[2023] KETAT 864 (KLR)

Bid Management Consultancy Limited v Commissioner Domestic Taxes (Tax Appeal 1117 of 2022) [2023] KETAT 864 (KLR) (Commercial and Tax) (24 November 2023) (Judgment)

Neutral citation: [2023] KETAT 864 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal 1117 of 2022

RM Mutuma, Chair, W Ongeti, EN Njeru, M Makau & BW Wachira, Members

November 24, 2023

Between

Bid Management Consultancy Limited

Appellant

and

Commissioner Domestic Taxes

Respondent

(An Appeal against the Respondent's Objection decision dated 26th August 2022)

Judgment

Background 1. The Appellant is a private limited company duly incorporated and registered under the Companies Act within the Republic of Kenya. Its main form of business is in dealing in stocks and shares, investment clubs, and factoring activities, stock exchange and money brokerage.

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) of the Act, Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further under Section 5 (2) of the Act with respect to the performance of its function under subsection (1), it is mandated to administer and enforce all provisions of the written laws as set out Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenue in accordance with those laws.

3. The Respondent reviewed the Appellant’s tax returns, issued a notice of intention to audit dated 29th July 2021, and issued a notice of assessment to the Appellant on 23rd September 2021 for the period December 2017 to December 2019 followed by additional assessments on iTax on 4th March 2021.

4. The Appellant lodged an Objection to the additional assessments vide a letter dated 27 June 2022 after which the Respondent issued an Objection decision on 26th August 2022 confirming its assessment.

5. On receiving the Objection decision and being aggrieved, the Appellant lodged a Notice of Appeal on 22nd September 2022.

The Appeal 6. In its Memorandum of Appeal filed on 5th October 2022, the Appellant premised its Appeal on the following surmised grounds:a.The Respondent erred in law by assessing VAT for the period December 2017 to December 2019 without considering the Appellant’s nature of business and whether the same was subject to VAT as the supplies in dispute relate to exempt supplies as provided for by Part II of the First Schedule of the VAT Act 2013. b.The Respondent erred in law and misdirected himself in failing to find that the commission income earned from AIB Capital Ltd from December 2017 to December 2019 was exempt from VAT under Part II of the First Schedule to the VAT Act 2013 and thus not subject to VAT as per the provision of the law.c.The Respondent erred in law in not applying principles of natural justice and fairness in its actions towards the Appellant by demanding taxes from the Appellant arbitrarily without giving them a chance to be heard.d.The Respondent erred in law and failed to consider the substantial evidence contained in the detailed grounds of Objection dated 5th July 2022 together with the supporting documentation before making the confirmation assessments dated 26th August 2022. e.The Respondent erred in law by failing to invite the Appellant to explain practically how it facilitates trade and enables transactions with investors.f.The Respondent erred by failing to respond to the Appellant’s letter dated 21st October 2021 addressing issues raised during the meeting held on 19th October 2021. The Appellant had a legitimate expectation to receive a prompt response if the explanation given was not accepted which it did not receive until the date of the assessments lodged on iTax on 7th June 2022 and in the interim due to lack of further query from the Respondent, believed that the matter had been satisfactorily resolved.g.The Respondent erred in failing to appreciate that for the period assessed the Appellant had entered into an agreement with AIB Capital Ltd for the provision of stock brokerage agency services to investors on a 50:50 commission-sharing basis from the dealings in shares on behalf of its investors based on the transaction amount.h.The Respondent misdirected himself in finding that the Appellant earns an introductory fee as the Appellant is only involved in sourcing the clients and providing services to the investors by facilitating the trade of securities and enabling transactions on behalf of the principal at each step, and not only sourcing clients and ensuring a continued relationship between the investor and the broker.i.The Respondent erred in law and misdirected itself on the interpretation of ‘an Agent’ under Section 2 of the Capital Markets Authority Act as whereas the Appellant was not registered as a stockbroker for the period under review, it had an agreement with the Stock Broker for the provision of services and has dealings in shares on behalf of the investor where it earns 50% of the commission on the trade based on the transaction amount.j.The Respondent is drawn to the definition of Agent per the Capital Markets Act which means that the agent is governed by the rules and regulations of the Capital Markets Act.k.The Respondent erred in law and fact by failing to comprehend the agreement between the Appellant and AIB Capital Ltd on the agent’s obligations making an erroneous finding that the Appellant deals directly with AIB Capital and does not make any payments to BMCL.l.The Respondent misdirected himself and failed to appreciate that there is no limitation on or direct link to the number of brokers/agents an investor may engage with respect to their CDS accounts.m.The commissions from the provision of financial services in regard to dealings with securities are exempt from VAT due to the nature of the supply and the 50% share of the total commissions held by AIB is due to the Appellant and is a division of income and a direct cost of sale for the stockbroker against its exempt line of income.

The Appellant’s Case 7. The Appellant set down its case in its;a.Statement of Facts filed on 5th October 2022. b.Written Submissions dated and filed on 29th March 2023.

8. The Appellant stated that once an investor expresses an intent to trade in security, the Appellant sends the investor the file opening pack, CDSC opening form, account opening form, and agent authorization form and the investor authorizes the Appellant to transact on its behalf based on instructions given and the company executed transactions on the NSE through the Agent trading system.

9. It averred that it plays a role in executing and issuing applicable contract documentation to clients and the company has access to Trader WorkStation and Agent Trading System to enable it to place sales and purchases orders, generate clients’ statements, and generate a contract note summary once a trade is executed on behalf of the investors after which the Appellant delivers contract notes statements and other documentation issued in the purchase and sale of securities to the clients.

10. The Appellant detailed that it is mandated to transmit all research reports prepared by the principal, NSE announcements, and other vital market information to the investors.

11. It avowed that it presents proper forms, and information and promptly forwards all mandatory paperwork and policy provisions to the investors and follows up on debts with the client which include payments towards the purchase of security from the investors when a trade is executed, on behalf of the principal for submission to NSE and request payments on behalf of the clients on sales.

12. The Appellant contended that it keeps accurate, separate records and accounts in respect of the conduct of the business and supplies information relating to the business to the principal in such detail as the principal may request and employ such number of qualified personnel as is reasonably required by the demands of the business ensuring safe custody of all documents including cheques and orders and supplies them to the stockbroker upon request.

13. The Appellant specified that the Respondent did not consider the evidence provided before making the tax decision and the Appellant was not invited to explain and illustrate how it facilitates trade and enables transactions with the investor.

14. In its submissions, the Appellant reiterated verbatim the assertions in its pleadings, thus the Tribunal will not regurgitate the same and will therefore rely on its pleadings to determine the entirety of its case.

The Appellant’s Prayers 15. The Appellant prayed for orders for the Tribunal to:a.Allow this Appeal;b.Set aside the Respondent’s confirmed assessment; andc.Award the cost of this Appeal to the Appellant.

The Respondent’s Case 16. The Respondent’s case is premised on itsa.Statement of Facts dated and filed on 1st November 2022; andb.Written Submissions dated and filed on 12th April 2023.

17. The Respondent cited Section 5 (2) of the Kenya Revenue Authority Act, and Sections 24 (2), 29 and 31 of Tax Procedures Act and stated that it is not bound by the Appellant’s tax returns and that it may assess a taxpayer’s tax liability using any information available to it. It added that it is empowered to issue default assessments and amend returns based on the available information and to its best judgment.

18. The Respondent relied on Section 5 (1) (a), (2), and (3) of the VATAct and averred that the Appellant did not provide evidence to demonstrate that the payments were for exempt services as the Appellant is involved in the sourcing for clients and ensuring the continued relationship between the investor and the stockbroker (AIB Capital).

19. It quoted Section 34 of the VATAct and stated that the Appellant was required to register for VAT in 2018 but registered for the same from December 2019 and started filing VAT returns in January 2020.

20. Further, the Respondent contended that CDS accounts are opened and maintained at the Central Depository and Settlement Corporation Ltd (CDSC) and there is no limitation on or direct link to the number of brokers/agents that an investor may engage with as the investor’s CDSC account is independently maintained as evidenced by the fact that if an investor has numerous dealings with various brokers, the investor has access to the CDSC statements at CDSC which reflects all the investor’s securities portfolio at NSE.

21. The Respondent averred that the Appellant was not registered as a stockbroker and does not conduct trade or have any dealings in shares on behalf of investors who directly deal with AIB Capital and not make any payments to the Appellant. The stockbroker is the one who opens, transacts, and maintains the CDS accounts for the investor and there is no relationship between the Appellant and the investors other than the introduction made to the stockbroker.

22. The Respondent upheld that the income earned by the Appellant from AIB Capital relates to the services rendered by the taxpayer in sourcing clients and ensuring a continued relationship between the investor and the stock broker and such income is vatable hence the commissions earned from AIB Capital are vatable.

23. It relied on Section 56 (1) of the Tax Procedures Act and reiterated that the assessments were issued within the provisions of the Tax Procedures Act and the Appellant provided taxable supplies and is liable for the assessed amounts.

24. The Respondent submitted that the Appellant has not provided any documents to support its submission showing that it is a supplier of exempt services and that the Appellant is not registered as a stockbroker and does not trade and have any dealings in shares on behalf of any investors.

25. It avowed that the Appellant does not directly deal with investors who deal directly with AIB Capital and make payments to AIB Capital as AIB Capital opens CDS accounts, transacts, and maintains the accounts on behalf of the investors, and the Appellant does not participate in the transactions from account opening.

26. It added that the role played by the Appellant is client sourcing and ensuring a continued relationship between AIB Capital and the investors and that the Appellant’s commission income earned from the client sourcing exercises cannot fall under the provisions of Paragraph 1 (k) and (m) of Part II of the First Schedule to the VATAct as they are not exempt services.

27. On whether the Respondent was right to charge VAT on consultancy fees earned from the services rendered by the Appellant, the Respondent anchored its arguments on Paragraphs 1 (k) and (m) of Part II of the First Schedule to the VATAct, Sections 2 on “taxable supplies” and “supply of services”; and 5 (3) of the VATAct in asserting that the Appellant has not provided evidence to demonstrate that the payments were exempt services.

28. It cited Section 24 (2) of the Tax Procedures Act 2015 to buttress its position that despite the Appellant classifying the income in its books of accounts as an exempt supply and filing returns to that effect, the Respondent is not bound by the tax returns of the Appellant and may assess a taxpayer’s tax liability using any information available to it.

29. It reiterated that the Appellant was required to register for VAT in 2018 having met the threshold as provided in Section 34 of the VAT Act, 2013 but registered for VAT on 1st December 2019 and started filing returns from January 2020 thus the Respondent forcefully registered the Appellant for VAT and assessed it from the time it was deemed to have attained the registration threshold as the assessments were issued within the provisions of the law.

30. On whether the Appellant has discharged its burden of proof; the Respondent cited Section 56 (1) of the Tax Procedures Act and submitted that the Appellant has not discharged its burden of proof that it provides an exempt service as it clearly demonstrates that the stockbroker signed the documents with various investors and not the Appellant.

31. The Respondent argued that the agreement executed between the Appellant and AIB Capital described the Appellant as a stockbroker agent whose principal activities are not those of a stockbroker but only as an agent to the stockbroker, AIB Capital. It added that no certificate of registration had been provided by the Appellant to show that it is a stockbroker and hence deals in exempt services as alleged.

32. It relied on the cases of Boleyn International Ltd v Commissioner of Domestic Taxes (TAT 55 of 2018) and Bermac Limited vs. Commissioner of Domestic Taxes (TAT 101 of 2016) and reiterated that the Appellant did not provide proof to defray the tax liability nor has it provided any proof before this Tribunal that the assessment is wrong.

The Respondent’s prayers 33. The Respondent, therefore, prayed for orders that the Tribunal:a.Dismisses this Appeal with costs to the Respondent for lack of merit;b.Upholds the Objection Decision dated 26th August 2022.

Issues For Determination 34. Gleaning through the Memorandum of Appeal, the parties’ Statements of Facts, and submissions, the Tribunal puts forth the following as the main issue for determination:Whether the Respondent’s Objection Decision dated 26th August 2022 was justified.

Analysis And Findings 35. The Tribunal wishes to analyse the issue as herein-under.

36. The Appellant maintained that it plays a role in executing and issuing applicable contract documentation to clients and has access to Trader WorkStation and Agent Trading System to enable it to place sales and purchases orders, generate clients’ statements, and generate a contract note summary once a trade is executed on behalf of the investors after which the Appellant delivers contract notes statements and other documentation issued in the purchase and sale of securities to the clients.

37. The Respondent contended that the Appellant does not directly deal with investors who deal directly with AIB Capital and make payments to AIB Capital as AIB Capital opens CDS accounts, transacts, and maintains the accounts on behalf of the investors, and the Appellant does not participate in the transactions from account opening.

38. It added that the role played by the Appellant is client sourcing and ensuring a continued relationship between AIB Capital and the investors and that the Appellant’s commission income earned from the client sourcing exercises cannot fall under the provisions of paragraph 1 (k) and (m) of Part II of the First Schedule to the VAT Act.

39. The Appellant avowed that it presents proper forms, and information promptly forwards all mandatory paperwork and policy provisions to the investors, and follows up on debts with the client which include payments towards the purchase of security from the investors when a trade is executed, on behalf of the principal for submission to NSE and request payments on behalf of the clients on sales.

40. Supply of services is defined in Section 2 of the VATAct which provides; -“supply of services" means 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;”

41. Exemption from VAT for Financial Services is provided for under Paragraphs 1 (k) and (m) of Part II of the First Schedule to the VATAct which states as follows; -“The supply of the following services shall be exempt supplies— 1. The following financial services—(k)the issue, transfer, receipt or any other dealing with bonds, Sukuk, debentures, treasury bills, shares and stocks and other forms of security or secondary security;(m)The provision of the above financial services on behalf of another on a commission basis.”

42. The Appellant argued that as an agent it is governed by the Rules and Regulations of Capital Markets Act which defined an agent as; -“any person appointed in writing by a licensed person except in derivatives market to perform any of the functions ordinarily performed by the licensed person on behalf of that licensed person”.

43. The Tribunal is persuaded that the Appellant is an agent in the provision of financial services as provided for under Paragraphs 1 (k) of Part II of the First Schedule to the VATAct and therefore commissions accruing from the same are VAT exempt since the Appellant acts on behalf of another on a commission basis. In this case the Appellant acts on behalf of AIB Capital Ltd on a commission basis.

44. In the circumstances the Tribunal finds that the Respondent’s Objection decision dated 26th August 2022 was not justified.

Final Decision 45. The upshot to the foregoing is that the Appeal is meritorious and the Tribunal consequently makes the following orders; -a.The Appeal be and is hereby allowed.b.The Objection decision dated 26th August 2022 be and is hereby set aside.c.Each party to bear its own costs.

46. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 24TH DAY OF NOVEMBER, 2023ROBERT MUTUMA - CHAIRPERSONDR WALTER ONGETI - MEMBERELISHAH N. NJERU - MEMBERMUTISO MAKAU - MEMBERBONIFACE K. TERER - MEMBER