[2023] KETAT 548 (KLR)

Baker Hughes Eho Limited (Kenya Branch) v Commissioner of Legal Services and Board Coordination (Tax Appeal 1189 of 2022) [2023] KETAT 548 (KLR) (13 October 2023) (Judgment)

Neutral citation: [2023] KETAT 548 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1189 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, E Ng'ang'a, AK Kiprotich & B Gitari, Members

October 13, 2023

Between

Baker Hughes Eho Limited (Kenya Branch)

Appellant

and

The Commissioner of Legal Services and Board Coordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act of the laws of Kenya, and whose principal activity is the provision of upstream services to contractors in the oil and gas industry.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, and is mandated with the responsibility for the assessment, collection, receipting and accounting for all tax revenue as an agent of the Government of Kenya. The Respondent is also mandated with the responsibility for the administration and enforcement of the statutes set out in the schedule of the Act.

3. The Respondent undertook an audit of the Appellant‗s operations for the period covering 2015-2017 to verify the correctness of the self-assessment returns filed by the Appellant. It communicated its preliminary findings vide a letter dated 25th November 2021, which the Appellant responded to on 8th December 2021.

4. The Respondent by a letter dated 4th February 2022 issued an assessment of Corporation and Withholding Tax (WHT) of Kshs 791,344,909. 00 and Kshs 234,871,216. 00 respectively.

5. The Appellant, aggrieved by the said assessment, lodged its notice of Objection on 27th May 2022, and the Respondent issued its Objection Decision on 30th August 2022 confirming the assessment.

6. Aggrieved by the Respondent‗s objection decision, the Appellant lodged its Notice of Appeal dated the 29th September 2022 at the Tribunal.

The Appeal 7. The Appellant filed its Memorandum of Appeal on the 13th October 2022 wherein it raised the following grounds of appeal:a.That the Respondent erred in law and fact by adjusting the deductible lease rental expense without considering the existing transfer methodology and operation model of the Appellant.b.That the Respondent erred in law and fact by adjusting the Wear and tear allowance claimed by the Appellant based on incorrect values and analysis contrary to what was contained in the financial statements.c.That the Respondent erred in law and fact by demanding additional corporate income tax on the disposal of used assets by employing a flawed transfer pricing adjustment.d.That the Respondent erred in law and fact by disallowing the cost of scrap assets written off, which has already been accorded the correct tax treatment by the Appellant, resulting in double taxation.e.That the Respondent erred in law and fact by disallowing deductible business expenses related to stock obsolescence and bad debts provisions despite the Appellant providing the necessary supporting documentation and explanations.f.That the Respondent erred in fact and law by disallowing Value Added Tax (VAT) expensed by the Appellant on legitimate business costs based on a misinterpretation of deductibility provisions under the Income Tax Act.g.That the Respondent erred in law and fact by disallowing management fees paid by the Appellant without fully taking into consideration all the documentation and explanations provided supporting their deductibility.h.That the Respondent erred in law and fact by levying additional tax on foreign gains and losses reported in the Appellant‘s financial statements without fully taking into consideration all the documentation and explanations provided.i.That the respondent erred in law and fact by imposing withholding tax on deemed interest (arising from intra-group advances) based on a misinterpretation of deeming provisions contained in the Income Tax Act.j.That the Respondent misapplied the law and in so doing demanded tax that was excessive, prejudicial, punitive and beyond the ability of the Appellant to pay contrary to the cannons of taxation.

Appellant's Case 8. The Appellant supported its case with its statement of Facts dated 13th October 2022 and filed on the same day and Written Submissions dated 3rd April 2023 and filed on the same day.

9. The Appellant raised several issues for determination which were discussed under the following broad headings:

a. Income Tax i. Overstated inter-company rental costs. 10. The Appellant stated as follows under this head:a.That it assumed a useful life of 7 years in determining the monthly rental payable on the tools, and that this practice was consistent with the industry practice for such items.b.That the information requested by the Respondent, namely its Financial Statements and invoices for the purchase of equipment were not in its custody and they were hence under no obligation to provide them. It invoked Section 59(1) (a) of the Tax Procedures Act, 2015. (―TPA‖) to support this argument.c.That its Financial Statements include financial information/data across all its business segments which did not present separate segmented data on the inter-company sub-leasing activities and therefore the data relied on by the Respondent to arrive at its assessment conclusion was erroneous.d.That the tools under its business are owned by it and not leased from its mother company. It was thus its view that the assumption by the Respondent that the said tools were under lease resulting in an adjustment of Kshs 652,656,188 was disjointed, flawed, and prejudicial and should be disregarded.

ii. Unsupported claim of wear and tear allowance on capital assets. 11. The Appellant averred under this heading that it provided a reconciliation of the alleged variances in its CIT returns with those in its audited financial Statements and claimed that the Appellant had not reconciled the figures in the two documents.

12. It argued that these variances comprised transfers from work in progress as well as capital assets which it had expensed amounting to Kshs 132,692,224 in 2015 and Kshs 1,169,022 in 2016.

iii. Wear and tear allowance on lease rental assets 13. The Appellant argued that although assets falling under General Ledger (―GL‖) Codes 184000 and 184530 were referenced as Rental Assets and lease Assets respectively in their chart of accounts, the two GL Codes are used to record assets purchased from related parties and that these assets were not on the lease. It provided a sample purchase invoice to support its claim that the WHT amounting to KES 61,581,152, KES 5,011,693 and KES 8,211,369 was erroneously and prejudicially disallowed by the Respondent.

iv. Gain/loss from disposal of assets 14. The argument of the Appellant on the assessment of gains and losses of assets was as hereunder:-a.That the Respondent erred in relying on a third-party benchmark of companies in the oil and gas industry to determine the value or cost of the equipment under consideration because such data does not exist in public sources.b.That it was of the view that a transfer pricing methodology consistent with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (―OECD Guidelines‖) should have been adopted by the Appellant to ensure a fair return.c.That the Respondent should have adopted this OECD methodology while relying on the net book values of these assets/tools and the data maintained in its SAP system which it had shared as a screenshot with the Respondent.

v. Disallowed costs on scrap assets written off 15. The Appellant affirmed that it provided documents to support the scrap asset write-off amounting to KES 24,100,409 and KES 51,400,181 for the 2015 and 2016 periods respectively and that adjustment made to compute the additional CIT in those periods was erroneous and unlawful as it amounted to double taxation.

vi. Provision of obsolescence and bad debts. a. Provision for obsolescence 16. Under this heading the Appellant stated that the Respondent acted in error to disallow KES 93,134,318, KES 18,872,413 and KES 7,597,815 relating to the 2015, 2016 and 2017 periods respectively on the wrong assumption that the total figure in the Appellant‘s GL 500900 related to provisions.

17. It also stated that it valued and scrapped its inventory in 2015 and 2016 because of the global recession and as guided by its internal policy. It shared emails, sample photos and serial numbers of obsolete assets to prove its point.

18. The Appellant asserted that the Respondent failed to consider these documents and explanations when it confirmed the additional assessment on account of the obsolete inventory.

b. Provision for bad debts 19. The Appellant stated that the decision of the Respondent to disallow Kshs 8,774,357, Kshs 9,588,267 and Kshs 81,501,580 for the 2015, 2016 and 2017 periods respectively relating to the decrease in bad debts provisions was erroneous because the law provides for such bad debts provisions and its bad debts were rightly classified under its accounting code GL Code 503000.

20. It explained that its bad debts provision arose from the sale of goods business line as shown in its CIT computation for 2014 and the decrease in the provision of bad debts

vii. Expensed VAT and WHT penalties 21. The Appellant stated that the argument by the Respondent that the deductibility of the VAT by the Appellant contravened Section 16(2) (c) of the ITA was a gross misinterpretation of the law because input VAT incurred by a business is considered a tax-deductible expense which should be allowed as was stated in the case of Shreeji Enterprises (k) Ltd v Commissioner of Investigations and Enforcement 58 & 186 of 2019.

22. It stated further that the fact that the input VAT had exceeded the 6-month threshold due to delays in billing by suppliers and the Appellant‘s payment processes is irrelevant for purposes of determining CIT deductibility.

viii. Disallowed management fees 23. The Appellant stated that the amount captured in its CIT return for 2015 of KES 943,460,621 did not relate to any management fees received. It was an input of several expense items which arose at the time the CIT return was being populated. And that it did not receive any management support services from Baker Hughes SAS or indeed any related party during the review period.

ix. Expensed Forex gains and losses. 24. The Appellant stated that:a.It sometimes incurs loss or gain when customers settle invoices using local currency, and that this was a genuine business expense allowed under Section 4A (2) of the ITA, and therefore tax deductible.b.It recorded all its unrealized forex gains/losses in separate GL Codes which it adjusted accordingly in the CIT computations and returns. It opined that it was therefore not reasonable or practicable for the Respondent to request details on a transaction-by-transaction basis because its data system was automated.c.The adjustment by the Respondent in the Assessment Letter had the effect of taxing the unrealised forex losses on third-party transactions twice, and yet these had already been accorded the correct tax treatment in its CIT returns.d.Its unrealised exchange gains /losses on related party transactions were inadvertently excluded in the determination of the CIT position during the Audit Period. It thus agreed to the additional CIT calculated on account of this portion of the forex gains/losses as summarized below;Forex gains/losses(Related Parties) 2015 (KES) 2016 (KES) 2017 (KES)

Net FX Loss Adjustment 387,563,839 1,036,875 874,941e.It made a mistake in computing the adjusted tax loss position for the 2015 period when it included the 2014 tax losses (generated from the Sale of Goods business) amounting to KES 139,699,789. Consequently, the differential tax adjustment arising from this error as shown in in its CIT computations and returns should be adjusted by vacating Kshs 11,957,091 thereof.

b) Withholding Tax Deemed interest arising from advances from related parties. 25. The Appellant stated that it was registered in Kenya on the 9th September 2011 and was issued with a certificate of compliance thereof. Hence, it was its view that it does not qualify to be a resident as defined in the ITA.

26. It was therefore its position that Section 16(2) (j) of the ITA does not apply to it and the Respondent therefore erred in confirming WHT on deemed interests amounting to Kshs 234,871,216.

27. It was its alternative view that reference to Section 16(2) (j) of the ITA by the Respondent in determining the additional tax payable by the Appellant was erroneous, as this section deals with expenses deemed as non- deductible by the ITA.

28. The Appellant concluded that the Respondent misinterpreted the law in determining the additional WHT.

Appellant‘s Prayer 29. Based on the foregoing the Appellant‘s prayer to the Tribunal was for orders that:a.That the Respondent‘s decision made on 30th August 2022 subjecting the Appellant to pay Corporation Income Tax and Withholding tax amounting to KES 1,026,216,124 be dismissed or adjusted in a manner reasonable to the Honourable Tribunal.b.This appeal be allowed.c.The costs of and incidental to this appeal be awarded to the Appellant.

Respondents Case 30. In its response to the Appellant‘s case, the Respondent grounded its response on its Statement of Facts dated 11th November 2022 and filed on 14th November 2022 and Written submissions dated 21st April 2022 and filed on the 27th April 2023.

31. The Respondent adopted the issues identified by the Appellant as issues for determination and thereafter proceeded to respond as follows:-

32. It stated that despite holding several meetings with the Appellant to discuss the issue of transfer pricing, and even after guiding it on how to respond, the Appellant failed to:i.Provide Invoices issued by the manufacturer of equipment and tools.ii.Provide the basis for applying a 7-year useful life of assets.iii.Provide an explanation for varying benchmarking results conducted by the Appellant.iv.Provide the financial statements of the Dutch affiliate to support the margin costs and use of benchmarks.v.Prove that its FAR analysis which had indicated that the Appellant bore most functions and risks was defective in any way.

33. It was its view that the tax burden in this appeal lay with the Appellant and failure to provide primary documents left it with no option other than to confirm its Assessment.

34. On the issue of adjustment of the wear and tear allowance claimed by the Appellant, the Respondent stated that the following documents were requested from the Appellant:i.The complete schedule of assets purchased by Baker Hughes and those leased during the period under review i.e. opening balance breakdown from January 2015. ii.The breakdown of the additions (segmented into the leased assets and those purchased by the appellant) and breakdown during the period of the audit and breakdown of the disposals (also segmented into the leased assets and the purchased assets) including tax exemption letter used when importing the assets into the country.iii.The import documents for the assets brought into the country as lease assets and those purchased including invoices of purchases for the disposals.iv.Export documents including invoices for sale.

35. It stated that the absence of these documents and the tax exemption documents, import documents, invoices and export documents made it difficult for it to verify the accuracy and correctness of the WHT claims made by the Appellant.

36. It was also of the view that:a.The Appellant‘s failure to provide segmented assets meant that it would make double claims on the leased and purchased assets for the WHT allowances.b.The lack of supporting documents made it impossible to verify the written-down values of these assets considering that no supporting information such as purchase of invoices or customs entries was provided.

37. On the issue of disallowing the cost of scrap assets written off, the Respondent affirmed that the Appellant did not :a.Provide documents to support the expensed assets written off for years 2015 and 2016 amounting to Kshs. 24,100,409 and Kshs 51,400,181. b.Provide the basis for the computations and the policy in place for write-offs was not provided.c.Produce the required documents to support their claims.

38. The Respondent further stated that the Appellant‘s asset count reconciliation reserve formed the greater part of the value in its ledger. No information was provided on how this computation was done and no policy for handling write-offs from reserve accounts was provided.

39. It submitted that in the circumstances and the absence of relevant information, it had no option but to confirm the assessment and disallow the costs which were capital in nature and which ought to have been claimed under the provisions of the Second Schedule of Paragraph 7 of the ITA.

40. It thus disallowed the amounts under section 16 of the ITA because they were not wholly and exclusively used in the generation of the revenues for the year under review.

41. On whether it correctly disallowed deductible business expenses related to stock obsolescence and bad debts the Respondent stated that:a.Without the documents, it was impossible to confirm the decrease or increase of the provisions that were added back into the tax computation.b.The general provisions for bad debts did not meet the conditions set out under Legal Notice No. 37 of 2011 and section 15 of the Income Tax Act.

42. It further stated that in the year 2014, oil and gas subcontractors were subjected to a final tax of 5. 625% and as such the movement was not subjected to tax in the tax computation of 2014.

43. On whether it correctly disallowed Value Added Tax (VAT) expensed claimed by the Appellant, the Respondent stated that:a.Section 16(2) (c) of the Income Tax Act does not allow taxes as an expense.b.A detailed breakdown of the said expenses together with their primary supporting evidence was not provided.

44. On whether it correctly disallowed the claimed management fees, the Respondent stated that the Appellant provided the support services agreement between it and Baker Hughes SAS and Bakers Hughes EHO Limited that showed the services chargeable under the intercompany account. It however failed to provide the documents to show that:i.There was need for the service.ii.The service was rendered/used.iii.The service was of value to the recipientiv.There was an arm‘s length charge for the service.

45. It relied on the OECD guidelines on Transfer Pricing which states that for the justification of an intra-group service, there has to be evidence of the actual provision of the service, determination of the value of the service actually rendered and whether the recipient entity needed the service.

46. On whether it correctly demanded additional tax on foreign exchange gains and losses claimed by the Appellant, the Respondent stated that the expenses were disallowed because the ledgers provided on forex gains/losses did not have any entries on the description of the transaction, the date of the translation, rates applied among other important details.

47. The Respondent also stated that the forex transaction by the Appellant did not meet the threshold set in sections 4A (2) (I) and 4A (3) of the ITA and it could thus not be sustained.

48. It was its position that this lack of documentation made it difficult for it to verify the particular transaction on which the forex gains/losses applied, the date of the transaction and the particular invoice /document number.

49. On whether it correctly disallowed additional corporate income tax on the disposal of used assets, the Respondent stated that the original Transfer Pricing policy provided did not include the said transactions as one of the related party transactions nor was any benchmarking performed to demonstrate how the arm‘s length principle was adhered to in the transactions. The Appellant did not also share its invoices or demonstrate how it derived the original Local Statutory costs and the purchase cost of assets.

50. Without this information, the Respondent stated that it was unable to verify the margins earned based on the original purchase values. It was also its view that sale of assets is often affected by several factors including the age of the asset, the condition/state of the asset, the current market value of the same asset and location of sale among other factors.

51. Its view was that none of these issues were considered in these sales that were mainly done between related parties. Therefore, its position was that benchmarking analysis was the most appropriate method to determine an arm‘s length transaction between the parties.

52. On whether it correctly imposed withholding tax on deemed interest it argued that the transaction relating to financial advances from a related entity did not conform to the conditions of a conventional arm‘s length transaction. In the premises, it took the position that Interest that ought to have accrued on these advances was therefore subject to withholding tax.

53. The Respondent submitted that in the absence of sufficient supporting documents it was forced to rely on the little available information provided by the Appellant and it also used its best judgment to raise the assessment. It supported this position with the following cases:a.TAT No. 555 of 2021: Atronix Ltd vs. Commissioner of Domestic Taxesb.HCITA No. 121 of 2021: Commissioner of Domestic Taxes vs. Metoxide Africa Ltdc.Republic vs Kenya Revenue Authority, Proto Energy Limited(exparte) (Judicial Review Application E023 of 2021) [2022] KEHC 5 (KLR) (24thJanaury 2022)

Respondent's Prayer 54. Based on the foregoing submissions the Respondent's prayer to this Tribunal was for orders that, it:a.Dismiss the appeal with costsb.Uphold the Objection Decision dated 30th August 2022

Issues for Determination 55. The Tribunal having carefully considered the pleadings and submissions filed by the parties is of the considered view that the Appeal distils into a single issue for determination:a.Whether the Appellant‘s assessment of Income tax and WHT was justified.

Analysis And Determination Whether the Appellant‘s assessment of Income tax and WHT was justified. 56. The parties argued the issue of whether the income tax assessment by the Respondent was justified under eight broad sub-headings. The Tribunal has hereby adopted these sub-headings and it shall issue its determination as hereunder:

i) Overstated Inter-company Rental Costs 57. The point of divergence on this issue was the method adopted by the Appellant in determining the monthly rental value of the tools and whether these tools were owned and or leased by the Appellant.

58. When it was requested for documents to prove ownership, the Appellant argued that the requested documents, purchase invoices and financial statements were not in its custody and it was also under no obligation to provide them. It invoked Section 59(1) (a) of the Tax Procedures Act, 2015. (―TPA‖) to support this argument.

59. Section 59(1)(a) of the TPA states as follows regarding production of documents:(1)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 authorized 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

60. This Section of the law is clear that a taxpayer would only be required to produce documents that are in its custody. This means that a taxpayer would be required to have and produce documents that it is reasonably expected to have regarding a transaction in question.

61. Section 59(1) (a) of the TPA is not a carte blanch for the Appellant to pick and choose which documents it has and which ones it does not have. Indeed Section 23(1) (b) of the TPA Act dictates that the Appellant is required to keep records of all its transactions. It provides as follows:A person shall—(a)…b.maintain any document required under tax law to enable the person's tax liability to be readily ascertained;‖

62. The Appellant, cannot therefore run away from its statutory responsibility when it is requested to provide documents that support its transactions.

63. The Respondent‘s request for financial statements, purchase invoices and any other relevant document that could help it determine whether the tools in question had been purchased and or were on lease was reasonable and justified in the circumstances. The Appellant should have provided these documents and or provided a plausible reason why it could not produce them. Stating that the documents were not in its possession was not a plausible reason.

64. The Respondent in the circumstances did not err when it used its best judgement and the documents available to it under section 31(1) of the TPA to it issued its assessment under this head.

65. Section 31(1) of the TPA states as follows concerning the application of the Commissioner‘s best judgment when amending assessments:(1)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,

66. This position was affirmed in Commissioner of Domestic Taxes v Altech Stream (Ea) Limited [2021] eKLR where it was held that:Both sections 29 (1) and 31 (1) of the Tax Procedures Act allow the appellant, to make an assessment based on such information as may be available and to the best of his judgment

67. In the present case, crucial documents which should have been in the possession of the Appellant and which may have helped the Respondent to reconsider the Objection were not provided. In the circumstances, the Respondent was justified in confirming the assessment under this head.

ii. Unsupported claim of wear and tear allowance on capital assets. 68. The Appellant averred that it was taxed in error under this heading because the sums assessed related to transfer from work in progress as well as capital assets which it had expensed in 2016.

69. The Respondent stated that it had requested invoices, export documents, tax exemption certificates and other related documents to help it verify the accuracy and correctness of the WHT claims made by the Appellant. However, these documents were not provided.

70. The Tribunal has gleaned through the Appellant‘s pleadings and it has not found any evidence to show that these documents were provided or a reason for such failure to provide them was ever proffered. This omission or failure contravened Section 23(1) (b) of the TPA which requires the Appellant to keep such records.

71. In the circumstances, the Tribunal finds and holds that Respondent was justified to use its best judgment and available evidence to confirm the assessment under this head.

iii. Wear and tear allowance on lease rental assets 72. The Appellant argued that the assets falling under the General Ledger (―GL‖) Codes 184000 and 184530 were purchased assets. It provided a sample purchase invoice to support its claim that these assets were not on lease and therefore its withholding tax claim should have been allowed.

73. The Respondent submitted that the Appellant did not provide purchase documents supporting each claim. It instead presented a few sample invoices and proposed to apply these invoices to all the transactions.

74. Section 30 of the TAT Act provides as follows regarding the burden of proof in tax cases:In a proceeding before the Tribunal, the appellant has the burden of proving—a.where an appeal relates to an assessment, that the assessment is excessive; orb.in any other case, that the tax decision should not have been made or should have been made differently.

75. It thus follows that the Appellant was required to provide specific evidence to show and prove that the assessment related to wear and tear allowances on rental assets was excessive or that it should have been made differently.

76. The evidence to displace the specific assessment that was raised by the Respondent should have related to that assessment and should have addressed every aspect related to that assessment. Therefore, an admission by the Appellant that it only provided sample invoices is not sufficient to displace this burden.

77. The burden placed on it required the Appellant to provide specific documents or evidence addressing each bit of the assessment related to the wear and tear allowances on rental and or leased assets. The admission by the Appellant that it only provided sample invoices is an admission that it indeed never provided the evidence and or documents required to displace the veracity of this assessment.

78. In the circumstances, the Respondent, therefore, did not err in its assessment under this heading.

iv. Disallowed Gain/loss from disposal of assets 79. The crux of the Appellant's argument was that the Respondent adopted the wrong methodology under transfer pricing to determine the value or cost of the equipment under consideration.

80. The Respondent asserted that it used the benchmarking method by making comparisons with other players in the same industry that buy and sell similar equipment.

81. The Appellant however argued that the companies picked by the Respondent dealt in buying and selling new equipment while the equipment under consideration related to used and or depreciation assets.

82. The transactional net margin method, also known as the comparable profits method is the most commonly used method in transfer pricing and indeed it was the method adopted by the Respondent herein.

83. However, the use of this method requires that the samples picked for comparison must be similar or be dealing in the same trade under the same circumstances as the taxpayer under consideration.

84. In this Appeal, it is clear that the Respondent picked entities in the same industry that were dealing with new products while the Appellant was dealing in used or depreciated products. Therefore, this was not a like-for- like comparison. The Respondent was thus obliged to obtain other companies dealing in used or depreciated assets for its comparison as is envisaged under the transactional net margin method.

85. The method used by the appellant in determine the gains /loss of the assets was also flawed to the extent that the Appellant did not explain how it carried out its benchmarking exercise to show that its preferred methodology was consistent with the arm‘s length principle.

86. Based on its finding above, the Tribunal hereby allows the Appellant‗s appeal under this head and it directs that the Appellant to redo the exercise using the correct comparison model.

v. Disallowed costs on scrap assets written off 87. The Appellant stated under this head that it supplied the documents to support the costs of scrap assets written off. it stated that it relied on its internal policies and a valuation exercise which found some inventories to be obsolete and hence the decision to write them off.

88. The Respondent argued that crucial documents like policy on write-offs and documents to support the workings arrived at in the Ledger were not supplied. It further submitted that the write-off of capital assets is considered to be capital in nature and must therefore be claimed within the provisions of Paragraph 7 of the 2nd Schedule of the ITA and Section 15 of the ITA.

89. It is clear from the evidence that the Appellant's internal policies and valuation report informed its decision to write off the debts. The Appellant however opted only to share the CIT extracts to support its argument on debt write-offs. No reason was provided as to why the internal policies and valuation report were not shared with the Respondent.

90. In the circumstances, the Respondent was therefore justified to arrive at its conclusion based on the documents that were provided. Its decision under this head was thus not in error.

vi. Provision of obsolescence 91. Under this heading the Appellant stated that the Respondent acted in error to disallow Kshs 93,134,318, Kshs 18,872,413 and Kshs 7,597,815 relating to 2015, 2016 and 2017 on the wrong assumption that they related to provisions when they related to stock obsolescence which arose from global rescission. Its position was that the provisions for stock obsolescence were guided by its internal policies.

92. The Respondent argued that it rejected these provisions because of a lack of supply of supporting documents and the relevant policy relied on.

93. Having invoked the fact it relied on its policy to justify the provisions on stock obsolence, the Appellant ought to have shared this policy with the Respondent to help it verify the model used to work out these provisions. This failure or refusal to share the Obsolescence Policy was fatal. It thus left the Respondent with no option other than to rely on its best judgment and the documents availed to it. The Respondent was thus justified to affirm its assessment as it was not possible for it to determine how the Appellant had done its tax computations.

Vii. Provision for bad debts 94. The Appellant stated that it made its provisions for bad debts based on its bad debts ledger and its tax computations. On its part the Respondent stated that the said provisions were disallowed because they did not confirm to Section 16 of the ITA and the Commissioner‘s Guidelines on Allowability of Bad debts published under Legal Notice No 35 and 37 of 2011.

95. Legal notice No. 37, titled Guidelines on Allowability of Bad Debts provides as follows regarding provisions for bad debts:A debt shall be considered to have become bad if it is proved to the satisfaction of the Commissioner to have become uncollectable after all reasonable steps have been taken to collect it.1. A debt shall be deemed to have become uncollectable under paragraph (1) wherea.the creditor loses the contractual right that comprises the debt through a court order;b.no form of security or collateral is realisable whether partially or in full;c.the securities or collateral have been realized but the proceeds fail to cover the entire debt;d.the debtor is adjudged insolvent or bankrupt by a court of law;e.the costs of recovering the debt exceeds the debt itself; or (1) efforts to collect.

96. In this Appeal, the Appellant has not attempted to prove and or bring itself and or the alleged debts that have become bad within the ambit of Rule 2(a) to (e) above. It has merely stated that the debts had become bad and the same had been reflected in its CIT computations which it shared with the Respondent.

97. The Respondent therefore did not err in disallowing the Appellant's provisions for bad debts as the said debts were not proved to be bad and non-collectable as is provided for in Rule 2(a) to (e) of the Legal notice No 37, titled Guidelines on Allowability of Bad Debts.

Viii. Expensed VAT and WHT penalties 98. The Respondent stated that the input VAT incurred by its business was deductible expense as stated in the case of Shreeji Enterprises (k) Ltd v Commissioner of Investigations and Enforcement 58 & 186 of 2019.

99. The Appellant on its part stated that the deductibility of the VAT by the Appellant contravened Section 16(2) (c) of the ITA which provides that taxes are not allowed as expenses. It was also its position that sufficient documents were not provided to support a breakdown of the said expenses.

100. Section 16(2)(c) of the ITA provides as follows regarding deductions not allowed:(2)Notwithstanding any other provision of this Act, no deduction shall be allowed in respect of -a.…b.…c.income tax or tax of a similar nature including compensating tax paid on income; but, save in the case of foreign tax in respect of which a claim is made under section 41, a deduction shall be allowed in respect of income tax or tax of a similar nature paid on income which is charged to tax in a country outside Kenya to the extent to which that tax is payable in respect of and is paid out of income deemed to have accrued in or to have been derived from Kenya;

101. It is clear from a plain reading of Section 16(2) (c) of the ITA that deductions are not allowed with respect to income tax and tax of a similar nature. VAT has not been mentioned under this section of the law and therefore, VAT deductions are not allowable under Section 16(2) (c) as averred by the Respondent.

102. The preamble to the VAT provides as follows regarding the imposition of VAT;An Act of Parliament to review and update the law relating to value- added tax; to provide for the imposition of value-added tax on supplies made in, or imported into Kenya, and for connected purposes ―

103. The plain reading of this preamble makes it clear that all issues related or connected to the imposition of VAT should be handled within the ambit of the VAT Act. The Appellant was thus obliged to claim its time-barred Input VAT under section 16(3) of the VAT Act. The same cannot be claimed as an expense under the ITA.

104. Based on the foregoing, the Respondent‘s decision to disallow the time- barred VAT input as an allowable expense under the ITA was justified.

Ix. Disallowed management fees 105. The Appellant stated that did not receive any management support services from Baker Hughes SAS or indeed any related party during the review period and therefore, the amount captured in its CIT return for 2015 of KES 943,460,621 did not relate to any management fees received. It was instead an input of several expense items which arose at the time the CIT return was being populated.

106. The Respondent stated that these fees related to management support services provided by Baker Hughes SAS and they were disallowed for lack of supporting documents.

107. The Tribunal has gleaned through the document provided by the Appellant to support its claim, and it notes as follows;a.Its extracts of GL Code840000 show:i.That administration fees were charged to the Appellant for payroll services.ii.The audit fees for Baker Hughes Malaysia were paid by the Appellant.iii.Kshs 905,709. 57 was paid for global business support services.b.Its CIT extracts have 16 items that have been described/titled as management fees.

108. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, January 2022, provides as follows regarding intra-group transfers:There are two issues in the analysis of transfer pricing for intra-group services. One issue is whether intra-group services have been provided. The other issue is what the intra-group charge for such services for tax purposes should be in accordance with the arm‘s length principle.

109. This documentation as supplied by the Appellant does not:a.Show a confirmation that the said services were provided.b.The value of the servicec.The basis upon which the value of the transaction was arrived at.d.Show whether the recipient needed the servicese.Evidence of request for that service and its justification.

110. In essence, the documents provided by the Appellant did not meet the OECD guidelines of Transfer Pricing. The Respondent was therefore justified in disallowing the amounts claimed as inter-company management fees in the period under review.

x. Expensed Forex gains and losses. 111. The Appellant stated that it inadvertently excluded unrealised gains/ losses on related party transactions in its CIT in the period under review.

112. The Respondent stated that the ledger provided did not include the description of the transaction, date of translation and rates applied. It was also its view that the Appellant's accounting system was operating on an accrual basis resulting in a constant balance in the forex gain or loss account.

113. Section 4A(2) of the ITA provides as follows regarding income from businesses where foreign exchange gain or loss is realized(2)The amount of foreign exchange gain or loss shall be calculated in accordance with the difference between (a times r1) and (a times r2) where –ais the amount of foreign currency received, paid or otherwise computed with respect to a foreign currency asset or liability in the transaction in which the foreign exchange gain or loss is realized;r1is the applicable rate of exchange for that foreign currency ("a") at the date of the transaction in which the foreign exchange gain or loss is realized.r2is the applicable rate of exchange for that foreign currency ("a") at the date on which the foreign currency asset or liability was obtained or established or on the 30th December 1988, whichever date is the latter.

114. It follows therefore that the Respondent would have been in a better position to calculate and re-consider its assessment disallowing the Appellant‘s gains or losses under this heading, only if it was provided with documents containing the following information as decreed under Section 4A(2) of the ITA:i.The rate of exchange for that foreign currency.ii.The date of the transaction in which the foreign exchange gain or loss is realized.iii.The applicable rate of exchange for that foreign currency at the date on which the foreign currency asset or liability was obtained or established.

115. Failure to provide these documents meant that the Respondent did not have the requisite information and documents to enable calculate the amount of or value of foreign exchange gain or loss as is envisaged in Section 4A(2) of the ITA. In the circumstances, the Respondent was justified to use the information at its disposal in disallowing the forex exchange gains and losses claimed by the Appellant.

xi. Withholding Tax on Deemed interest arising from advances from related parties. 116. The Appellant stated that it was registered in Kenya and was issued with a certificate of compliance thereof. It was hence its position that it does not qualify to be a resident as defined in the ITA and Section 16(2) (j) of the ITA does not apply to it.

117. The Respondent argued that the transactions in question were related party transactions which required the Appellant to supply its Transfer Pricing Policy, source of funds and repayment plan. It affirmed that its decision to use the outstanding balance to compute deemed interests on the amounts advanced in the period under review was justified.

118. The issue herein is the taxability of deemed interests which is defined in Section 2 of the ITA as follows;“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; ―

119. A resident for the purposes of determining whether WHT could be applied to the said deemed interest is defined as follows in Section 2 of the ITA:“resident", when applied in relation -(b)to a body of persons, means -i.that the body is a company incorporated under a law of Kenya; orii.that the management and control of the affairs of the body was exercised in Kenya in a particular year of income under consideration; oriii.that the body has been declared by the Minister by notice in the Gazette to be resident in Kenya for any year of income;

120. The question that arises herein is whether the Appellant was a resident in Kenya who obtained loans at favorable interest rates from a non-resident.

121. Section 365 of the Companies Act provides as follows regarding foreign companies established or incorporated in Kenya:Provisions as to the Establishment of Place of Business in Kenya(1)Sections 366 to 375 shall apply to all foreign companies, that is to say, companies incorporated outside Kenya which, after the appointed day, establish a place of business within Kenya and companies incorporated outside Kenya which have, before the appointed day, established a place of business within Kenya and continue to have a place of business within Kenya on and after the appointed day:‖

122. The Appellant herein was incorporated in Kenya under Section 366 of the Companies Act and it was issued with a certificate of Compliance dated 9th September 2011. On the face of it, it is a company that has been incorporated under a law in Kenya (the Companies Act) which qualifies it to be a resident of Kenya.

123. It is also not in dispute that it obtained unsecured, interest-free loans which did not have fixed repayment terms from affiliated subsidiaries. These subsidiaries were all non-resident companies.

124. Based on the above analysis the Tribunal concludes that the Appellant which is a resident company indeed received interest-free loans with no repayment period from its affiliated subsidiaries. In the circumstances, the Tribunal holds that the Respondent did not fall into error when it computed deemed interests on the amounts advanced and further subjecting it to WHT.

Final Decision 125. Given the foregoing, the Tribunal finds that the Appeal succeeds partially and accordingly makes the following Orders: -a.The Appeal be and is hereby partially allowed.b.The Respondent‘s Objection decision dated 30th August 2022 be and is varied in the following terms:i.The decision disallowing unjustified assignment of tested party be and is hereby upheld.ii.The decision disallowing claims of wear and tear on capital assets be and is hereby upheld.iii.The decision disallowing claims on wear and tear on rental assets capitalised be and is hereby upheld.iv.The decision disallowing gains/losses arising from benchmarking and disposal of the assets under the arm‘s length principle be and is hereby set aside.v.The Respondent is directed to carry out a fresh benchmark analysis using the correct comparison model.vi.The decision disallowing expensed scrap assets written off be and is hereby upheld.vii.The decision disallowing write off of obsolete inventory be and is hereby upheld.viii.The decision disallowing provision for bad debts be and is hereby upheld.ix.The decision disallowing expensed VAT that is time barred and withholding tax penalties be and is hereby upheld.x.The decision disallowing management fees provided by a related company be and is hereby upheld.xi.The decision disallowing claims of deemed interest arising from advances from related parties be and is hereby upheld.c.Each party is to bear its own costs.

126. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 13TH DAY OF OCTOBER, 2023ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY OLUOCH - MEMBEREUNICE NG‘ANG‘A - MEMBERABRAHAM K. KIPROTICH - MEMBERBERNADETTE GITARI - MEMBER