‘other manufactured tobacco and manufactured tobacco substitutes; “homogenous” and “reconstituted tobacco”; tobacco extracts and essences.”

164. Whereas HS Code 2403 which provides for, ‘Other manufactured tobacco and manufactured tobacco substitutes; “homogenised” or “reconstituted” tobacco; tobacco extracts and essences” which is a similar phrase under to the provisions of the Excise Duty Act, the Tribunal was of the view that the Applicable law is the Excise Duty Act. This is so because first, the goods in issue are manufactured in Kenya and the provisions of the Act covers the products in issue. Secondly, when goods are imported, Section 44 of the Excise Duty Act provides that the provisions of the East African Community Customs Management Act, 2004 are applicable but with modifications to comply with the provisions of Excise Duty Act.

165. Therefore, the Tribunal is of the view that the Respondent was right in relying on the provisions of the Excise Duty Act as opposed to the East African Community Customs Management Act, 2004.

166. The Appellant referred to Chapter 3 of the Final Engineering Report: Tobacco Products Processing Detailed Study; the Tobacco Processing Agreement between the Appellant and BAT; international and regional best practices such as in in the United Kingdom, United States of America, Tanzania and Uganda to advance the theory that its products are not manufactured but are unmanufactured tobacco and tobacco refuse which are classifiable under HS Code 24. 01. The Tribunal is not persuaded by the Appellant reasoning because Kenya has a statute being the Tobacco Control Act which defines what constitutes manufacturing when dealing with tobacco. Secondly, the issue of classification under the East African Community Customs Management Act, 2004 is not issue because the Respondent in its assessments and Objection Decision alleged that the Appellant manufactures tobacco products in Kenya.

167. Be that as it may, the Appellant relied on bundle of documentary evidence to support its case. The Tribunal carefully examined the documentary evidence and noted that the evidences under Appendix 18, 19, 20, 21,23,24,25, and 26 are not applicable to this Appeal on grounds that the Respondent assessed the Appellant concerning excisable goods manufactured in Kenya by a licensed manufacturer as opposed to excisable goods imported into Kenya. The highlighted evidence relates to imports therefore, not relevant to this Appeal.

168. Whereas the Tribunal agrees with the Respondent that the Excise Duty Act is the proper applicable law and not the East African Community Customs Management Act, the Tribunal faults the Respondent’s assessments and Objection Decision where the Respondent referred to HS Code 2403 when determining the applicable rate. We say so because the Respondent did not allege be it in its assessments, Objection Decision or Statement of Facts that the Appellant imported excisable goods within the meaning of Section 5 (1) (c) of the Excise Duty Act. If the Appellant imported the products, those facts are not in the assessment nor in the Objection Decision.

169. The upshot of the foregoing is that the Appellant manufactured excisable goods activities in Kenya and ought to pay duty on the same under the the Excise Duty Act.

170. Under the circumstance, Tribunal is unable to fault the Respondent’s decision to charge duty under the Excise Duty Act. However, the Tribunal faults the Respondent’s decision to rely HS Code 2403 when the Excise Duty Act has applicable rates.

171. Consequently, the Appellant’s Appeal partially succeeds.

Determination 172. The Tribunal finds and holds that the Appeal partially succeeds and shall make the following orders; -a.The Appeal be and is hereby partially allowed;b.The Respondent’s Objection Decision issued on 7th December 2022, be and is hereby varied in the following terms;i.The tax assessment in relation to Corporation Income Tax prior to June 2016 and in relation to VAT prior to September 2017 be and are hereby expunged from the Objection Decision;ii.The assessments in relation to Corporation Income Tax from the June 2016 and in relation to VAT from September 2017 to March 2021 be and are hereby upheld;iii.The Respondent to recompute the taxes taking into account order b (i) and (ii) herein above and considering the rates under the Excise Duty Act as regards order b (ii) herein above; and,c.Each party to bear its own cost.

173. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF SEPTEMBER 2024. ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERJEPHTHAH NJAGI - MEMBERDR. TIMOTHY - MEMBERB. VIKIRU - MEMBERDELILAH K. NGALA - MEMBER