[2024] KETAT 1318 (KLR)

Avipro East Africa Limited v Commissioner of Domestic Taxes (Tax Appeal E112 of 2023) [2024] KETAT 1318 (KLR) (6 September 2024) (Judgment)

Neutral citation: [2024] KETAT 1318 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E112 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, G Ogaga & AK Kiprotich, Members

September 6, 2024

Between

Avipro East Africa Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a company registered in Kenya and incorporated under the Companies Act (Cap 486) and dealing in the production of day-old chicks for both the local market and export.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue, and the administration and enforcement of all tax laws set out in Parts 1& 2 of the First Schedule to the Act, for purposes of assessing, collecting, and accounting for all tax revenues in accordance with those laws.

3. The Respondent undertook a tax verification exercise on the Appellant’s affairs from 2018 to 2021 which led to the issuance of additional tax assessment vide a letter dated 25th November, 2022. The Appellant objected to the assessment through a letter dated 20th December 2022.

4. The Respondent issued its objection decision dated 17th February 2023 wherein it confirmed the Appellant’s assessments for P.A.Y.E and WHT at Kshs. 24,602,599. 00.

5. Aggrieved by the Respondent’s decision, the Appellant lodged at the Tribunal a Notice of Appeal dated 15th March 2023 and filed on even date.

The Appeal 6. The Appeal is based on the Memorandum of Appeal filed on 29th March 2023 which raised the following grounds:i.That the Respondent wrongly computed and charged tax on school fees of Kshs 4,934,664. 00 and Kshs 4,524,251. 00 for 2021 and 2022, respectively. The correct amount attributable to school fees was Kshs 2,763,944. 00 and Kshs 2,262,125. 00 for 2021 and 2022. ii.That the Respondent erred in law and fact by rejecting the Appellant’s objection on school fees variance for the periods 2021 and 2022 of Kshs 2,763,944. 00 and Kshs 2,262,125. 00, respectively despite the same variances being adjusted in the year 2022 income tax computation and the income tax return.iii.That the 2020 income tax assessment is excessive by the reason of some error or mistake in the tax rate applied of 30% instead of 25% as provided by Tax Laws Amendment Act, 2020. iv.That the Respondent erred in law by making an assumption that the amounts due to related parties are equivalent to foreign loans enjoyed by the Appellant.v.That the Respondent made a substantial error or defect while raising the additional assessments by imposing withholding tax on amounts due to related parties which does not fall within the scope of Section 16 (3) of the Income Tax Act.vi.That the Respondent failed to make a finding that indeed no interest payment was ever paid or deemed payable by the Appellant on the amounts due to the related parties and therefore, no withholding tax was payable by the Appellant in its capacity as an agent of the Respondent. The word “paid” as provided in Section 2 of the Income Tax Act includes distributed, credited, dealt with or deemed to have been paid in the interest or on behalf of a person.vii.That the Respondent is unable to demonstrate from the existing statutes that the term 'loan' includes trade debts or any form of indebtedness which are 'interest-free' or in respect of which no financial charge, discount or premium is paid. In the case of Socabelec East Africa Limited Vs Commissioner of Domestic Taxes, the Tribunal failed to get a different definition of loan provided by the Income Tax Act other than "all loans" in Section 16 (3). The Tribunal held that "For any form of indebtedness to qualify as a loan under the provision of the law, there must be a fixed charge, interest, discount or premium".viii.That the Respondent's erroneous interpretation of the term 'loan' does not follow the principle of strict interpretation of taxation laws and the Respondent has strained, tortured and laboured the construction of Section 16 (3) of the Income Tax Act by including amounts due to related parties as which is deemed as interest-free to qualify as a foreign loan, which is contrary to the finding in the case of Keroche Industries Limited Vs Kenya Revenue Authority & 5 Others [2007] in which the Court held that construction which would undermine the integrity of the clear words of an Act of parliament and it’s provisions must avoided.ix.That the WHT additional assessment as communicated via notice of assessment dated 25 November 2022 should be vacated entirely since the Respondent has no legal basis under the 'law to assess the payment of tax when in fact the Appellant had not repaid the interest or accrued any interest in its books during the relevant years.x.That the tax demanded as per the objection decision is in excess as the same was confirmed without any amendments as per the Appellant’s objection application.xi.That the Appellant stands to suffer a substantial financial loss if this appeal is not upheld.xii.That the Tribunal be pleased to set aside the assessments and award costs of the Appeal.

Appellant’s Case 7. The Appellant set out its case in its undated Statement of Facts which was filed on 29th March 2023 and Written Submissions dated 13th May 2024 and filed on 22nd May 2024 wherein it objected to the additional assessments on the following grounds:a.That the Respondent wrongly computed the school fees variances of Kshs 4,934,664. 00 and Kshs 4,524,251. 00 for the period 2021 and 2022. As a result, the respondent relied on the erroneous variances in arriving at the excessive additional assessments. The correct variances were Kshs 2,763,944. 00 and Kshs 2,262,125. 00 for 2021 and 2022, respectively.b.That the Respondent further misdirected itself by raising the contentious additional assessments on the above erroneous variances under the PAYE obligation.c.That the Respondent failed to apply the graduated scale rates in calculating the PAYE (where applicable) and instead applied a tax rate of 30% throughout the period under assessment.d.That the Respondent, though not in a position to prove the term 'loan' to include trade debts or any form of indebtedness, proceeded to charge withholding tax on amounts due to related parties.e.That the Respondent failed to honour explanations provided at the verification stage and ended up doubling or in excessive taxation of the same variances. As an example, the Respondent charged withholding tax from Dice Concepts on Kshs 20,481,201. 00 instead of Kshs 15,238,000. 00 as per the invoice. This resulted in an excessive tax of Kshs 614,436. 00. However, the correct withholding tax of Kshs 457,140. 00 at 3% had already been fully paid by the Appellant.f.That the Respondent indicated salaries per audited accounts for 2018, 2019 and 2020 as Kshs 23,394,837. 00, Kshs 23,358,203. 00 and Kshs 40,374,779. 00, respectively. The correct figures as per the audited financial statements are Kshs 22,577,628. 00, Kshs 18,171,213. 00 and Kshs 32,985,518. 00, respectively. This resulted in overstated variances and excessive taxation. The correct variances and explanations are as per appendix (x).g.That the 2020 salaries of Kshs 40,374,779. 00 as indicated by the Respondent include an amount to expatriates of Kshs 7,389,260. 87. However, these expatriates’ costs form part of salaries as per the PAYE returns of Kshs 28,947,434 hence these amounts to double taxation of a similar subject.

8. The Appellant alleged that it communicated its intention to rectify school fee variances via the objection application by disallowing it under the Corporate tax computation for 2022, which was subsequently effected as per the 2022 Income tax filed return.

9. According to the Appellant, its agents and the Respondent's agents held a meeting on 13 February 2023 at the Appellant's agent premises to discuss resolution of the matter and the Respondent subsequently issued an objection decision which confirmed the sums contained in the additional assessments.

10. The Appellant identified two issues for determination in its written submissions as follows:-a.What does the law stipulate on deemed interest?b.What is the tax consequence of applying the provisions of the law?

a. What does the law stipulate on deemed interest? 11. The Appellant argued that deemed interest is interest which is deemed on interest-free loans borrowed by a Kenyan resident from non-resident lenders. That the tax is deemed at the 91-day average interest rate on Treasury Bills and it suffers withholding tax at 15%.

12. It cited Section 2 of the Income Tax Act which provides that “deemed interest” means an amount of interest equal to the average ninety-one-day Treasury Bill rate deemed to be payable by a resident person in respect of any outstanding loan provided or secured by the non-resident, where such loan is provided free of interest.

13. The Appellant submitted that such interest is deemed to be income derived from Kenya by non-resident persons under Sections 10 and 35 and therefore taxed at 15% as per Paragraph 3(e) (i) of Head B of The Third Schedule to the Act.

14. It submitted that the requirements for applicability of deemed interest are three factors:i.A Kenyan company has borrowed a loan.ii.The loan is free of interest (a reward for the lender).iii.The loan is provided or secured by a non-resident person.

15. The Appellant also relied on Section 16(3) of the Income Tax Act which provides that "All loans" means loans, overdrafts, ordinary trade debts, overdrawn current accounts or any other form of indebtedness for which the company is paying; financial charge, interest, discount or premium.

16. The Appellant submitted that a loan is a facility that is borrowed, especially a sum of money, which is expected to be paid back, usually with interest. That it created an indebtedness of the borrower to the lender and may be secured or not.

17. It alleged that it follows that those payments to suppliers by the holding company on behalf of the Appellant and which no interest is charged, cannot be termed as loans. The Appellant relied on the case of Socabelec-EA-LTD-v-Commissioner-of-Domestic-Taxes (Tax Appeal No 195 of 2017) where the Tribunal held that no withholding tax was due and payable since the Appellant’s indebtedness had no interest or financial charge.

b. What is the tax consequence of applying the provisions of the law? 18. With regards to withholding tax, the Appellant relied on Section 39A of the Tax Procedures Act which provides:-“Penalty for failure to deduct or withhold tax: Where a person who is required under a tax law to deduct or withhold tax and remit the tax to the Commissioner fails to do so, the provisions of this Act relating to the collection and recovery of tax and the payment of penalties and interest thereon, shall apply to the collection and recovery of that tax not deducted or withheld as if it were tax due and payable by that person and the due date for the payment shall be the date on which the amount of tax should have been remitted to the Commissioner.”

19. The Appellant submitted that this provision became effective on 7th November, 2019, when it was implemented. It also submitted that the Respondent is legally prohibited from collecting withholding tax from the Appellant during the period from January 2017 to 6th November, 2019, as the law permits the Commissioner to require taxes from individuals who failed to withhold them had been removed. It submitted that this position was affirmed in Commissioner of Domestic Taxes v Pevans East Africa Limited & 6 others (Tax Appeal E003 of 2019) and the Commissioner of Domestic Taxes vs Japan Ports Consultants Limited Tax Appeal E076 of 2023.

20. On that basis, the Appellant prayed that the assessment issued by the Respondent for the years 2018 and 2019 be set aside for not being factually or legally grounded.

21. With regards to withholding tax for the years 2020 to 2022, the Appellant submitted that it withheld and remitted the deemed interest to the Kenya Revenue Authority.

22. The Appellant also submitted that it provided documents to discharge its burden of proof under Section 56(1) of the Tax Procedures Act.

23. It posited that it had a legitimate expectation that the Respondent would not raise taxes on the basis of grounds that are not based on either the law or the clear facts. It supported this argument with the treatise from De Smith, Woolf & Jowell In “Judicial Review of Administrative Action” 6th Edition. Sweet & Maxwell to support its claim that it had legitimate expectations.

24. The Appellant averred that departing from the law would deny it the right to a fair administrative action as enshrined under Section 47 of the Fair Administrative Action Act, 2015. To support this position, it cited the case of Republic v Public Procurement Administrative Review Board & 2 others [2019] eKLR; Nairobi HC Misc. Civil Application No. 187 of 2018.

Appellant’s Prayers 25. In light of the foregoing, the Appellant urged this Honourable Tribunal to allow the Appeal as the tax imposed was not only illegal but was also unfair and unreasonable.

The Respondent’s Case 26. The Respondent’s case is premised on its Statement of facts dated 28th April 2023 and filed on 4th May 2023 in which the Respondent stated that it undertook a tax verification exercise on the Appellant for the period of 2018 to 2021 wherein it assessed an additional tax liability of Kshs. 36,062,351. 00.

27. The Respondent averred that it and the Appellant’s agents had a meeting on 8th September 2022 wherein they agreed that the Appellant would avail the reconciliation or explanations for the following:i.Withholding tax on deemed interest by 11th November 2022;ii.Evidence on withholding tax payment on contractual and professional fees by 15th November 2022;iii.Feedback on salaries paid from Mauritius for 2018 and 2019 by 15th November 2022;iv.Breakdown of the expatriate costs by 15th November 2022; andv.Confirmation that the school fees was added back during tax computation by 15th November 2022.

28. The Respondent asserted that the Appellant did not provide any documents in support of the above issues as requested by the Respondent and as agreed in their meeting.

29. It stated that its assessment was premised on the grounds that:i.It undertook the analysis of the bank statements and made necessary adjustments for the opening and closing debtors and taxes. This analysis established a variance of sales amounting to Kshs 5,862,790 which remained unexplained;ii.The staff cost analysis which involved the comparison between the PAYE returns and Income tax returns revealed variance which was brought to charge;iii.School fees paid to one of the director’s children was not subjected to PAYE charge;iv.The review of the books established that the Appellant had received financing from the parent company in Mauritius however there was an understatement of the 'WHIT on deemed interest; andv.The Appellant also failed to submit withholding tax for payments for professional and contractual fees.

30. The Respondent averred that the Appellant on 20th December 2022 objected to the assessment but failed to provide documentation to support the position being advanced. It averred that having considered the explanation advanced it confirmed the assessment.

a. On Whether the Respondent correctly brought PAYE to tax 31. The Respondent stated that the Appellant has not disputed the fact that there is a variance in its PAYE returns and the Income tax returns.

32. It was its view that Section 59 of the Tax Procedures Act 2015 requires the Appellant to provide records to enable the Commissioner to determine its tax liability. The Respondent maintained that the Appellant failed to provide supporting documents which the Respondent had specifically requested in a meeting held between its agents and those of the Appellant.

33. The Respondent added that out of all the documents requested at the meeting, the Appellant provided an audited financial statement for 2018 only which was not sufficient enough to persuade the Commissioner to drop the assessments issued. According to the Respondent, the Appellant provided financial statements extracts, which the Respondent could not verify their authenticity since they were not signed nor verified in any way.

34. The Respondent alleged that in making the objection decision, it reviewed the Appellant's audited financial statements, reconciliation for the variance and tax computations. The Respondent noted that despite the Appellant's undertaking to provide the primary documents including the cash book, vouchers, balance sheets, and trial balance used to prepare the financial statements to support the statement, the Appellant ignored the request. The Respondent emphasised that even at this Appeal no such documents have been availed to verify the accuracy of the reconciliation.

35. The Commissioner’s analysis revealed variances between salaries as per PAYE returns versus salaries as per Income tax returns and the variance was brought to a charge of Kshs. 8,332,155. 00.

36. The Respondent stated that the 2020 variance which is admitted of Kshs 2,377,763. 00 was not paid prior to instituting the current Appeal.

37. The Respondent stated that it relied on Section 31 of the Tax Procedures Act which empowers it to make assessments according to the information available to it and its best judgment in ensuring that the Appellant is only liable for the correct tax.

38. The Respondent asserted that the Appellant has the burden of proof and has to prove that the assessment was incorrect as provided under Section 56 (1) of the Tax Procedures Act, 2015 but it failed to do so.

39. On the school fees paid to the child of the directors, the Respondent argued that the Appellant had failed to appreciate that this was a taxable benefit accorded to an employee and the same is the Income Tax Act which provides that "Monthly pay" includes income in respect of any employment or service rendered, accrued in or derived from Kenya. The Respondent emphasized that the amount of any private expenditure of the employee paid by the employer otherwise than as a loan, e.g. house rent, grocery bills, electricity, water, telephone bills, and school fees shall be treated as salary and be subjected to PAYE.

40. It relied on Section 37 of the Income Tax Act which requires the Appellant to deduct and account for taxes for emoluments to an employee. Section 37 of the Income Tax Act states as follows;“Deductions of tax from emoluments(1)An employer paying emoluments to an employee shall deduct therefrom, and account for tax thereon, to such extent and in such manner as may be prescribed.”

41. It was the Respondent's case that the Appellant did not charge PAYE to the benefit derived by one of the directors whose children's school fees were paid by the company, neither was the benefit disallowed in its company tax computation hence the variance brought to a charge of Kshs. 7127,598.

42. The Appellant's claim was that the tax assessment for 2020 is incorrect and excessive as the rate applied is 30% as opposed to 25% as provided under the Tax Laws Amendment Act, 2020. The Respondent argued that it applied the correct rate as provided. The Respondent further argued that the Appellant did not bring this up in its objection stage so that it could be reviewed.

b. On Whether the Respondent correctly brought to charge the Withholding tax on deemed interest 43. Whereas the Appellant contested the assessment on grounds that there was no loan for which interest could be deemed and that the Appellant took the position that the amounts due to the related parties were expenses paid by the parent company to suppliers and other financial obligations made on behalf of the Appellant, the Respondent argued that on 13th February 2023 it requested the Appellant to avail the documents to support its position but the Appellant failed to avail any of the documents.

44. The Respondent pointed out that it also requested for loan agreements, audited financial statements for the period under review, and reconciliations of withholding taxes paid and showing dates when paid to support the Appellant's objection towards Withholding income tax. The Respondent argued that out of the documents requested during the meeting held on Monday 13 February 2023, the Appellant did not provide any of them which limited the Respondent's review of the assessments

45. According to the Respondent, the Appellant’s position amounts to approbating and reprobating as the Company had in 2020 through the voluntary disclosure program partially declared and paid withholding income tax on deemed interest in 2020.

46. The Respondent stated that there was also partial payment through the normal regime in the year 2021 but noted that there was an understatement of the WHIT paid hence the correct tax was computed and credit given for the taxes already paid.

47. It is the Respondent’s case that the Appellant did not demonstrate or support its contention that the amounts due from foreign companies were not loans, it hence deemed interest on the said amounts.

48. The Respondent relied on the provisions of Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act to argue that the Appellant failed to discharge its burden of proof.

c. On Whether the respondent correctly demanded tax with the professional fees 49. The Respondent invoked Section 35(1) of the Income Tax Act which requires the Appellant to deduct taxes from payments made to any non-resident persons, for payment made in respect of professional fees and contractual fees.

50. The Respondent averred that the additional assessment leading to the objection decision was based on the Appellant’s own self-assessment returns.

51. That the Appellant was given an opportunity to challenge the additional assessments through the provision of documentation at the objection level which option it did not exercise. That its decision cannot be faulted as it was made based on available information.

52. The Responded identified two issues for determination in its submission, namely:a.Whether the Respondent's charge to withhold tax on deemed interest on the Appellant was justified;b.Whether the Appellant discharged its burden of proof to support its objection.

a. On Whether the Respondent's charge to withhold tax on deemed interest on the Appellant was justified 53. The Respondent relied on the provisions of Section 16 (2) of the Income Tax which provides that "loans" include any other form of indebtedness for which the non-resident company is paying a financial charge, interest, discount or premium. On the other hand, the Appellant relied on the Tribunal's judgment in the case of Socabelec (supra).

54. The Respondent submitted the said judgment was overturned in Commissioner of Domestic Taxes vs Socabelec East Africa Limited (Income Tax Appeal E001 of 2021) [2024] KEHC 3319 (KLR) (Commercial and Tax) (19 March 2024) in which the Court stated as follows:“... it is clear that if there is an indebtedness to a non-resident entity, withholding tax would apply whether there was interest payable or not. The only difference is that where there was no interest, deemed interest would apply at the 91 Treasury bill rate. Therefore, I find and hold that the Tribunal erred in by failing to appreciate that deemed interest only applies to loans that are provided free of interest and in concluding that for any form of indebtedness to qualify as a loan, there must be a fixed charge, interest, discount or premium.”

55. The Respondent was of the view that the Appellant had misguided itself in affirming that no withholding tax was due and payable since the Appellant’s indebtedness had no interest or financial charge and therefore this Tribunal ought not to entertain it.

56. The Respondent submitted that the deduction of tax from interest and deemed interest is guided by Section 35 of the Income Tax Act. It also submitted that the penalty for failure to deduct or withhold tax is housed under Section 39A of the Tax Procedures Act 2015.

57. In relation to the withholding tax for the years 2018 up to 6th November 2019, the Respondent submitted that it applied the provisions of Section 34 (3) (b) of the Income Tax Act as read with Rule 6 and Rule 8 (2) of the Income Tax (Withholding Tax) Rules, 2001 which establishes that withholding tax is chargeable and calculated on gross payments without netting off any expense/investment.

58. The Appellant submitted that in its financial statements, the Appellant declared payments to the mother company as liabilities which amounts it failed to withhold and remit. That it was thus justified to raise and confirm assessments for the years 2018 up to 6th November 2019.

59. In relation to withholding tax for the years 7th November 2019, the Respondent stated that for the years 2020 to 2022, the Finance Act, 2019 had provided for the penalty where a taxpayer fails to deduct or withhold tax under Section 39A of the Tax Procedures Act which came into effect on 6th November 2019. It also emphasised that the Appellant had the amounts payable under liabilities in its financial statements for the periods 2020 to 2022, and therefore it is admittedly indebted to the related parties.

60. The Respondent submitted that the Appellant has not provided any evidence that it paid any interest with regard to this particular indebtedness.

61. The Respondent posited that it was guided by Section 35 (1) (e) of the Income Tax Act which imposes WHT on deemed interest on the payables to related parties. The Respondent further submitted that the term “paid” is defined in Section 2 of the Income Tax Act to include distributed, credited, dealt with or deemed to have been paid in the interest or on behalf of a person.

62. To shed light on the issue of payment, the Respondent cited the Court of Appeal decision in Kenya Revenue Authority vs Republic (Exparte Fintel Limited) [2019] eKLR.

63. The Respondent also submitted that the Appellant has not availed the loan agreements covering the indebtedness which it alleged to have been payments made by the related persons on its behalf. It cited the case of Lordship Africa Management Limited v Commissioner of Investigation & Enforcement (Income Tax Appeal E022 & E037 of 2020) [2021] KEHC 286 (KLR) to support this position.

b. On Whether the Appellant discharged its burden of proof 64. The Respondent submitted that it requested for several documents including loan agreements, audited financial statements for the period under review and reconciliations of withholding taxes paid but the Appellant did not provide them. The Respondent relied on a number of the cases to support its argument on the burden of proof, including R V Kenya Revenue Authority ex parte Aberdare Freight Services LTD HDWC App. 9410/04, Francis Otile vs. Uganda Motors Kampala HCCS No. 210 of 1989, East African Court of Appeal held in Mohammed & Another vs. Haidara [1972] E.A 166 and Edward Muriga Through Stanley Muriga vs. Nathaniel D. Schulter Civil Appeal No. 23 of 1997.

65. The Respondent also invoked Section 56(1) of the Tax Procedures Act and the cases of Pearson v Belcher CH.M Inspector of Taxes) Tax Cases Volume 38 and PZ Cussons East Africa Limited v Kenya Revenue Authority (2013) eKLR to submit that the Appellant failed to discharge the burden of proof.

Respondent’s prayers 66. The Respondent prayed that this Appeal be dismissed with costs to the Respondent as the same is devoid of merit, and that the Respondent's charge to withhold tax on deemed interest amounting to Kshs 16,569,321 be deemed proper and in conformity with the provisions of the law.

Issues for Determination 67. The Tribunal has noted that parties signed a Partial Consent dated 28th December 2023 and adopted as part Judgment on the 9th April, 2024 resolving the issue of additional PAYE and WHT on professional and contractual fees. The issue of whether the Respondent erred in its assessment of WHT on deemed interest was referred back to the Tribunal for resolution by consent of the parties.

68. The Tribunal has considered the Memorandum of Appeal, the parties' Statements of Facts, witness statements, and written submissions and it is of the view that the issue falling for its determination outside the Consent signed by the parties are:a.Whether the Respondent’s decision to charge withholding tax on deemed interest is justified;b.Whether the Respondent was justified to charge WHT on deemed Interest in the period between January 2017 to 6th November 2019

Analysis and Findings 69. The Tribunal having identified the issues falling for its determination proceeds to analyse the same as hereunder.

a. Whether the Respondent’s decision to charge withholding tax on deemed interest was justified 70. The Appellant’s case is that the Respondent was not able to prove that there was a loan advanced to it and hence the WHT charged on the alleged deemed interest was erroneous.

71. The Respondent on its part held the position that the Appelant’s books of accounts reflected advancements and no document was provided to show that these advancements were not loans. That moreover the Appellant had previously conceded to these loans in its voluntary disclosures under the voluntary disclosure program in 2020 and 2021 and it even paid partial deemed interest on these loans.

72. The Appellant had the burden to show that the amounts due from the foreign companies were not loans. This could have easily been done by sharing the documents that gave rise to those advancements to prove that they were indeed not loans. This was not done.

73. Moreover, in an interesting twist of events, the Appellant admitted in Paragraph 15 of its submissions dated 13th May 2024 that:“…the Appellant concedes that the loan due from Avipro Company Limited-Mauritius is KES 423,043,110 as per the loan agreements between Avipro Company Limited-Mauritius and the Avipto East Africa Limited signed by both parties on 01 January 2020”

74. The said document was thus not attached although it was indicated to have been marked as ‘Appendix XVI’. The Tribunal notes that from the Appellant's bound bundle of the documentary evidence, the last document is marked as Appendix XII which is an e-return acknowledgement receipt. The loan agreement is not on record therefore, the Tribunal did not have an opportunity to examine it.

75. This refusal by the Appellant to provide the loan agreement that was requested by the Respondent to help it reconsider its decisions, if at all, on the issue of deemed interest meant that the Respondent’s assertion on the content and existence of this loan agreement and more so that part that the loans birthed deemed interest which ought to be taxed stood unchallenged and hence proved.

76. This is more so because the burden of proof in tax cases is at the first instance always on the taxpayer under Section 56(1) of the TPA. Its open refusal or failure to discharge this burden using the evidence that would ordinarily be in its possession to show that the Respondent erred in its assessment means that the Respondent’s tax assessment was unchallenged and hence confirmed.

77. The Tribunal supports its conclusion with the case of Darwine Wholesalers Limited v Commissioner of Investigations and Enforcement (Income Tax Appeal E051 of 2021) [2023] KEHC 23537 (KLR) found as follows:-“Under Section 59 of the TPA and section 43 of the VAT Act the Commissioner is expressly empowered to ask for additional information to ascertain the tax chargeable. This legal position aligns with sections 107 and 112 of the Evidence in that the balance of proof lies with the party with the knowledge of facts. Further section 30 of the Tax Appeals Tribunal Act (TATA) and section 56 of the TPA impose the burden of proof on the taxpayer to prove that an assessment was wrong or that it was excessive.”

78. Consequently, the Tribunal finds and holds that the Appellant failed to prove that the assessment herein was wrong or excessive, it is thus upheld.

b. Whether the Respondent was justified to charge WHT on Deemed Interest in the period between January 2017 to 6th November 2019 79. The Appellant argued that the WHT assessment for 2018 and 2019 was not grounded on the law because the Finance Act 2016, which was effective on 9th June 2016 had repealed Section 35 (6) of the Income Tax Act.

80. The Respondent argued that it was legally permitted to collect this WHT under Sections 34(3)(b) of the ITA as read with Rules 6 and 8(2) of the Income Tax(Withholding Tax) Rules, 2002 which established that WHT is chargeable on gross payments.

81. The Tribunal has noted that before 2016, Section 35(6) of the ITA provided that the Commissioner could claim taxes from a payer who fails to make a deduction as though the taxes were due from them.

82. However, the amendment introduced by the Finance Act, 2016 deleted the said Section 35(6) of the ITA meaning that the Commissioner could no longer demand taxes not withheld from the person who should have withheld the same. This position remained until the enactment of the Finance Act, 2019 which came into force on 7th November 2019 when the previously deleted provisions of Section 35(6) of the ITA were now reintroduced and reproduced as a new Section 39A under the TPA.

83. Section 39A of the TPA provides as follows regarding WHT:“39A. Penalty for failure to deduct or withhold taxWhere a person who is required under a tax law to deduct or withhold tax and remit the tax to the Commissioner fails to do so, the provisions of this Act relating to the collection and recovery of tax, and the payment of penalties and interest thereon, shall apply to the collection and recovery of that tax not deducted or withheld as if it were tax due and payable by that person and the due date for the payment shall be the date on which the amount of tax should have been remitted to the Commissioner.”

84. Section 39A of the TPA provides that everyone who is required to withhold and remit tax must do so, failure to which it would be liable to pay for the tax that it failed to withhold as if it was a tax that is due and payable by it. Section 39A of the TPA was however only applicable from 7th November 2019 when it came into force.

85. The Respondent could thus not demand WHT from the Appellant in the period between January 2017 to 6th November 2019 when the law which allowed the Commissioner to demand taxes not withheld from the person who should have withheld the same had been deleted.

86. This position has been asserted severally by the Tribunal including in the case of Commissioner of Domestic Taxes v Pevans East Africa Limited & 6 others (Tax Appeal E003 of 2019) [2022] KEHC 10392 (KLR) (Commercial and Tax) (13 May 2022) (Judgment) where the Courts stated thus:“Consequently, I, therefore, find and hold that during the subject years of 2018 and 2019, the Commissioner could not collect the WHT that ought to have been deducted by the Respondents from the punters and that all the Commissioner could do was seek the same from the punters directly.”

87. For the reasons set out above, the Tribunal finds and holds that the Respondent erred in assessing WHT for the years 2018 up to 6th November 2019 when the Appellant could not be held liable.

Final Decision 88. The upshot to the foregoing analysis is that the Tribunal finds and holds that the Appeal is partially meritorious and consequently makes the following Orders; -a.The Appeal is partially allowed;b.The parties’ Partial Consent dated 28th December 2023 and admitted as part Judgment resolving the issue of additional PAYE and WHT on professional and contractual fees be and is hereby adopted as a Judgment of this Tribunal.c.The Respondent’s objection decision dated 17th February 2023 be and is hereby varied as follows:i.The Respondent’s WHT on deemed interests for the years 2018 up to 6th November 2019 are hereby set aside.ii.The Respondent’s WHT on deemed interest from the 6th of November 2019 and onwards are hereby upheld.d.The Respondent to re-calculate and issue the Appellant with its WHT assessment on deemed interest for the period running from the 6th of November 2019 onwards.e.The assessment regarding order (c) above to be issued within Thirty (30) days from the date of delivery of this Judgment.f.Each party is to bear its own costs.

89. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 6TH DAY OF SEPTEMBER, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERGLORIA A. OGAGA - MEMBERABRAHAM K. KIPROTICH - MEMBER