[2024] KETAT 1661 (KLR)

Capdrill Kenya Limited v Commissioner of Legal Services And Board Coordination (Tax Appeal E940 of 2023) [2024] KETAT 1661 (KLR) (21 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1661 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E940 of 2023

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

November 21, 2024

Between

Capdrill Kenya Limited

Appellant

and

Commissioner of Legal Services And Board Coordination

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated in Kenya whose principal activity is providing drilling services to mining and exploration companies.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). 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 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. In a letter dated 13th July 2022 and on i-Tax platform, the Appellant applied for income tax refund amounting to Ksh 15,378,202. 00 relating to years ending 31st December 2017, 2018 and 2021 which was acknowledged by the Respondent on the same date.

4. Following a refund audit, the Respondent issued a pre-assessment letter dated 17th August 2023 fully disallowing the Appellant’s refund claim and instead assessed principal additional corporate tax, VAT and PAYE totaling Kshs 82,869,105. 00.

5. In a letter dated 15th September 2023, the Appellant lodged its objection to the assessment which was also sent vide electronic mail and acknowledged by the Respondent on 18th September 2023.

6. Following electronic mail correspondence and meetings between the parties, on 14th November 2023, the Respondent rendered its objection decision confirming the principal assessment of additional corporate tax, VAT and PAYE totaling Kshs 82,869,105. 00.

7. Aggrieved by the Respondent’s objection decision dated 14th November 2023, the Appellant filed its notice of appeal dated 13th December 2023 on 14th December 2023 at the Tribunal.

The Appeal 8. In the Memorandum of Appeal dated 19th December 2023 and filed on even date, the Appellant outlined the chronology of events leading to the objection decision of 14th November 2023.

Appellant’s Case 9. The Appellant’s Statement of Facts dated 19th December 2023 were filed on even date.

10. The Statement of Facts were a reiteration verbatim of the Memorandum of Appeal.

11. It was the Appellant’s case that it provided all evidence necessary for the pre-assessment and fully justified its position that no taxes were due contrary to the pre-assessment raised. That it was the Respondent who failed to consider the information, documentation and explanations provided.

Appellant’s Prayer 12. The Appellant’s prayed for the following reliefs:a.That the Tribunal allows the Appeal.b.The Tribunal directs the Respondent to vacate pre-assessments to nil.

Respondent’s Case 13. The Respondent replied to the Appeal through its Statement of Facts dated 18th January 2024 and filed on 19th January 2024.

14. It was the Respondent’s case that upon carrying out an audit on the Appellant, it discovered variances in Appellant’s income tax, PAYE and VAT declarations. That upon scrutiny of Appellant’s tax returns and information readily available to it such as i-Tax declarations, the Respondent raised additional taxes as provided for under Section 24(2) of the Tax Procedures Act ,CAP 469B of the Laws of Kenya (hereinafter “TPA”) since the documentary evidence adduced by the Appellant was not sufficient to support inconsistencies noted.

15. The Respondent held that its audit established discrepancies in sales declared in VAT returns vis a vis what was declared in the Income Tax Returns (IT2C) and the audited financial statements. Additionally, that sales declared for the sole customer, Shanta, were significantly understated compared to purchases claimed. It was the Respondent’s assertion that tax returns by the Appellant did not meet the requirements of Section 24(1) of the TPA which provides that“24. Submission of returns1. A person required to submit a tax return under a tax law shall submit the return in the approved form and in the manner prescribed by the Commissioner.”

16. The Respondent averred that the Appellant’s PAYE had a variance of Ksh. 10,033,385. 00 between employment expense booked in accounts compared to PAYE returns declarations.

17. The Respondent asserted that the Appellant failed to maintain records as couched under Section 54A(1) of the Income Tax Act, CAP 470 of the laws of Kenya (hereinafter “ITA”), specifically, that the Appellant was unable to support equipment hire expenses in its audited financial statements.

18. It was the Respondent’s case that it did not err in law or fact in confirming the assessment due to lack of supporting documentation as it is empowered by Section 29 and 30 of the TPA to issue additional assessment based on available information and its judgement that instead it was the Appellant who failed to discharge its burden as provided for by Section 56(1) of the TPA.

Respondent’s Prayer 19. The Respondent prayed for the following reliefs:i.That the Tribunal upholds the Respondent’s decision dated 14th November 2023. ii.That the Tribunal dismiss the Appeal with costs to the Respondent as the same was devoid of any merit

Parties’ Written Submissions 20. The Appellant’s Written Submissions dated 22nd July 2024 were filed on 24th July 2024 wherein the Appellant submitted on three issues as hereinunder:

i. Whether the tax assessment of Ksh 23,680,148. 00 relating to income tax because of disallowing the equipment hire expense of the Appellant has to be vacated. 21. The Appellant submitted that it proved beyond reasonable doubt through provision of all necessary information and documents specifically agreement it entered into with equipment hire suppliers and had equally attached the same in its pleadings. Additionally, the Appellant disagreed with the methodology used by the Respondent to compute tax in regard to equipment hire expenses claimed in the financial statements versus the cost of the equipment as evidenced in the customs import records.

22. It was the Appellant’s case that it duly accounted for all withholding taxes on equipment expense and that the equipment hire suppliers charged for the machines based on the number of days the specific machines were used and not on the cost of import; since cost was the value of the hired equipment owned by suppliers. Furthermore, that the Respondent failed to use the right measure to determine tax due resulting in undue burden on the Appellant by using an illogical matrix yet Section 15(1) of the ITA provides as follows:“(1)For the purpose of ascertaining the total income of any person for a year of income there shall, subject to section 16 of this Act, be deducted all expenditure incurred in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income, and where under section 27 of this Act any income of an accounting period ending on some day other than the last day of such year of income is, for the purpose of ascertaining total income for any year of income, taken to be income for any year of income, then such expenditure incurred during such period shall be treated as having been incurred during such year of income.”

(ii) Whether there was any further amount payable by the Appellant to the Respondent as result of the assessment. 23. The Appellant submitted that it provided all necessary evidence to the Respondent for it to vacate the income tax assessment and as such there was no further amount payable.

(iii) Whether the Appellant was now entitled to have its overpaid tax relating to income tax be refunded of Ksh 15,378,202. 00. 24. That pursuant to Section 47 (1) to (5) of the TPA and having verified Appellant’s records, the Respondent ought to have concluded that the Appellant was entitled to receive the original income tax refund of Ksh 15,378,202. 00.

25. The Appellant asserted that the Respondent’s method of allowing only the cost of equipment whose ownership did not belong to the Appellant in the first place was flawed and the assessment was based on incorrect methodology. It was the Appellant’s case that it submitted all evidence required in law for it to be allowed to claim the equipment hire expenses.

26. The Respondent’s Written Submissions dated 2nd August 2024 were filed on 5th August 2024 wherein the Respondent submitted on a single issue as hereinunder:

Whether the Respondent erred by confirming the additional assessments issued with regards to VAT, Corporation tax and PAYE. 27. The Respondent in submitting on the analysis of the issue as determined reiterated in verbatim its stance as held in its Statement of Facts. The Tribunal will not rehash the same.

Issues For Determination 28. The Tribunal having carefully considered the parties’ pleadings, submissions and documentation adduced before it notes that a single issue falls for its determination as follows:Whether the Respondent was justified in disallowing the expenses for the hire of drilling equipment.

Analysis And Findings 29. The Tribunal having established that there is a single issue for determination will proceed to analyze it as follows:Whether the Respondent was justified in disallowing the expenses for the hire of drilling equipment.

30. This dispute arose when the Appellant disagreed with the methodology used by the Respondent to compute tax on the difference between the amounts claimed as per the financial statements in relation to equipment hire expenses versus the cost of the equipment so imported via the Simba system records on behalf of the suppliers of the equipment hired. The Appellant averred that the suppliers charged it for use of the machines based on the number of days the specific machines were used and provided invoices to demonstrate its case. The Appellant also provided evidence of the expenses incurred by showing withholding tax on the payments.

31. The Respondent on its part, computed the cost of the hired equipment based on the cost of importation and argued that the equipment hire expenses were not genuine and could not be authenticated by the withholding tax paid on the payments to its non-resident supplier which the Appellant had remitted under “management fees” as “hire of equipment” in i-Tax. It was the Respondent’s position that its request for invoices relating to the equipment hire went unheeded and this greatly impeded its ability to ascertain whether or not the Appellant incurred expenses.

32. The Tribunal has had occasion to review the invoices referred to by the Appellant which were adduced as evidence. The invoices, are issued by the Appellant to various customers for drilling programmes. The Tribunal did not find expense invoices issued to the Appellant for the hire of drilling machines.

33. The Tribunal notes that Section 56(1) of the TPA as read with Section 30 of Tax Appeals Tribunal Act, CAP 469A (hereinafter “TATA”) provides that the Appellant at all times bears the burden of proving a tax assessment as wrong, excessive or how the tax liability could have been arrived at differently. This is an odious burden that is only discharged with evidentiary proof in form of documents. However, this burden is not static but is like a pendulum that once discharged by the Appellant, it shifts to the Respondent who must put to question the evidence placed before it on why the same must not be admitted to dispel tax liability.

34. From the foregoing, the Tribunal finds that the Appellant failed to discharge its burden of proving that the Respondent’s decision to disallow expenses for the hire of drilling equipment was incorrect.

Final Decision 35. The upshot of the foregoing is that the Appeal herein lacks merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 14th November 2023 be and is hereby upheld.c.Each party to bear its own costs.

36. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 21ST DAY OF NOVEMBER, 2024. ………………………………….CHRISTINE A. MUGACHAIRPERSON………………………….. …………….……………..BONIFACE K. TERER ELISHAH N. NJERUMEMBER MEMBER…………..……………… ……….…..…………….EUNICE N. NG’ANG’A OLOLCHIKE S. SPENCERMEMBER MEMBER