[2024] KETAT 1342 (KLR)

Berry Hill Company Limited v Commissioner of Legal Services And Board Coordination (Tax Appeal E609 of 2023) [2024] KETAT 1342 (KLR) (20 September 2024) (Judgment)

Neutral citation: [2024] KETAT 1342 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E609 of 2023

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

September 20, 2024

Between

Berry Hill Company Limited

Appellant

and

Commissioner of Legal Services And Board Coordination

Respondent

Judgment

Background 1. The Appellant is a limited company incorporated in Kenya whose business interest is in human resources consultancy, management and training established in response to human resources challenges faced by many organizations.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya. Under Section 5(1), the Respondent is an agency of the Government for the collection and receipt of all tax revenue. Further under Section 5(2) with respect to the performance of its functions under subsection (1), it is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent conducted a verification exercise on the Appellant with a view to establishing the accuracy of the Appellant’s returns. The exercise revealed that purchases claimed for the months of December 2021, January 2022, March 2022, April 2022, May 2022, June 2022 and July 2022 by Apex Steel Limited according to the availed data, were not declared as sales by the Appellant. Consequently, the Respondent issued additional assessments to the Appellant dated 12th May 2023.

4. The Appellant lodged an objection to the assessments on 13th June, 2023. Upon its consideration, the Respondent issued the objection decision dated 10th August, 2023 confirming taxes of Kshs. 5,392,742. 00.

5. Aggrieved by the Respondent’s decision, the Appellant lodged its Appeal vide a Notice of Appeal dated 31st August, 2023 and filed on 1st September 2023.

The Appeal 6. The Appeal is predicated on the following grounds as set out in the Memorandum of Appeal dated 18th September 2023 and filed on 21st September, 2024:i.That the Respondent erred in law and fact by treating payroll cost KShs. 28,735,535. 00 from Apex Steel Limited to the Company and subjecting to Value Added Tax of KShs. 4,598,721. 00 (“VAT”);ii.That the Respondent erred in fact and law by demanding penalties amounting to Kshs. 229,936. 00 based on an erroneous assessment; andiii.That the Respondent erred in law and fact by demanding late payment interest amounting to Kshs. 564,084. 00 based on an erroneous assessment.

Appellant’s Case 7. In support of the appeal, the Appellant filed its statement of facts dated 19th September 2023 on 21st September together with written submissions dated 9th May 2024 and filed 14th May, 2024.

8. The Appellant stated that the Respondent issued a Notice of Assessment to the Appellant dated 12th May 2023 for the period December 2021 to July 2022. In the assessment letter, the Respondent notified the Appellant of additional Value Added Tax (“VAT”), amounting to Kshs.5,392,742. 00 inclusive of penalties and interest.

9. The Respondent issued a notice of assessment based on the payroll expenditure of which VAT was not charged or claimed by the Company and Apex Steel Limited. It is the Appellant’s case that the fund request did not qualify as invoices as per Section 42(1) of the Value Added Tax, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”) or as simplified tax invoice under regulation 9.

10. According to the Appellant, the wrong/erroneous declaration of payroll cost by Apex Steel Limited under zero rated purchases for the purpose of filling VAT for the months of December 2021 to July 2022 was a trigger for the Respondent to assess the VAT of Kshs.5,392,742. 00 being principal plus penalties and interest.

11. The Appellant argued that the Respondent issued a notice of assessment without analysing the Income streams of the company for the same period and historical performance for 5 years (2022 — 2018). It stated that the 5 years turnovers combined for the year of incomes (2018 — 2022) of the company total to Kshs.26,826,038. 00 which is lower than the 5 months VAT tax assessed of Kshs. 28,735,535. 00 making the VAT assessed punitive, extremely high and unreasonable compared with the company historical performance.

12. The Appellant lodged its notice of objection against the Respondent's assessment vide a letter dated 13th June 2023 followed by the Respondent’s objection decision dated 10th August 2023.

13. In further support of the Appeal, the Appellant submitted that it raised two Vouchers to Apex Steel Limited, the Fund Request Notes and Management fees Note/Invoice. The Fund request Note was purely to obtain the funds to pay Staff in terms of salaries and statutory deductions and no VAT was charged on the cost. It submitted that the management fee invoices were for the revenue to the Appellant and VAT was charged (Output VAT) and Claimed (Input VAT) and Withholding taxes were deducted and paid to the Respondent.

14. The Appellant also submitted that it received funds, being Salaries and statutory deductions from Apex Steel Limited through a Funds request Note and Pay to staff at cost. Apex Steel Limited in turn, pays management fees to Appellant of which Value Added Tax (“VAT”) was charged and claimed and Withholding tax (“WHT”) was deducted on any amount above Kshs 24,000. 00 threshold in a given month.

15. The Appellant maintained that the assessed VAT was on salaries and statutory deductions for the months of December 2021 to July 2022 was wrongly declared/wrongly accounted for as Zero-rated sales in Section D of the VAT return of Apex Steel Limited hence the trigger for the assessment.

16. The Appellant asserted that no Value Added Tax (Output) was passed to the Company through the Fund Request Notes nor Value Added tax (Input) was claimed by Apex Steel Limited in compliance with VAT Act (Taxable supplies).

17. The Appellant submitted that the assessment was biased for the months (December 2021 – July 2022) as it represents VAT on salaries and statutory deductions on erroneous declaration by Apex Steel Limited through a return filling. According to the Appellant, the business model adopted by the Appellant was not different or unique but no VAT arose in the transaction for the staff cost. The Respondent had no loss of revenue/ taxes.

Appellant’s Prayers 18. The Appellant made the following prayers to the Tribunal:a.That this Appeal be allowed;b.The Respondent’s objection decision dated 10th August 2023 be set aside and annulled;c.The costs of and incidental to this Appeal be awarded to the Appellant; andd.Any other orders that the Tribunal may deem fit.

Respondent’s Case 19. In response to the Appeal, the Respondent filed its Statement of Facts dated 19th October 2023 on 24th October, 2023 together with its written submissions dated 22nd May 2024 and filed on 28th May, 2024.

20. The Respondent replied to the Appeal as hereunder:

Services offered by Apex Steel Limited 21. The Respondent’s case is that the crux of the appeal was in regard to the Appellant’s failure to charge VAT on sales/supply. It stated that Section 5 of the VAT Act requires a payment of VAT on taxable goods/ supplies.

22. The Respondent pleaded that it examined the contract between the Appellant and Apex Steel limited. The Respondent noted that it was a term of the agreement that the former was to render the human resources management services for a consideration as stipulated in the contract termed as ‘contractor’ and entitled to charge fee. The latter was to procure services from the contractor under terms and condition and make payment for the services consumed. The Respondent pleaded that it was thus right in concluding that the Appellant misdirected itself in relying on an unconventional provision of law in declaring sales.

Failure of the Appellant to avail documentation 23. On this issue, the Respondent stated that the crux of the Respondent’s decision is that it rejected the objection and upheld the assessment on the basis that the Appellant failed to avail documentation and reconciliation in support of the Objection.

24. It was the Respondent’s case that upon receiving the Appellant’s objection it requested the Appellant to avail documents supporting its grounds of objection. The Respondent asserted that it requested the following documents for verification but the same were not provided: contractual agreement between employer and employees,

copies of employee’s letter of offer for different cadres (skilled and unskilled),

copy of employees’ payroll, proof of payment for salary and wages.

25. The Respondent relied upon section 51(3) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”) which mandates the Appellant to support its objection with all relevant documents but the Appellant failed to fulfil this obligation.

26. It relied on the provisions of Section 24(2) of the TPA, to state that it is not bound by the tax return or information provided by the taxpayer and that the Respondent is empowered to assess any taxpayer based on information available. It relied on Section 31 of the TPA which allows the Respondent to make additional assessment based on the information placed before it using his best judgment.

27. The Respondent cited section 56(1) of the TPA which places the burden on the taxpayer to prove that a tax decision is incorrect. It further relied on Section 59 of the TPA that empowers the Respondent to seek any information relating to the ascertaining of the correct tax liability of an Appellant.

28. The Respondent pleaded that it was within its rights to request for documents from the Appellant and any other taxpayer where necessary. It asserted that in the absence of documents it was left with no option but to rely on information available to it. As such, it was the Respondent’s case that its decision was not flawed as alleged by the Appellant.

29. In further support of the Appeal, the Respondent through its written submissions identified two issues for determination namely; whether the Respondent’s assessments are justified and whether the Respondent’s objection decision was proper.

Whether the Respondent’s assessments are justified. 30. The Respondent submitted that the assessments were based on the failure of the Appellant to declare sales that Apex Steel Limited declared in its returns following a series of transactions between the two entities. The transactions ought to have been charged VAT on undeclared supplies/ sales as obtained.

31. The Respondent submitted that it is at liberty to make assessments based on information available to it accordance to Section 24(2) and section 31 of the Tax Procedures Act. The Respondent submitted that it relied on its best judgement based on information available to it in compliance with Section 31 of the Tax Procedures Act while raising the additional VAT assessment. In support of its assertions, the Respondent cited that case of Commissioner of Domestic Taxes v Altech Stream (Ea) Limited [2021] eKLR where the Court stated that Section 31 (1) of the Tax Procedures Act allows the Commissioner to make an assessment based on such information as may be available and to the best of his judgement.

32. The Responded relied on Section 13(1) of the VAT Act 2013 which provides that taxable value of supply is consideration for the supply. The Respondent also cited section 13(3) of the VAT Act which provides that the consideration for a supply shall be the total of the amount in money paid or payable, directly or indirectly, by any person for the supply. The Respondent also relied on section 13(5) of the VAT Act 2013 which stipulates as follows: “in calculating the value of any services for the purposes of subsection (1), there shall be included any incidental costs incurred by the supplier of the services in the course of making supply to the client.”

33. Based on the foregoing, the Respondent concluded that consideration for the supply of agents outsourcing services is the total of payroll costs (which are incidental costs as provided for under section 13 (5) of the VAT Act) and the management fees and thus ought to have charged VAT on both the fee (payroll) subject to the contract.

34. The Respondent submitted that taking into account the nature of services subject to the transaction between the Appellant and Apex Steel Limited it is expected that, the Company providing the labour service should charge VAT at the general rate on the gross amount invoiced (cost of labour plus any mark-up) subject to the VAT Act; and that the Company procuring the labour service may claim input charged on the services provided as a credit against it output VAT. The Respondent therefore, submitted that a review of the contract lays all the tax responsibility squarely on the Appellant.

Whether the Respondent’s objection decision was proper 35. The Respondent submitted that section 59 of the TPA empowers the Respondent to seek any information relating to the ascertaining of the correct tax liability of an Appellant. It also submitted that section 51 (3) of the TPA requires the Appellant to provide all the relevant documents relating to the objection but the Appellant failed to provide the documents. The Respondent relied on Court decision in Osho Drapers Limited versus Commissioner of Domestic Taxes [2022] eKLR, where it was held that Section 59 of the Tax Procedures Act empowers the Commissioner to request for more and additional information to satisfy himself on the taxable income declared.

36. The Respondent cited the case of Boleyn International Limited versus Commissioner of Investigations & Enforcement (Tax Appeal Tribunal No 55 of 2019) and Rongai Tiles and Sanitary Ware Limited versus Commissioner of Domestic Taxes (Tax Appeals Tribunal No 163 of 2017) where it was held that a notice of objection was valid if it complied with ssection 51 (3) of the TPA.

37. The Respondent submitted that it requested the Appellant to provide the Contractual agreement between the employer and employees; Copies of employees’ letters of offer for different cadres (both skilled and unskilled); Copy of payroll comprising of biodata, showing employees names, KRA PIN numbers, identity card numbers, telephone and address; Proof of payment of salary and wages and any other evidence in support of objection grounds but the Appellant failed to comply.

38. According to the Respondent, the Appellant only availed the following documents: letter objecting the assessment stating the business model of the company.

audited accounts for the assessed years.

bank statements.

invoices of the assessed periods.

and labour services agreement between the Appellant and Apex Steel Limited.

39. Whereas the Appellant contended that the variance noted was as a result of an erroneous declaration by Apex Steel Limited indicating that the amount received by the Appellant as Zero rated and that Apex Steel Limited did not declare input VAT on the debit notes and fund request noted; the Respondent submitted that upon review of the contract between the Appellant and Apex Steel limited, it was a term of the agreement that the former was to render the human resources management services for a consideration as stipulated in the contract termed as contractor and entitled to charge fee. According to the Respondent, the latter is procuring services from the contractor under terms and condition and make payment for the services consumed.

40. Consequently, the Respondent submitted that it was right in concluding that the Appellant misdirected himself in relying on an unconventional provision of law in declaring sales. Further, the Respondent submitted that owing to the failure of the Appellant to avail documentation and upon establishing that there was reliance on wrong law in declaring VAT, it was right to confirm the assessments raised.

Respondent’s Prayers: 41. The Respondent prayed for this Tribunal to find that its findings were proper and in conformity with the law and dismiss this Appeal with costs to the Respondent. It therefore urged the Tribunal to uphold the objection decision dated 10th August, 2023.

Issues For Determination 42. The Tribunal having considered the parties, pleadings, documents and written submissions, puts forth the following single issue for determination:Whether the Respondent’s assessments and the resultant objection decision are justified.

Analysis And Findings 43. The Tribunal will proceed to analyse the issue identified for determination as hereinunder:

Whether the Respondent’s assessments and the resultant objection decision are justified. 44. The Respondent carried out verification exercise which revealed that purchases claimed in diverse months being; December 2021, January 2022, March 2022, April 2022, May 2022, June 2022 and July 2022 by Apex Steel Limited were not declared as sales by the Appellant in view of the availed data. The Appellant asserted that the notice of assessment was based on the payroll expenditure on which VAT was not charged or claimed by the Appellant and Apex Steel Limited.

45. According to the Appellant, the Fund request did not qualify as invoices as per Sec 42(1), VAT Act or as simplified tax invoice under regulation 9. The Appellant further stated that the wrong or erroneous declaration of payroll cost by Apex Steel Limited under zero rated purchases for the purpose of filling VAT for the months of December 2021 to July 2022 was a trigger for the Respondent to assess the VAT of Kshs 5,392,742. 00, being principal tax together with penalties and interest.

46. From the availed invoices, the Tribunal noted that the Appellant was an independent contractor and retained by Apex Steel Limited to provide labour services in favour of Apex Steel Limited. The key question is whether the Appellant offered taxable supplies and if so, whether the Respondent’s assessments are justified.

47. Section 2(1) of the VAT Act defines "supply of services” to mean ‘’anything done that is not a supply of goods or money, including—a.the performance of services for another person;b.the grant, assignment, or surrender of any right;c.the making available of any facility or advantage; ord.The toleration of any situation or the refraining from the doing of any act.’’

48. The Tribunal notes that it was not disputed that that Apex Steel Limited outsourced the Appellant who procured employees. Based on this, the Tribunal is of the view that the Appellant supplied services to Apex Steel Limited. The issue is whether the services that the Appellant provided are vatable or not.

49. Section 5(1) (a) of the VAT Act is the charging clause of the VAT Act and outlines how a tax to be known as Value Added Tax, is charged in accordance with the provisions of VAT Act on a taxable supply made by a registered person in Kenya. The Respondent submitted that the Appellant is registered for VAT which assertion was not denied by the Appellant. Therefore, the Tribunal has no difficulty in finding that the Appellant was registered for VAT obligation.

50. Section 2 (1) of the VAT Act defines "taxable supply" as, ‘‘a supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person, including a supply made in connection with the commencement or termination of a business.’’ Section 2(1) of the aid Act also defines ‘exempt supply’ as, ‘‘supplies specified in the First Schedule which are not subject to tax.’’ Having examined the Appellant’s pleadings in light of the aforementioned provisions of the law, there was nothing to indicate that the services that the Appellant provided were exempt supplies. Consequently, the Tribunal is of the view that the Appellant supplied taxable supplies to Apex Steel Limited.

51. Having established the foregoing, the Tribunal sought to determine whether under the circumstances, the Respondent assessments were justified and noted the Appellant’s argument that the Respondent erred by treating payroll cost of Kshs. 28,735,535. 00 from Apex Steel Limited to it and subjecting to VAT of Kshs. 4,598,721. 00. On the other hand, the Respondent submitted that it requested the Appellant to provide a number of documents namely: The Contractual agreement between the employer and employees.

Copies of employees’ letters of offer for different cadres (both skilled and unskilled).

Copy of payroll comprising of biodata, showing employees names, KRA PIN numbers, identity card numbers, telephone and address.

Proof of payment of salary and wages.

Any other document.

53. The Respondent submitted that the Appellant only provided the following documents: A letter objecting the assessment stating the business model of the company;

Audited accounts for the assessed years;

Bank statements;

Invoices of the assessed periods;

A labour services agreement between the Appellant and Apex Steel Limited.

54. Consequently, the Respondent accused the Appellant of failing to provide documents to support the notice of objection and therefore, it relied on available documents to make its decision. The VAT Act provides for ways of calculating VAT including by determining taxable value. Section 2(1) of the VAT Act defines ‘‘Taxable value" to mean, ‘‘the value determined in accordance with section 13 and 14. ’’ To be precise, section 13(1) (a) of the VAT Act provides as follows:‘Subject to this Act, the taxable value of a supply, including a supply of imported services, shall be (a) the consideration for the supply.’’

52. The Appellant adduced as evidence, an agreement between itself and Apex Steel Limited entered into on 1st March 2023. The Tribunal finds that this agreement insufficient for purposes of the instant Appeal because the assessments are not in relation to the year 2023 but are in relation to VAT for the period December 2021, January 2022, March 2022, April 2022, May 2022, June 2022 and July 2022. For this reason, the Tribunal found that there was no agreement on record between the Appellant and Apex Steel Limited in support of the Appeal and in respect of the period under review.

53. The Appellant, in support of its appeal adduced as evidence, invoices, payroll for December 2021, books of account and bank statements. However, the Tribunal noted that from the availed documents, the Appellant did not attempt to demonstrate taxable value as required under Section 13 of the VAT Act. For instance, the Appellant ought to have demonstrated expenses and other deductibles that ought to have been deducted to arrive at the correct taxable value. The Appellant did not plead these issues and as such, the Tribunal cannot prosecute the Appeal for the Appellant. The Appellant failed to discharge its burden of proof as provided for under section 56(1) of the TPA and 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”).

54. Apart from the above, the Appellant alleged that the 5-year turnover combined for the years of income (2018—2022) of the company total to Kshs. 26,826,038. 00 which is lower than the 5 months VAT tax assessed of Kshs. 28,735,535. 00 making the VAT assessed punitive, extremely high and unreasonable compared with the company historical performance. Having examined the documentary evidence, the Tribunal notes that the Appellant did not adduce documentary evidence to support the allegation concerning the years 2018, 2019, and 2020.

55. Section 13(2)(b) of the TATA requires a taxpayer to file a statement of facts which should support and expound the contents of the memorandum of appeal and explain why and how the Respondent’s decision is incorrect. Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 emphasises this assertion.

56. Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 provides as hereunder:‘‘(1)Statement of fact signed by the appellant shall set out precisely all the facts on which the appeal is based and shall refer specifically to documentary evidence or other evidence which it is proposed to adduce at the hearing of the appeal.(2)The documentary evidence referred to in paragraph (1) shall be annexed to the statement of fact.’’

57. Section 30 of the TATA provides as follows:“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; or (b) In any other case, that the tax decision should not have been made or should have been made differently.”

58. On the other, section 56 (1) of the TPA provides as follows:‘In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.’

59. The High Court in Darwine Wholesalers Limited v Commissioner of Investigations and Enforcement (Income Tax Appeal E051 of 2021) [2023] KEHC 23537 (KLR) held 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 is in consonance with section 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 imposes the burden of proof on the tax payer to prove that an assessment was wrong or that it was excessive.”

60. In the case of Digital Box Limited v Commissioner of domestic investigations and Enforcement [2020] this Tribunal affirmed that that the burden to prove that the Commissioner’s decision is wrong falls on the taxpayer. The Appellant through an Application dated the 14th June 2024 sought leave to file supplementary list of documents. The Tribunal delivered a ruling on this application and allowed the Appellant to file and serve a Supplementary list of Documents. Despite the Appellant having been allowed by the Tribunal to file supplementary documents, it failed to do so.

61. The Tribunal having examined the documentary evidence as filed by the Appellant the Tribunal found that the Appellant failed to demonstrate how the Respondent failed in its mandate. Therefore, the Tribunal was unable to fault the Respondent’s assessments and the resultant objection decision.

Final Decision 62. The upshot to the foregoing is that the Appeal lacks merit. Consequently, the Tribunal makes the following Orders:a.The Appeal be and is hereby dismissed.b.The objection decision dated 10th August 2023 be and is hereby upheld.c.Each party to bear its own cost.

63. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 20THDAY OF SEPTEMBER, 2024. CHRISTINE A. MUGA- CHAIRPERSONBONIFACE K. TERER-MEMBERELISHAH N. NJERU -MEMBEREUNICE N. NG’ANGA -MEMBEROLOLCHIKE S. SPENCER-MEMBER