[2023] KETAT 604 (KLR)

Aspac International East Africa Limited v Commissioner Legal Services & Board Coordination (Tax Appeal 765 of 2021) [2023] KETAT 604 (KLR) (29 June 2023) (Judgment)

Neutral citation: [2023] KETAT 604 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 765 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

June 29, 2023

Between

Aspac International East Africa Limited

Appellant

and

Commissioner Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a company registered in Kenya under the Companies Act and a registered tax payer.

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 carried out an audit on the tax affairs of the Appellant and issued a letter of preliminary findings on 19th June 2020. Through its tax agents, the Appellant replied vide a letter dated 6th August 2020.

4. The Respondent issued an assessment on 23rd October, 2020 for Corporation tax, Withholding tax, PAYE and VAT for total amount of Kshs. 599,036,434. 00 inclusive of penalties and interest.

5. The Appellant responded vide letters dated 20th November, 2020 and 25th November, 2020 objecting to the assessments. Thereafter the parties engaged through emails, meetings and exchange of documents with the aim of resolving the issues.

6. Subsequently, the Respondent issued a letter invalidating the Appellant’s objection on 3rd June 2021. The Respondent later issued Agency Notices to the Appellant’s bankers on 1st November, 2021.

7. This prompted the Appellant to file a Notice of Motion and its Appeal documents to the Tribunal on 26th November 2021. The Tribunal rendered its ruling regarding the Notice of Motion application on 4th March 2022 leaving the Appeal to proceed.

The Appeal 8. The grounds of appeal as captured in the Memorandum of Appeal were as follows:-a.That the Respondent erred in law and fact by issuing the Agency notices when the facts indicated that the Respondent had not made a decision on an objection filed by the Appellant more than one year earlier.b.The Respondent erred in law and in fact by issuing the Agency notices which were issued outside the law.c.The Respondent erred in law in issuing the Agency notices when by operation of the law, the Objection had been allowed.d.The Respondent erred in law and fact by assessing taxes payable at Kshs. 599,036,034. 00 and the resultant interests and penalties and issuing agency notices when the taxes were not due and payable and are not supported by any evidence.

The Appellant’s Case 9. The Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal;i.The Appellant’s Statement of Facts dated 24th November 2021 and filed on 26th November, 2021 together with the documents attached thereto.ii.The witness statement of Jacques Massart dated 26th August, 2022 and filed on 30th August 2022 which was admitted in evidence on oath on 12th October, 2022. iii.The Appellant’s submissions dated the 25th October, 2022 and filed on the 27th October, 2022.

10. The Appellant submitted that Respondent, by a letter dated 19th June 2020, being preliminary audit findings for 2015 to 2019, tabulated and assessed tax liability against the Appellant for the sum of Kshs. 692,936,206. 00 being principal taxes of Kshs. 594,419,802. 00, and interests and penalties of Kshs. 98,516,404. 00.

11. That by a letter dated 6th August 2020, the Appellant made a reply to the preliminary audit findings through its tax agents.

12. It averred that by a letter dated 23rd October 2020, the Respondent issued a tax assessment for the period 2015 to 2019 demanding a tax liability of Kshs. 433,175,408. 00 being principal tax, and Kshs. 165,861,026. 00 being interest and penalties all totaling to Kshs. 599,036,434. 00.

13. The Appellant submitted that by a letter dated 20th November 2020 it objected to the tax assessment.

14. The Appellant averred that it was encountering difficulties in filing the objection through the system as required. That its agents through a letter dated 25th November 2020 sought assistance of the Respondent to lodge the objection.

15. The Appellant stated that to this day the Respondent had not made an objection decision neither had the Appellant been notified of what became of its objection.

16. That the Respondent again engaged the Appellant’s tax agents in the month of January through email. That reference was not made of the objection filed by the Appellant or any objection decision by the Respondent’s agents who dealt with the Appellant.

17. The Appellant averred that there were several meetings that took place frequently and long emails exchanged between the parties. It added that the emails did not mention anything about the objection decision.

18. The Appellant stated that it was called by its main bankers ABSA Bank and shown the agency notices, which required that the accounts to be frozen. That it has since not transacted.

19. The Appellant stated that the Respondent’s actions on the face of it are malicious and aimed at crippling the Appellant’s business completely.

20. That the agency notices were issued outside the law as the procedure required under the law was not followed. That the notices in the circumstances were illegal.

21. The Appellant requests that the Tribunal allows the Appeal as prayed in the Memorandum of Appeal.

The Appellant’s Prayers 22. The Appellant made the following prayers:-a.This Appeal be allowed in its entirety.b.The Agency Notices decision dated 1st November, 2021 and the resultant assessment be set aside.c.The Respondent do pay the costs of this Appeal.

Respondent’s Case 23. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Respondent’s Statement of Facts dated 24th December 2021 and filed on 24th December, 2021 together with the documents attached thereto.ii.The Respondent’s witness statement of Sylvester Masinde dated 11th October, 2022 filed on the 12th October, 2022 and admitted in evidence on the 12th October, 2022. iii.The Respondent’s written submissions dated and filed on 26th October 2022.

24. The Respondent submitted that during the period 2012 to 2019, Aspac SPRL won the following contracts in Kenya;a.Rift Valley water services Board - Sabor-Iten -Tambach Water Supply Project (Keiyo District) (“Iten 1”)b.Rift Valley water services Board - Construction of water pipes around Nakuru Town (“Iten 2”)c.Tanathi water Services Board - Recycling and supply of water from Athi River (“Mavoko”)

25. That the Appellant herein, Aspac EA was contracted by Aspac SPRL to provide certain services with respect to the above projects in Kenya.

26. The Respondent averred that it carried out an audit on the operations of Aspac EA and noted variances between contract amounts and revenue declared in Kenya.

27. The Respondent stated that it issued the preliminary findings on 19th June 2020. That the Appellant, through Aspac SPRL responded on 6th August 2020 and responded to the findings on the grounds that income tax was not chargeable on the whole contract value but only on the fees earned by Aspac International East Africa Limited, that WHT was not chargeable on management and professional fees paid by Aspac International East Africa Limited among other grounds.

28. The Respondent stated that the aforementioned letter was aimed to address the issues raised in the audit findings. That the Commissioner then issued an assessment letter dated 23rd October 2020 detailing the taxes due for Corporation tax, Withholding tax, PAYE and VAT totalling Kshs. 599,036,434. 00 inclusive of penalties and interest.

29. That the Appellant then sent two letters dated 20th November 2020 and 25th November 2020 indicating that it would wish to object and requested an opportunity to present its facts for consideration. The second letter was premised on the claim that the Appellant was not able to object via iTax for Withholding Tax. That none of these letters outlined the basis or the reasons to oppose the tax assessment

30. The Respondent stated that thereafter, it made efforts to resolve the case whereby the Appellant was repeatedly requested to provide various documents in order to shed light on the tax liability status but the Applicant failed to provide the same.

31. That having failed to provide supporting documents to the letters dated 20th and 25th November, 2021, the Respondent had no other option than to invalidate the application and confirm the assessments raised.

32. The Respondent therefore issued an invalidation letter dated 3rd June 2021 on the basis that the Applicant had failed to comply with the provisions of Section 51 (3) of the Tax Procedures Act.

33. That the Appellant thereafter failed to take any step from 3rd June 2021 to November 2021, and despite being aware of the outstanding taxes failed and/or neglected to pay the same leading to the matter being forwarded for enforcement. The Respondent averred that this prompted the issuance of agency notices to the Appellant’s bankers on 1st November 2021 pursuant to the powers granted to the Commissioner under Section 42 of the Tax Procedures Act.

34. The Respondent submitted that the Appellant thereafter moved this Tribunal by way of Notice of Motion dated 24th November, 2021 for orders to set aside the Agency notices and subsequently the Appellant filed this Appeal.

35. The Respondent stated that it shall raise a preliminary objection against this Appeal on grounds that it had been lodged outside the statutorily allowed timelines of lodging an Appeal and the same should be dismissed.

36. It was the Respondent’s submission that the issues in dispute were the following;i.Whether the Agency Notices were issued in error.ii.Whether the Respondent issued an Objection Decision within the confines of the law.iii.Whether the Appellant’s Objection had been allowed by operation of the lawiv.Whether the Respondent erred in assessing the taxes and resultant interest and penalties.v.Whether this Appeal has been validly lodged

37. The Respondent denied that there was any error in issuing the agency notices as the Appellant had failed to pay the taxes in issue from 3rd June, 2021 when the objection was invalidated until November 2021 when the agency notices were issued.

38. The Respondent stated that the Appellant was well aware that there were ongoing engagements between the parties to resolve the issue up to June 2021 when the Respondent required the Appellant to provide further documentation, which the Appellant failed to do. That indeed the Appellant does admit in its Appeal that the parties were exchanging correspondences in a view to determine the true tax status of the Appellant but failed to reach an amicable solution.

39. The Respondent reiterated that Section 42 of the Tax Procedures Act empowers it to issue agency notices to persons holding or are likely or will in future hold funds belonging to the tax debtor in order to fulfil its tax obligations.

40. That Section 42 reads as follows:(1)This Section applies when a taxpayer is, or will become liable to pay a tax and —(a)the tax is unpaid tax; or(b)the Commissioner has reasonable grounds to believe that the taxpayer will not pay the tax by the due date for the payment of the tax.(2)The Commissioner may, in respect of the taxpayer and by notice in writing, require a person (referred to as the "an agent")—(a)who owes or may subsequently owe money to the taxpayer;(b)who holds or may subsequently hold money, for or on account of, the taxpayer;(c)who holds or may subsequently hold money on account of some other person for payment to the taxpayer; or(d)who has authority from some other person to pay money to the taxpayer, to pay the amount specified in the notice to the Commissioner, being an amount that shall not exceed the amount of the unpaid tax or the amount of tax that the Commissioner believes will not be paid by the taxpayer by the due date.”

41. The Respondent stated that failure by the Appellant to honor its tax obligations from 19th June 2020 when the preliminary findings were issued to 3rd June 2021 when the Notice of Invalidation was issued up till 1st November 2021 when enforcement measures were taken against the Appellant, is sufficient grounds for the Respondent to have issued agency notices to its bankers in order to enforce payment of taxes.

42. That in view of the Appellant’s failure to pay the outstanding taxes, the Respondent was constrained to take measures to enforce recovery of the outstanding taxes against the Appellant to ensure that the tax owing was safeguarded and the Respondent prays that the Tribunal finds that the agency notices issued on 1st November 2021 were issued in accordance with the law.

43. The Respondent further denied that the Appellant’s objection was allowed by operation of law. That for this to happen, the Appellant ought to have lodged a proper objection which it did not do hence the invalidation.

44. That Section 51(3) of the Tax Procedures Act sets out the parameters of when an objection can be deemed as being validly lodged. That the Section states as follows:“A notice of objection shall be treated as validly lodged by a taxpayer under subSection (2) if—(a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;(b)in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under Section 33(1); and(c)all the relevant documents relating to the objection have been submitted.”

45. The Respondent contended that the Appellant was audited and an assessment issued. That thereafter, the Appellant lodged an invalid objection which despite being granted opportunities to validate the same by provision of supporting documents as per Section 51(3)(c) of the Tax Procedures Act over a period of more than 0ne (1) year, the Appellant failed to furnish the Respondent with the necessary records and thus the objection was invalidated.

46. That Section 59 (1) of the TPA empowers the Respondent to request for documents in order to ascertain the tax status of a taxpayer. The Section provides as follows:“For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorised officer may require any person, by notice in writing, to—(a)produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;(b)furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; or(c)attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person.”

47. The Respondent averred that the Appellant failed, refused and/or neglected to provide the same despite ample notice and requests as evidenced by the multitude of email requests, thereby leaving the Respondent with no other choice other than to invalidate the objection. That the Appellant was therefore the author of its own misfortune.

48. The Respondent stated that the assessed taxes were due and owing as the Appellant did not provide any sufficient documents to convince the Respondent otherwise. That it is a fact that the Appellant transacted within Kenya, derived an income and was liable to pay taxes on it, facts which were well within the knowledge of the Appellant.

49. That furthermore, vide the preliminary findings dated 19th June 2020, the Appellant was made aware of the taxes due under the various tax heads and how the same were arrived at. That it was therefore untrue that the taxes were not due and payable. The Respondent asserted that evidence of the taxes due was availed in the letter by the Respondent dated 23rd October 2020.

50. That Section 3 (1) of the Income Tax Act provides that:“(1) Subject to, and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.”

51. That from all the service contracts signed with Aspac SPRL, Aspac EA was to organize and supervise the construction of the projects and also construct the pipework, the hydro mechanical and electro mechanical works. In particular, Aspac EA was required to provide the following services;a.Design and engineering works;b.Installation of equipment and systems and construction of structures, including the technical, administrative and logistic aspects linked to the execution of the Project in conformity with the laws and standards applied in Kenya;c.Perform any other activities or tasks related to the previously mentioned services which are necessary for the proper and timely implementation of the Project;d.The support to the ASPAC Intl personnel involved in the Project. AIEA will have to provide all the necessary assistance to the ASPAC lntl professionals whilst on mission in Kenya:e.The monitoring of the respect by RVWSB of all the contractual clauses (including possible amendments and additions);f.The follow-up of the invoices transmitted to RVWSB for payment;g.The collection of data and information for ASPAC Intl.

52. The Respondent averred that all these functions were being carried out by Aspac EA at its main office in Westlands or site offices. That furthermore, Aspac EA had been providing services exclusively to Aspac SPRL and thereby deriving an income, paying staff, receiving management and professional services from various suppliers and making vatable supplies for which it needed to pay Corporation tax, Withholding tax, PAYE and VAT taxes as per the Respondent’s assessment.

53. The Respondent stated that for Corporation tax, the Appellant was contracted by Aspac SPRL for services as stated above for 2 projects which contract amount was Kshs. 1,393,148,787. 00. That however, the Appellant only reported income of Kshs. 213,977,500. 00 which was a clear under-declaration of its income for purposes of reducing its tax liability.

54. That for Withholding tax, the Appellant received management and professional services from various suppliers amounting to Kshs. 100,746,263. 00 but had not remitted withholding tax contrary to Section 35 of the Income Tax Act. That the resultant liability was Kshs. 4,262,040. 00,

55. For PAYE, the Respondent reiterated the letter dated 23rd October 2020 and stated that the Appellant had in its employment several expatriates but failed to account for their income and payment of PAYE on all emoluments paid. That when requested for further information on the employment contracts of the expatriates, the Appellant failed to provide the same. That the Respondent therefore used its best judgment as allowed by Section 31 of the Tax Procedures Act and made the assessment.

56. The Respondent stated that for VAT, the Appellant declared and charged VAT on Kshs. 182,766,022. 00 as the total value of vatable supplies for services provided to Aspac SPRL. That however, this was a gross under-declaration as the amounts regarded as investments and projects costs amounting to Kshs. 1,210,382,766. 00 were not charged VAT. That further input VAT claimed on restaurant and accommodation services amounting to Kshs. 700,444. 00 was disallowed as it was contrary to Section 17(4)(b) of the VAT Act which provides thus;-“A registered person shall not deduct input tax under this Act if the tax relates to the acquisition, leasing or hiring of—(a)……..(b)entertainment, restaurant and accommodation services unless—(i)the services are provided in the ordinary course of the business carried on by the person to provide the services and the services are not supplied to an associate or employee; or(ii)the services are provided while the recipient is away from home for the purposes of the business of the recipient or the recipient’s employer:”

57. That Section 31(1) empowers the Commissioner to amend an assessment based on the information available to it and based on its best judgment. The Commissioner is not obligated to take any self-assessment as final. The Section provides thus;“Subject to this Section, the Commissioner may amend an assessment (referred to in this Section as the “original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that—(a)…………(b)………. or(c)in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

58. That the Respondent was therefore well within its rights to confirm this assessment in the absence of any documents or evidence otherwise.

59. The Respondent averred that the Appellant failed to provide the required documents hence the burden of proof was not discharged as per Section 56 of the Tax Procedures Act which provides as follows;“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

60. That it should further be noted that the Appellant had admitted to taxes due and not paid vide its letter dated 6th August 2020 and therefore has approached this Tribunal in contravention of Section 52(2) of the Tax Procedures Act which requires a prospective Appellant to pay any undisputed taxes prior to filing an Appeal. The Section provides as follows;“A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice.”

61. That furthermore, this Appeal had been filed outside the statutory timelines allowed by the Tax Procedures Act and was therefore invalid. That the Respondent invalidated the Appellant’s objection on 3rd June 2021 and the Appellant ought to have filed a Notice of Appeal within 30 days, which it failed to do.

62. The Respondent reiterated that the Appeal was invalidly lodged as per the provisions of Section 52(2) of the Tax Procedures Act and Section 13 of the Tax Appeals Tribunal Act and the same should be dismissed with costs to the Respondent.

The Respondent’s Prayers 63. The Respondent prayed that the Tribunal:a.Confirms the assessment of Kshs. 599,036,434. 00 together with the resultant penalties and interest are due and payable.b.That this Appeal be dismissed with cost to the Respondent as the same is without merit.

Issues For Determination 64. The Tribunal upon due consideration of the pleadings, documents and written submissions separately filed by the parties and the testimonies adduced by the witnesses of both parties is of the view that the following issues precipitate for its determination: -a.Whether there is a valid Appeal before the Tribunal.b.Whether there were any admitted taxes by the Appellant.c.Whether the Respondent erred in its assessment of tax on the Appellant.

Analysis And Determination 65. The Tribunal having ascertained the issues that crystallizes for its determination shall proceed to make the analysis on the identified issues separately as hereunder:-a.Whether there is a valid Appeal before the Tribunal.

66. The genesis of this dispute was an audit by the Respondent on the tax affairs of the Appellant and the subsequent assessment issued on 23rd October, 2020 for Corporation tax, Withholding tax, PAYE and VAT for a sum of Kshs 599,036,434. 00 inclusive of penalties and interest.

67. The Respondent stated that the Appeal had been filed outside the statutory timelines allowed by the Tax Procedures Act and was therefore invalid. The Respondent submitted that it invalidated the Appellant’s objection on 3rd June 2021 and the Appellant ought to have filed a Notice of Appeal within 30 days, which it failed to do.

68. Section 52(1) of the Tax Procedures Act provides as follows regarding an appealable decision;“A person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the provisions of the Tax Appeals Tribunal Act, 2013 (No. 40 of 2013).”

69. Further, Section 13 of the Tax Appeals Tribunal Act provides as follows regarding appeals to the Tribunal;(1)A notice of appeal to the Tribunal shall—(a)be in writing;(b)be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner.(2)The appellant shall, within fourteen days from the date of filing the notice of appeal, submit enough copies, as may be advised by the Clerk, of –(a)a memorandum of appeal;(b)statements of facts; and(c)the tax decision” (Emphasis added)

70. The Tribunal noted that the Respondent issued its decision to invalidate the Appellant’s objection on 3rd June 2021. Going by the provisions of Section 13 of the Tax Appeals Tribunal Act as cited above, where a taxpayer is dissatisfied with a decision of the Commissioner it ought to lodge an Appeal within 30 days. In the instant case, the Appellant having been served with a decision by the Respondent on 3rd June 2021, the Appellant ought to have lodged a Notice of Appeal on or before 3rd July 2021.

71. The Appellant in this case lodged its Appeal documents on 26th November, 2021 which was 4 Months and 24 days late. The law however provides a remedy for a tax payer who is late in approaching the Tribunal with its appeal documents under Section 13(3) & (4) of the Tax Appeals Tribunal Act which provides as follows;(3)The Tribunal may, upon application in writing, extend the time for submitting the documents referred to in subSection (2).4)An extension under subSection (3) may be granted owing to absence from Kenya, or sickness, or other reasonable cause that may have prevented the applicant from giving notice of appeal within the specified period”

72. From the facts presented to the Tribunal, the Appellant clearly did not pursue this option to remedy its course. The Tribunal noted that the Appellant had approached the Tribunal with a Notice of Motion under a Certificate of Urgency on 26th November, 2021 seeking orders aimed at lifting the agency notices issued by the Respondent on 1st November, 2021, The Tribunal through a ruling delivered on 4th March 2022 dismissed the application for lack of merit. The Tribunal in the ruling affirmed that the Respondent issued the Agency notices procedurally as provided in law.

73. The Appellant in its pleadings had further averred that its objection had been allowed by law following the failure of the Respondent to issue an objection decision within time as stipulated by law. Following the Ruling dated 4th March 2022 the Tribunal finds this argument cannot hold as the Respondent had by implication been vindicated of such a failure in the Ruling.

74. The Supreme Court on the issue of timeliness expressed itself as follows in Charo vs. Mwashetani & 3 Others (2014) KLR- SCK:“In the emerging jurisprudence, the concept of ‘timelines and timeliness’ is generally upheld, as a vital ingredient in the quest for efficient and effective governance under the Constitution.”

75. The Tribunal is further guided by the court’s holding in Nicholas Kiptoo Arap Korir Salat vs. IEBC & 6 Others [2013] eKLR with regard to strict compliance with mandatory statutory provisions when the court stated as thus;“This Court, indeed all courts, must never provide succor and cover to parties who exhibit scant respect for rules and timelines. Those rules and timelines serve to make the process of judicial adjudication and determination fair, just, certain and even-handed. Courts cannot aid in the bending or circumventing of rules and a shifting of goal posts for, while it may seem to aid one side, it unfairly harms the innocent party who strives to abide by the rules. I apprehend that it is in the even-handed and dispassionate application of rules that courts give assurance that there is a clear method in the manner in which things are done so that outcomes can be anticipated with a measure of confidence, certainty and clarity where issues of rules and their application are concerned…”

76. Going by the foregoing analysis and case laws cited above, the Tribunal determined that the Appeal was filed out of time without leave of the Tribunal as required by law and therefore invalid.

77. Having entered the above finding, the Tribunal did not delve into the other issues that fell for its determination namely; Whether there were any admitted taxes by the Appellant, and Whether the Respondent erred in its assessment of tax on the Appellant as they had been rendered moot.

Final Decision 78. In view of the foregoing analysis, the Tribunal determined that the Appeal is incompetent and unsustainable in law. The Orders that accordingly recommend themselves are as follows: -i.The Appeal be and is hereby struck out.ii.Each party to bear its own costs.

79. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 29TH DAY OF JUNE 2023. ERIC N. WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERGRACE MUKUHA - MEMBERJEPHTHAH NJAGI - MEMBERABRAHAM K. KIPROTICH - MEMBER