[2024] KETAT 758 (KLR)

Booking.Com Limited v Commissioner Domestic Taxes (Tax Appeal E018 of 2023) [2024] KETAT 758 (KLR) (9 May 2024) (Judgment)

Neutral citation: [2024] KETAT 758 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E018 of 2023

Grace Mukuha, Chair, W Ongeti, G Ogaga, E Komolo & Jephthah Njagi, Members

May 9, 2024

Between

Booking.Com Limited

Appellant

and

Commissioner Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated in Kenya whose core business is rendering online accommodation reservation services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the 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 functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts 1 & 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 raised and issued additional assessments of Corporate income tax on 20th September 2022 for the period of the year 2016 amounting to Kshs. 6,160,648. 00 via iTax.

4. On 14th October 2022 the Appellant lodged a notice objection to the additional assessment.

5. Following a series of engagements and correspondences, between the Appellant and Respondent, on 9th December 2022 the Respondent issued an objection decision confirming the income tax assessment, penalties, and interest that added up to Kshs. 10,657,922. 00.

6. On receiving the Objection decision and being aggrieved, the Appellant filed a Notice of Appeal on 6th January 2023.

The Appeal 7. The Appellant set down its case in the Memorandum of Appeal dated 19th January 2023 and filed on 23rd January 2023 and premised on the following surmised grounds:a.The Respondent erred in law and fact and in assessing and demanding from the Appellant Corporate income tax (CIT) in the sum of Kshs. 6,160,648. 80 despite the variance being one drawn from the Appellant’s VAT return.b.The Respondent erred in law and in fact by holding that the Appellant did not provide sufficient evidence to discharge its burden of proof despite the Appellant providing adequate explanations and reconciliations in support thereof in the notice of objection.c.The Respondent erred in law and fact by charging late payment interest in the sum of Kshs. 4,189,241. 00 based on an incorrect Corporate income tax assessment contrary to the provisions of Section 38 of the Tax Procedures Act.

The Appellant’s Case 8. The Appellant’s case was set out in its:a.Statement of Facts dated 20th January 2023 and filed on 23rd January 2023 together with the documents attached thereto.b.Written submissions dated and filed on 7th December 2023.

9. The Appellant stated that the Respondent conducted a desk audit exercise on the Appellant’s tax returns filed for the tax period of January 2015 to December 2018 after which, by a letter dated 25th May 2021, the Respondent issued the summary of its audit findings.

10. In the said audit findings letter of 25th May 2021, the Respondent raised concerns as to the variance between Income tax returns and the Pay As You Earn (“PAYE”) returns; the variance between the sales in the Income tax and the Value Added Tax (“VAT”) declared; and the non-filer of Income tax return for the year of income 2019.

11. The Appellant averred that in addition, thereto, in a letter dated 13th September 2021, the Respondent communicated its further audit findings, this time covering the tax period of January 2016 to December 2019. In the said further audit finding letter, the Respondent raised concerns as to the Appellant’s failure to file returns for the period 2020; the variance between the employment costs in the income tax returns and the PAYE returns; and the variance between the turnover declared in the income tax returns and VAT returns.

12. The Appellant argued that in the letter dated 26th October 2021, the Appellant responded in detail to the Respondent’s concerns raised in the two letters of 25th May 2021 and 13th September 2021.

13. The Appellant averred that the Respondent never responded to the issues addressed in the Appellant's letter of 26th October 2021 until 29th June 2022, when by a letter dated 29th June 2022(“VAT Demand Notice”) the Respondent issued a demand notice wherein, the Respondent indicated that from its analysis, an amount of Kshs. 17,064,488. 00, in the year of income 2016 and Kshs. 20,535,496. 00 in the year of income 2017 remained unsupported.

14. Accordingly, the Appellant stated that in the same letter, the Respondent proceeded to demand VAT thereon in the sum of Kshs. 3,285,679. 36. This VAT demand notice had a disclaimer couched in the following terms:-“This letter does not contribute a notice of assessment under Section 31 of the Tax Procedure Act. A formal notice of assessment shall be issued in i-tax in due course for the affected added tax head.”

15. In response thereto, by a letter dated 29th July 2022, the Appellant reiterated the explanations hitherto given in its letter of 26th October 2021 to the issues raised in the VAT demand notice and further proceeded to give a detailed reconciliation to reconcile the purported variance between the Income tax returns and the VAT returns.

16. The Appellant posited that in a rather sudden shift of goal post from the VAT tax demand letter dated 16th September 2022 (“Corporate Income Tax (“CIT”) Demand Notice”), the Respondent reiterated its previous assertions verbatim in the VAT demand notice with respect to variance between CIT and the VAT returns. The Respondent proceeded to demand CIT in the sum Kshs, 6,160,648. 80. The Appellant indicated that just like in the VAT demand notice, the Respondent proceeded to reiterate that: -“This letter does not constitute a notice of assessment under Section 31 of the tax Procedures Act. A formal notice of assessment shall be issued in the i-tax in due course for the affected tax head.”

17. The Appellant stated that, on 20th September 2022, the Respondent proceeded to post on the Appellant i-tax portal the amended assessment assessing the company for CIT in the sum of Kshs. 6,160,648. 80.

18. Dissatisfied with the contents of the CIT demand notice dated 16th September 2022 and the attendant assessment posted on 20th September 2022, out of the abundance of caution, the Appellant objected to the same vide a notice of objection dated 14th October 2022.

19. The Appellant averred that the Respondent invited the Appellant for an Independent Review of Objection meeting on 8th December 2022, just two days before the lapse of the 60 days within which the Respondent ought to have issued an objection decision. The Appellant stated that it attended the said meeting, through its tax agents, and clarified all the concerns that the Respondent had.

20. That on 9th December 2022, the Respondent issued its objection decision wherein it confirmed the total assessment for the sum Kshs. 6,160,648. 80 plus penalties and interest thereby assessing taxes in the sum of Kshs. 10,657,922. 00.

21. That in its tax decision, the Respondent had assessed the Appellant for CIT in the sum of Kshs. 6,160,648. 80. This is predicated on the reconciliations as set out in the Respondent’s CIT demand notice.

22. That the Respondent held the view that there was an unexplained variance of Kshs. 20,535,496. 00 purportedly arising from the CIT adjusted turnover for the year 2016 of Kshs. 125,369,167 as contra-distinguished from the VAT-adjusted turnover of Kshs. 145,904,663. 00.

23. It was the Appellant's position that contrary to the Respondent's assertion, the Appellant's CIT turnover for the year of income 2016 as reported in the 2016 returns was Kshs. 200,097,783. 00 and not the CIT turnover of Kshs. 125,369,167. 00 as purported by the Respondent in its CIT demand notice.

24. The Appellant avowed that the Respondent was therefore fundamentally misguided in its CIT demand notice in alleging that the Appellant in its CIT returns for 2016 underdeclared the CIT turnover by Kshs. 20,535,496. 00 less than what was declared as the VAT turnover for the same period.

25. The Appellant contended that Courts have settled that a tax demand cannot be predicated on figures plucked from the air and wondered where the Respondent derived the alleged figure of Kshs. 125,369,167. 00 as CIT turn-over for 2016 instead of relying on the sum of Kshs. 200,097,783. 00 as declared by the Appellant.

26. The Appellant cited Odunga J in SBI International Holdings Ag Kenya v Commissioner, Customs and Border Control, of Kenya Revenue Authority, (JR Mis. Civil Application No. E009 of 2021) where the Court stated that.“Therefore, whereas this Court is not entitled to question the merits of the decision of taxing authority, that authority must exercise its powers fairly and there ought to be a basis for the exercise of such powers. A taxing authority is not entitled to pluck a figure from the air and impose it upon a taxpayer without some rational basis for arriving at that figure and not another figure. Such action would be arbitrary, capricious, and in bad faith. It would be an unreasonable exercise of power and discretion and that would justify the Court intervening.”

27. That, accordingly, the Respondent having predicated its assessment on fictitious figures which cannot be supported and was in any event, never supported in the Objection decision, the entire assessment is unreasonable and unlawful and ought to be vacated forthwith.

28. The Appellant averred that the CIT returns for the year of income 2016 declared the CIT turnover as Kshs. 200,097,783. 00. What was under-declared in the year 2016 as the turnover was in relation to VAT and not CIT, wherein there was a variance of Kshs. 20,535,496. 00 between what was declared as VAT (taking into account a December 2015 invoice and the revenue booked in 2017) as distinguished from what was declared as CIT in the same year of income.

29. The Appellant submitted that the Respondent had no basis in law upon which to assess the company for CIT when in fact, the alleged “unexplained variance” of Kshs. 20,535,497. 00 only related to the “under-declared” VAT turnover for the same year of income.

30. The Appellant averred that it is not open in law for the Respondent to assess the company for CIT on an alleged variance that relates to another tax head (VAT). The two tax heads are separate and distinct with varying tax rates (CIT at 30% while VAT at 16%) and cannot be conflated as purported by the Respondent in its tax demands.

31. The Appellant held that the adjustments to its CIT computation and the attendant assessment thereto, having been predicated on a VAT reconciliation issue and on a purported "under declared VAT", and not a CIT returns issue.

32. The Appellant argued that in its Objection decision the Respondent in essence disfavored the Appellant’s notice of objection primarily on alleged failure to support the grounds of objection to the satisfaction of the Respondent.

33. The Appellant averred that it lodged a notice of objection on 14 October 2022 and that the Respondent had sixty days within which to determine the notice of objection. That the Respondent did not seek any clarifications from the Appellant until the 8th December 2022, which was the 57th day from the date of Objection. That after the meeting the Respondent on an email dated 8th December 2022, sought certain clarifications from the Appellant in a manner and time that would not accord the Appellant an opportunity to respond to these concerns and provide evidence if any before the Respondent issues an objection decision contrary to its legitimate expectation.

34. The Appellant argued that to the contrary, the Respondent proceeded to issue an Objection decision dated 09 December 2022, (the next day after the meeting). The Appellant is therefore concerned as to whether the information and explanation sought by the Respondent had any value when it is apparent that in less than twenty-four (24) hours from the date of the first working meeting (IRO), the Respondent had already issued a decision confirming the assessment. The Appellant theorized that by the time the Respondent was calling the Appellant for a meeting, the Respondent already had a draft objection decision just pending execution thereof.

35. The Appellant pleaded that owing to the circumstances under which the Objection decision was issued, the Tribunal should declare the Respondent's conduct leading to the decision as being unreasonable.

36. To the purported "unexplained variance" of Kshs. 20,535,497,00 the Appellant averred that it provided sufficient evidence and reconciliations to prove the nature and source of the variance and that there was no tax leakage emanating therefrom.

37. That the CIT returns reported the turnover for the year of income 2016 as Kshs. 200,097,783. 00. On the other hand, the VAT returns for the year 2016, reported the turnover as Kshs. 166,869,104. 00. This therefore leaves a variance of 33,228,769. The Appellant explained this VAT variance as follows:

i. December 2015 Invoice booked in 2016 – Kshs. 20,964,351. 00. 38. That in December 2015, there was an accrued revenue of Kshs. 20,964,351. 00 whose invoice was issued in January 2016 and reported in the January 2016 filed VAT return.

39. That therefore, the turnover amount as per the VAT return was exclusive of the accrued income whose invoice was later issued in 2017 but inclusive of the invoice issued in 2016 but had been accrued in 2015.

ii. Revenue booked in 2017-Kshs. 74,728,617. 00 40. That in December 2016, there was an accrued revenue of Kshs. 74,728,616. 00 whose invoice was issued in January 2017 and reported in the January 2017 filed VAT return. That this is what is adjusted on the VAT returns for 2016 to tally with the sales as per the CIT returns.

41. That in the event, the Kshs. 74,728,617. 00 adjustment has no bearing on the CIT status of the Appellant and is therefore a non-issue in relation to the CIT returns as the said amounts formed part of the CIT turnover of Kshs. 200,097,788. 00.

42. That since there was no adjustment of Kshs. 74,728,617. 00 on the Appellant's CIT turnover, the Respondent's purported adjustments and reconciliations of the CIT turnover on this amount is therefore factually inaccurate and has no basis either in law or in fact and ought to be vacated forthwith.

iii. The cost-plus revenue adjustment -Kshs. 20,535,497. 00 43. The Appellant explained that being an international entity as a matter of practice reports its revenue in the US Generally Accepted Accounting Principles (GAAP). This US GAAP system varies from the local GAAP which follows the International Financial Reporting Standards (IFRS).

44. That under these varying reporting systems, adjustments during the statutory procedure are included in local GAAP (IFRS) during the audit period. These adjustments are then included in US GAAP only in the subsequent year. As such, there were adjustments in the VAT returns for the year of income 2016 to factor in the varying reporting systems. This adjustment was in relation to the outstanding variance of Kshs. 20,535,497. 00.

45. Further, the Appellant submitted that the audit adjustment of Kshs. 20,535,497. 00 is wholly as a result of the differing accounting standards being the US GAAP as distinguished from the IFRS.

46. The Appellant averred that even if it had used the IFRS standards in its financial reporting, there would have been no difference in turnover for the year 2016.

47. That in any event, the VAT on the sum of Kshs. 20,535,497. 00 was ultimately remitted and accounted for in the invoice dated 30th November 2020 which reconciled 2015, 2016 and 2017 adjustments to the sum of Kshs. 246,911. 29. The Credit Note settled some other payments including the sum of Kshs. 20,535,497. 00.

48. The Appellant averred that it provided adequate evidence and reconciliations to discharge its burden of proof and on the contrary, the Respondent had not called to question or interrogate the evidence before it both in its assessment and in its objection decision.

49. The Appellant drew the attention of the Tribunal to the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR where Mativo J agreed with the holding by the Supreme Court of Canada in Hickman Motors Ltd. V. Canada [1997] 2 S.C.R. where the court held as such:The Supreme Court of Canada in Johnston v Minister of National Revenue18. decided that the onus is on the taxpayer to “demolish the basic fact on which the taxation rested.” Also, the Supreme Court of Canada provided guidance on this issue in Hickman Motors Ltd. v Canada [19] that the onus is met when a Taxpayer makes out at least a prima facie case. Prima facie is another legal term that literally means “on its face”. To prove a case “on its face” you must provide evidence that, unless rebutted, would prove your position. According to the said decision, a prima facie case is made when the taxpayer can produce unchallenged and uncontradicted evidence. Once the taxpayer has made out a prima facie case to prove the facts, the onus then shifts to the Revenue Authority to rebut the prima facie case. If the Revenue Authority cannot provide any evidence to prove their position, the taxpayer will succeed.”

50. The Appellant also argued that the Respondent had purported in its Objection decision to levy late payment interest at the rate of 1% on the principal CIT alleged to be due.

51. That Section 38 (1) of the TPA provides that:“..a person who fails to pay a tax on or before the due date for the payment of the tax shall be amount unpaid for the period commencing on the date the tax was due and ending on the date the tax is paid."

52. The Appellant submitted that Section 38 (1) of the TPA envisions payment of interest where one fails to pay a tax that is due when the said assessment is in dispute. Given that no tax was and was due, no late penalty is chargeable in the circumstances.

Appellant’s Prayers 53. The Appellant urged this Tribunal to:a.Allow this Appeal.b.To find that the Respondent erred in law in demanding for Corporate income tax for the sum of Kshs. 6,160,648. 80 when the Respondent itself held the view that the “unexplained variance” related to purported Value Added Tax (VAT) under-declaration.c.To vacate and set aside the Respondent’s Objection decision in its entirety.d.Any other orders that the Tax Appeals Tribunal may deem fit.

The Respondent’s Case 54. The Respondent’s case is premised on:a.The Statement of Facts dated and filed on 17th February 2023 together with the documents annexed thereto; andb.The Written Submissions dated 18th December 2013 and filed on 21st December 2023.

55. The Respondent posited that it issued an additional income tax assessment after it was noted that the Appellant failed to explain variances observed between the turnovers declared in the Income tax returns vs Value Added Tax (VAT) returns.

56. That the Appellant's reconciliation together with the explanations received during the reconciliation meetings indicated that there were revenue adjustments in local GAAP in the year 2016.

57. That further, a review of the disputed amount indicated that it was not sitting in the VAT books of the year 2016 but rather conglomerated with many other amounts in the year 2020 culminating in a negative invoice of Kshs. - 246,911. 29.

58. The Respondent reiterated that the decision to arrive at the assessment and subsequent objection decision was justified and had basis in law.

59. That during the objection review, it was clear that the variances in the return giving rise to the assessment were not merely a double entry in the Appellant's books of accounts/returns but one that needed to be sufficiently supported by the production of relevant documents/ invoices to explain away the variances.

60. That the correspondence between parties during the objection review was clear that the Appellant was required to support the variance noted by providing copies of invoices, documents which the Appellant failed to provide. Section 51(3) states that:“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-a.The notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;b.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1); andc.All the relevant documents relating to the objection have been submitted.”

61. That in the absence of any evidence contrary to the assessment issued, the Respondent maintained the assessments as issued in the notice of assessment.

62. The Responded added that Section 24(2) of the TPA states thus:“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the commissioner.”

63. Concerning ground (iii) of the Memorandum of Appeal, the Respondent reiterated that late payment interests are due based on Section 38 of the Tax Procedures Act as the Appellant failed to settle the tax arrears as at the time it fell due. Section 38(1)) states that:“Subject to subsection (2), a person who fails to pay a tax on or before the due date for the payment of the tax shall be liable for late payment interest at a rate equal to one per cent per month or part of a month on the amount unpaid for the period commencing on the date the tax was due and ending on the date the tax is paid.”

64. The Respondent relied on the case of Fusys(kenya) Limited -v-Southern Credit Banking Corporation Limited (2015) eKLR, where the court stated as follows:“A party who in one proceeding avers one thing and in another proceeding the opposite in a related matter as in this case cannot but be said to be vexatious. Where in the same matter a party's pleadings are at variance, such party is said to be guilty of departure in his pleadings and the court has power to strike out a matter that is vexatious or amounts to departure.”

65. The Respondent submitted that the importance of relevant and material evidence was emphasized in the case of Commissioner of Domestic Taxes vTrical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) where it was stated as thus:-“From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner. I have emphasized and underlined 'competence 'and 'relevance' because it is only evidence that meets these two tests that demolishes presumption of correctness and swings the burden to the Commissioner. This means that even if one avails evidence but then it is found that the same is incompetent or irrelevant, then the burden continues to remain with the taxpayer.”

66. The Respondent submitted that rather than adducing the copies of the invoices agreed upon by the parties to be the only way of explaining away the variances, the Appellant had produced certain documents which it stated is contained at appendix 15 and 16 of its Statement of Facts, information that were not invoices requested and agreed upon by parties.

67. That thus, the Appellant could not have provided the copies of invoices requested and what has now been produced before the Tribunal is not relevant and competent evidence to challenge the assessment indeed as agreed by parties in its meetings dated 8th December 2022. The Respondent's objection decision was therefore justified and reasonable.

Respondent’s Prayers 68. Respondent prayed that this Tribunal:-a.Upholds the Respondent’s decision as proper in law and in conformity with the provisions of the law.b.Dismisses this Appeal with costs to the Respondent.

Issue for Determination 69. The Tribunal has carefully studied the parties’ pleadings and submissions and is of the respectful view that the issue that calls for its determination is as hereunder:Whether the Respondent was justified in assessing the Appellant for CIT.

Analysis and Findings 70. The Respondent analyzed the Appellant’s sales turnover declarations in the income tax and VAT returns for the months of January 2016 to December 2016 and determined that there was a variance of Kshs. 33,228,769. 00. The Appellant had declared a sales turnover of Kshs. 200,097,783. 00 in its 2016 income tax return, and a turnover of Kshs. 166,869,104. 00 in its VAT returns for January 2016 to December 2016.

71. The Appellant explained the Kshs. 33,228,769. 00 variance which the Respondent partially accepted. The Respondent rejected the explanation of variance of negative Kshs. 20,535,497. 00 on the basis that this variance was not sufficiently supported. The Respondent consequently issued to the Appellant an income tax assessment of Kshs. 6,160,649. 00 plus interest and penalties, being 30% of Kshs. 20,535,497. 00.

72. The Appellant argued that the Kshs. 20,535,497. 00 was a cost-plus revenue adjustment that was included in the accounts and income tax return for 2016 to account for the conversion of the accounts from US GAAP to IFRS. That this amount was not included in the 2016 VAT returns, hence the lower turnover reported for VAT purposes in January 2016 to December 2016.

73. The Appellant submitted that it corrected this under-declaration of turnover in its VAT declarations in the year 2020 where it raised an intercompany invoice to reconcile turnovers in the VAT returns and income tax returns. The Appellant further submitted that the Respondent has no basis in law to assess the Appellant for additional income tax when in fact the variance of Kshs. 20,535,497. 00 only related to under-declared turnover in the VAT returns of 2016.

74. The Respondent argued that whereas it was justified and reasonable to request for further information (being copies of the invoices) based on the agreed position by parties in a meeting dated 8th December 2022, the Appellant had not demonstrated that it provided the information requested.

75. That instead, rather than adducing the copies of the invoices agreed upon by parties to be the only way of explaining away the variances, the Appellant had produced certain documents which were not invoices requested and agreed upon by parties.

76. The Tribunal notes that in support of its Appeal the Appellant attached to its Appeal the following documents:a.The 2016 income tax return showing the turnover declared for income tax purposes.b.An intercompany invoice to Booking.com BV number 11. 2020 dated 30th November 2020 of negative Kshs. 246,911. 29. c.An intercompany ledger entry of the above invoice posted on 26th November 2020.

77. The Tribunal reviewed the pleadings and evidence adduced by both parties and observes that the income on which the Respondent issued the disputed income tax assessment was a turnover variance of Kshs. 20,535,497. 00 already accounted for in the Appellant’s 2016 income tax return, but not declared by the Appellant in the VAT returns for January 2016 to December 2016. The Tribunal observes that legally, under-declared turnover in a VAT return would not give rise to an additional income tax assessment when the income has already been declared and accounted for in an income tax return covering the same period.

78. It is the Tribunal’s considered view that the Respondent's income tax assessment lacks reason and sound basis. Further, the Tribunal notes that the Appellant sufficiently discharged its burden to prove that the Respondent’s income tax assessment was wrong.

79. The Tribunal, therefore, finds that the Respondent erred in issuing an income tax assessment on income already declared and accounted for in the Appellant’s income tax return.

Final Decision 80. The upshot to the foregoing analysis is that the Appeal is merited, and the Tribunal consequently makes the following Orders: -a.The Appeal be and is hereby allowed.b.The Respondent's objection decision dated 9th December 2022 be and is hereby set aside.c.Each party to bear its own costs.

81. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF MAY, 2024. GRACE MUKUHA - CHAIRPERSONDR. WALTER ONGETI - MEMBERGLORIA A. OGAGA - MEMBERDR. ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBER